CHICAGO—The state of Illinois faces a number of economic challenges, including the inability of its politicians to resolve the unfunded pensions issue, and a continuing weakness in the Chicago metropolitan area's job market. Nevertheless, both the office and industrial markets in commercial real estate showed modest strength in the second quarter, according to research by Newmark Grubb Knight Frank. The office market, for example, “recorded its fifth consecutive quarter of positive net occupancy gains as vacancy fell to 18.3%,” the firm found. Furthermore, the area's “industrial market saw 1.5-million-square-feet absorbed in the second quarter of 2013,” however, this was “less than half of the space absorbed the previous quarter.”
“Both the office and industrial sectors experienced positive net absorption during the second quarter, which underscores the city's continued world-class appeal,” says Michael Sheinkop, executive vice president and regional managing director. “The improvement seen in the second quarter bodes well for the region in the short term; however, owners and users of real estate are beginning to factor in possible effects of state tax hikes set to commence in 2014, unless local politicians can soon reach a solution to Illinois' roughly $100 billion unfunded pension liability. At the very least, this hurdle is expected to curb speculative construction and add complexity to underwriting strategies, impacting capital markets activity.”
A total of 801,000-square-feet of office space, spread out between the CBD and the suburbs, was absorbed in the second quarter, and average rental rates for class A and class B spaces remained largely static at $27.88/sf and $25.48/sf, respectively, but the prices for class C space increased in most submarkets. And “the eight largest office leases signed during the quarter were all either renewals or expansions, an encouraging sign that the market may be entering expansion mode.”
“Second quarter leasing activity is more indicative of firms planning for future hiring than correcting for downsizings, which was the case in 2011 and 2012 – the same time rents bottomed,” says Tim Van Noord, research manager. “Sublease availability, which historically has increased when firms shed employees, also supports this growth trend. We've seen sublease inventory drop over the past two quarters, ending June at just over eight-million-square-feet. Still, local employment growth, which has not been robust in recent months, remains the key element for future office leasing market improvement.”
NGKF data show that the Chicago area lost about 46,400 non-farm jobs in the first five months of 2013, and researchers say this could mean that leasing will decelerate in the coming quarters.
“The pull-back in industrial occupancy is attributed to relatively slow leasing activity earlier in the year as businesses struggled to foresee possible effects of the fiscal cliff and sequestration spending cuts,” Van Noord adds. “These concerns are now fading and, when combined with the boost in leasing activity seen during the second quarter, both absorption and under-construction rates, primarily in the surging warehouse sector, are expected to sustain in the latter half of 2013.”
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Brian J. Rogal
Brian J. Rogal is a Chicago-based freelance writer with years of experience as an investigative reporter and editor, most notably at The Chicago Reporter, where he concentrated on housing issues. He also has written extensively on alternative energy and the payments card industry for national trade publications.
