CHICAGO—As reported in GlobeSt.com last week, the office market in the CBD has been putting up some good numbers, showing solid improvement in its vacancy rate, level of absorption and the ability to attract investors. But the suburban region, long regarded as anemic and still losing some companies to downtown buildings, at least held its own in the third quarter, and has shown some signs of life, according to a new third quarter report just published by Newmark Grubb Knight Frank.
Although the firm found that the vacancy rate for the metro area rose to 17.6%, a rise of 20 bps since the last quarter, it attributed this increase largely to the addition of Motorola's 1.2-million-square-foot suburban Libertyville campus to the leasing inventory. NGKF did not count this space as part of the available inventory when Motorola moved downtown in the first quarter because the firm does not count owner-occupied buildings. But BECO Management just purchased the campus and has begun marketing it for lease.
“That hurts the absorption rate and it's going to take time to re-lease,” perhaps two years, Mitch Loveman, an executive vice president with NGKF, tells GlobeSt.com. But otherwise, things don't look too bad in the suburbs, although the vacancy rate is 21.4%. For one thing, Walgreens no longer seems inclined, at least for now, to vacate its huge suburban campus. “That would have been a huge blow.”
Furthermore, “net absorption in both the CBD and the suburbs was positive, as rents rose to new post-recession highs and the amount of available sublease space fell to post-recession lows,” according to the new study by NGKF. “While activity in the suburbs was far from robust, the North submarket saw its third straight quarter of positive net absorption, as rents rose $0.13 to $22.37/SF, a $0.59 increase from two years ago.”
The North submarket had 105,804-square-feet of absorption in the quarter, NGKF found. And overall, throughout the year the suburbs had 466,901-square-feet of absorption, compared to 1,182,874-square-feet in the CBD.
“The suburban market is certainly not robust, but it's now stabilizing,” says Loveman. And although big moves like Motorola's have generated headlines, many small companies throughout the suburban region have been renewing leases and even expanding a bit. “They are filling in the gaps. To go downtown, you generally have to sign long leases,” and most of these little-noticed firms prefer to keep their options open by sticking with five-year or seven-year leases in the suburbs.
Loveman, however, does believe that the suburban region has reached any real post-recession milestone. For one thing, unlike the CBD, where developers have about 2.3-million-square-feet of office space under construction, no projects are currently under way in the suburbs. “There is not even any build-to-suits.”
And several submarkets continue to struggle, he adds. The Northwest, for example, has a vacancy rate above 23% and does not show much ability to attract new companies. Much of its leasing activity "is movement within the market. It's rare a company in O'Hare decides to move to Schaumburg.”
Furthermore, he also does not expect developers to show much interest in new construction. “Overall, vacancy rates in all suburban submarkets remains above 20%. You would have to go down another 5%. There may be demand for a build-to-suit, but I don't see demand for speculative construction for a long time.”
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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.
