CHICAGO—The downtown office market saw a modest increase in its vacancy rate during last year's fourth quarter, according to a study just released by Savills Studley, but company officials say the overall market remains quite strong and in 2015 should continue growing and attracting big investors. The overall rate increased from 15% to 15.5% and the class A rate went from 14.3% to 14.9%.
“I think it's a blip relative to the bigger picture,” Robert Sevim, the Chicago-based executive vice president, tells GlobeSt.com. “The market is still extremely active.” The bigger picture shows a CBD that in last two years has experienced a lot of absorption and development, including a plethora of office conversions for tech and creative firms in River North and the Far West Loop, and the launching of trophy towers at 444 W. Lake St. and 150 N. Riverside in the West Loop.
“Large leases needed to be signed to kick those off,” Sevim adds, and this has helped boost investor confidence in Chicago office buildings. “Many buyers continue to enter or reinvest in this market.” Heitman, for example, recently bought 353 N. Clark St. for $715 million, or $609 per-square-foot, the second-highest ever paid for a Chicago office building, after beating out a crowded field of domestic and global investors. The 46-story tower in River North was completed in 2009, making it among the last trophy properties built before the economy cratered.
But investors have also shown confidence in properties that can be repositioned as creative space, Sevim points out. Golub & Company, for example, bought 311 W. Monroe in 2012 for $44.0 million and resold it in November to Prudential Insurance for $58 million.
“Following trends seen in many CBDs around the country, the robust capital markets landscape is giving landlords added incentive to hold fast to their asking rents,” according to the new report. In the fourth quarter, overall asking rents in the CBD increased 2.0% to $34.89. But the River North and Far West Loop neighborhoods fared even better. Rents in the former increased 9.5% and hit $41.55. And class A properties in the latter increased 5.6% and reached $45.00.
One of the big questions hanging over the Chicago market last year was whether the tech sector would sustain its rate of growth. But Savills Studley notes that a combination of big leases from West Coast tech firms like Google, Yelp and Uber, and a continuing migration of suburban firms into the CBD made it a great year from a real estate perspective. “It's been voracious and we expected it to be,” says Sevim. “Every day, business is increasingly conducted with a basis in technology, whether it is from a product or a service perspective. As this phenomenon persists, so will tech's consumption of office space.”
“They are one of the key sectors partly responsible for the decline in the availability of space” in neighborhoods like the West Loop, he adds, although its superb transportation options continue to make the area appealing to more traditional companies. The entire CBD has 22.5-million-square-feet available for lease, a 9.5% decline from a year ago, but the amount of available class A space in the West Loop fell by 10.4% to 4.7-million-square-feet.
And in the past year, small and mid-size companies have responded to this increasingly tight market by looking beyond the West Loop submarket. “We're already seeing a lot of percolating activity in the Fulton Market area and beyond,” Sevim says.
Small and mid-size companies have responded to this increasingly tight market by pushing out of the West Loop and Sevim expects the heightened activity in these outlying areas, such as Fulton Market and the Far West Loop, will continue.
“There are the makings of a fully self-sufficient submarket in light of the retail, residential and ongoing office activity in the works. It's reminiscent to the scaling phases of River North when it all started coming together."
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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.
