CHICAGO—Many companies have recently migrated from the suburbs and down into the CBD, often generating headlines that give the impression these outlying submarkets are in permanent decline. But according to MBRE's latest office market overview, a look behind the headlines shows that things are not so bad.
After six straight years of negative or stagnant absorption, the economic recovery gave the suburban market its own bounce last year with about 1.3-million-square-feet of positive absorption. Much of this came from class A properties, especially in the East-West and Northwest submarkets, and shows that although the region certainly has a lot of obsolete, vacant space, many top-of-the-line suburban properties retain tremendous appeal.
Overall direct vacancy fell by 42 bps to 20.54%, MBRE found. The East-West and Northwest areas had combined 1.05-million-square-feet of the total year-end positive absorption but the North suburbs continues to boast the lowest vacancy rate at 18.07%. It remains the only suburban submarket under 20%, but at 20.48, the East-West area is approaching this milestone. However, “how long a general economic recovery can buoy an area with aging properties in antiquated corporate campuses, and a generally overbuilt market remains to be seen,” MBRE notes.
Still, throughout the year, big property sales and new developments showed the importance of some key portions of the suburbs. In the fourth quarter, for example, Apollo Global Management recorded the largest suburban office sale of the year by buying the 1.1-million-square-foot Kemper Lakes Business Center in north suburban Long Grove for $127 million. And insurance company Zurich North America has started building a state-of-the-art 753,300-square-foot headquarters in northwest suburban Schaumburg, currently the largest build-to-suit development in the US.
Other important developments were recently completed in the O'Hare area. The American Academy of Orthopedic Surgeons completed its new headquarters in Rosemont, adding 180,000-square-feet to the submarket. And DHL Global Forwarding's new $35 million office and warehouse was completed in fourth quarter.
Another good sign for suburban landlords is that after a very long decline, gross asking rents, especially among class A properties, finally bounced back in 2014. The North suburban market saw class A rates climb to more than $26.00-per-square-foot, a year-over-year gain of about 32%. And the O'Hare office market rents hit $25.99, a gain of 18.3%.
“As corporations downsize their suburban operations, or move wholesale into the CBD, there are still those who believe that the suburbs are due for a comeback based on the traditional build-to-suit corporate campus,” MBRE notes. “The ongoing Zurich North America project would indicate that there are companies with unique requirements that still see the value in the spacious and conspicuous suburban campus lifestyle.”
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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.
