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Is CBD's Landlords' Market Ready to Pivot?

CHICAGO—There are several signs that tenants could finally regain the upper hand, according to Savills Studley, but the tech boom and continued corporate migrations from the suburbs means it's not inevitable.

By Brian J. Rogal | brianjrogal | | Updated on July 22, 2016

 

chi-LisaDavidson2016 (3) Lisa Davidson of Savills Studley in Chicago
CHICAGO—The downtown office market has been tightening up for years, and some observers have started to wonder how long the landlord-friendly conditions can continue. After all, the next year-and-a-half will bring several milestones. Developers will finally put the finishing touches on several gleaming new office towers in the West Loop, opening up several million square feet of class A space, and even though users have already signed lease agreements for much of it, their moves will open up big vacancies throughout the CBD. As a result, tenants could finally regain the upper hand. “Historically this market has always been very cyclical,” Lisa Davidson , a Chicago-based executive managing director for Savills Studley , tells GlobeSt.com. And it usually remains in landlord-friendly territory for relatively short periods. That may be because the city, unlike some coastal areas hemmed in by water, is not land -constrained, and developers used to take advantage of periods with robust demand and overdo it. New construction has been more restrained in the post-recession era, but the present tilt toward owners has lasted about five years, and “it feels to me that things are about to change.” Average asking rents for all building classes have increased for 11 straight quarters and now stand at $37.45, according to company data. But deciding what constitutes a landlord-friendly market involves more than this statistic. Davidson also looks at the availability rate, which for the most part has been falling since 2010, but recently ticked up. Among class A properties, for example, the rate increased from 14.7% at the end of 2015 to 16.2% in the second quarter. And anecdotally, tenants have recently been getting a different set of signals from those on the ownership side. Davidson says, for example, that these days when tenants go looking for spaces in the CBD, more are getting unsolicited bids from owners. And frequently these are not inquiries from the owners of class B buildings or otherwise ordinary properties that struggle to fill spaces, but from owners generally considered market leaders.   The source of the change is not hard to pinpoint. Developers currently have millions of square feet under construction in downtown Chicago, including A+ towers like 444 W. Lake St., and renovations of old, underutilized properties such as 125 S. Clark St., and in new submarkets like Fulton Market. Furthermore, the city has approved a deal which will finally bring two million square feet of the Old Post Office back to life. Landlords have considered all of this development activity and responded by sweetening deals with more money for improvements. Davidson says until recently tenants could expect to secure packages worth roughly between $5 and $6 per square foot per year, but lately that amounts have been hitting $7 to $8.    If the market does start sliding into tenant-friendly conditions, Davidson adds that this means there will be winners and losers. “There will always be someone looking for the newest and best,” so those new office towers in the West Loop will definitely remain on the winning side and retain an advantage in negotiations with tenants.  And unique spaces, such as those in the refurbished warehouses of Fulton Market, could also continue to attract a host of prospective users. The properties put at a disadvantage will probably be the standard glass and steel towers, especially those with spaces considered class A- or B. “Some buildings will be left holding the bag, and have hundreds of thousands of square feet to fill,” she says. And neighborhoods that have historically have been less desirable, such as the East Loop, or those still in the experimental phase, such as Goose Island, may also start to feel a pinch if the market turns. However, a turn toward a tenant-friendly market is not inevitable, Davidson adds. The CBD still has sources of demand which may balance out all of the space that will soon open up. The tech industry shows no sign of slowing down, and may even sustain places like Goose Island. And with global firms like McDonald’s continuing to migrate from the suburbs and into the CBD, landlords may have little to worry about.

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