Strong Office Market Sees Tech Slowdown

 

Hines’ River Point development at 444 W. Lake St. will be one of the more costly buildings in the market, but has not had any trouble attracting tenants.

CHICAGO—As reported earlier this week in GlobeSt.com, the Chicago office market has recently seen a lot of leasing activity and rising rental rates. About 2.8 million square feet was leased in the second quarter, according to Savills Studley new second quarter report, and 2.4 million square feet in the first. That brings the total for the four most recent quarters to 13.3 million square feet, far more than the long-term annual average of 8.9 million square feet. But although other developments this year can’t exactly be termed storm clouds, they do show that the current picture is more complicated. The availability rate recently went up, for example, an increase that Savills Studley partly attributes to the new class A space underway in the West Loop and Fulton Market area. And amidst a bit of a slowdown among tech companies, the supply of sublease space has also started to rise. “In the next two to three quarters, I don’t think we’ll see the same level of aggressive leasing ,” Robert Sevim , Savills Studley’s executive vice president and co-branch manager, tells GlobeSt.com. “But I also think we will continue to see an active market.” “The supply of sublease space has increased dramatically,” he adds, rising by nearly 20% in just the past year. Similar spikes have occurred in other tech-heavy markets such as San Francisco. Among tech firms, “there was a mindset of grow first, and deliver profits later.” But business leaders in the tech world, and perhaps its investors, have started to push a more cautious approach. “They are definitely the ones leading the pack in terms of space disposition efforts. Many technology companies are being more cautious before taking on additional space.” Savills Studley’s report highlights the recent experience of Avant . The online lending startup laid off 60 employees, most at its Chicago headquarters. Funding has become more difficult to secure, and the firm has said it will now focus on “achieving profitability as soon as possible.”   “The landlord community needs to be aware of the current supply and demand dynamics,” Sevim adds. “If you include sublease space, tenants have plenty of choices. There is no shortage of space.” Still, the market shows many signs of strength. In the second quarter , o verall asking rents in the CBD increased from $36.37 to $37.45, a jump of 3.0%. Class A properties were disproportionately responsible for that increase, and went from $40.24 to $41.87, an increase of 4.0%. The class A space coming to the market in neighborhoods such as West Loop accounts for much of this increase, Sevim says. Many of the spaces in Chicago’s new trophy office towers rent for considerably more than $50.00, and have contributed to driving up average asking rates. “But it’s not just the trophy buildings,” he adds. Last year saw about $6 billion in downtown office sales, and many other owners have pushed up rates to perhaps position their buildings for sale, although the market is unlikely to hit the heights of 2015. “We are seeing a general upward trend in asking rents,” although at the same time landlords are also offering more economic concessions to tenants.