Suburban Market Has Bright Spots

CHICAGO—The Chicago suburban office market witnessed a slight setback heading into 2018, but there were a number of bright spots. Despite the market ending the first quarter with negative absorption, suburban tenants signed five new lease transactions greater than 25,000 square feet. In addition, Amita Health will soon commence its lease of about 225,000 square feet at in Lisle, and Brightstar will in the next few weeks occupy a portion of the former Motorola campus in Libertyville.

“The class A product across suburban Chicago is performing well,” Jonathon Connor, senior vice president, Colliers International, tells GlobeSt.com. “That’s where we’re seeing the bulk of the absorption.”

Overall vacancy rose to 20.8% in the first quarter, up from 20.3% at the end of last year, according to new statistics from Colliers. Vacancy in class A remained flat at 21.3%, but among the best “trophy” properties, the rate was just 17.6%. And Colliers expects that number to decrease further in the next few months as other firms that made commitments in 2017 begin moving into their spaces.

Connor adds that rental rates for class A properties keep rising, and furthermore, “we’ve still got some room left on the runway.” Average asking rates just hit $29.56 gross, up from $29.22 at the end of last year. The O’Hare submarket is especially tight, and class A properties in the Oak Brook submarket just hit an all-time high in gross rental rates.

“I think that in 2018 the office market will continue to improve,” Connor says. Colliers found that 110 tenants with needs ranging from 10,000 to 150,000 square feet are actively looking for spaces in the suburban market, with nearly half expressing interest in the East-West submarket.

Colliers will soon publish a full breakdown of data from all of the submarkets, but at the end of last year, the vacancy rate among class A properties around O’Hare had already sunk to 11.4%, and Connor says absorption will soon trickle down to the B market. But the B market elsewhere is not doing well.

“It’s continuing to struggle, and that’s the best way to describe it, unfortunately.” And with the possible exception of B properties in the small O’Hare submarket, that struggle is not likely to end any time soon. Most office users now prefer spaces that possess class A amenities, and landlords willing to spend money will attract tenants.

Therefore, the suburbs will stay a bifurcated market with certain portions doing quite well. “There are a lot of companies that have chosen to stay in the suburbs,” Connor says. Caterpillar, for example, recently moved its headquarters from Peoria to the Corporate 500 complex in Deerfield instead of downtown Chicago.

The bulk of the suburban vacancy is due to some of the large, outlying corporate campuses, he adds. “These one million square foot campuses really eat into your vacancy levels.”