CHICAGO, IL--The following summary is designed to provide a brief overview of the Chicago metro office market during the third quarter of 2009. For more information or to speak with one of the company’s local market experts, please contact Erin Mays at 312.698.6735 or via email at erin.mays@grubb-ellis.com.
· Nearly 1.3 million square feet of vacant space was added to the Chicagoland market during the third quarter, increasing the total negative net absorption to more than 3.3 million square feet year-to-date and contributing to the region’s 60-basis-point increase in vacancy to 19.6 percent.
· The area currently has more than 2.7 million square feet of new development under construction. However, much of it is the 1.1-million-square-foot 155 N. Wacker and the 1.2-million-square-foot 353 N. Clark in Chicago’s CBD, both delivering in the fourth quarter and both 80- to 85-percent leased.
· Average Class A asking rental rates for the region stayed flat at $29.80 per square foot from $29.79 per square foot in the second quarter.
Analysis: Most tenants are interested in evaluating their options while it is a tenant’s market. However, inability to make a long-term commitment has caused tenants to either put decisions on hold or sign short-term renewals in order to maintain maximum flexibility. Many well-capitalized landlords are holding out for the market to revive, or alternatively, they are “backloading” deals by offering rental rates that are initially low to help the tenant through the recession, then escalating those rates toward the end of the term to recoup the discount.
CHICAGO CENTRAL BUSINESS DISTRICT
· The vacancy rate in the Chicago CBD office market increased 60 basis points to 15.4 percent from the second quarter.
(O'Hare Airport, middle right photo)
· Class A average asking rental rates decreased by $0.02 to $37.13 per square foot for the third quarter.
Analysis: While 155 N. Wacker and 353 N. Clark may be mostly preleased, the older buildings from which tenants are moving don’t have other businesses waiting in the wings to take the space. This, combined with the existence of more than 4.3 million square feet of sublease space on the market, indicate that things are likely to get worse before they get better.
The downtown real estate market continues to be a tale of two landlords. Well-capitalized landlords are in a position to either wait out the recession or to woo tenants with attractive incentives, including moving allowances and tenant improvement dollars. Highly leveraged landlords, however, are very limited in what incentives they can provide to tenants, and lenders have taken a more active role in these discussions.
SUBURBAN CHICAGO
The vacancy rate crept to 24.3 percent overall, an increase of 40 basis points from the previous quarter.
The market saw more than 500,000 square feet in negative net absorption during the quarter, bringing the total for the year to 1.8 million square feet of negative net absorption.
A modest 430,000 square feet is currently under construction in the I-88 East, I-88 West, North and O’Hare submarkets. The Northwest submarket, which has the highest vacancy of the region at 29.3 percent, currently has no new construction underway.
Average Class A asking rental rates in the Chicago suburbs stood at $24.19 per square foot, an increase of $0.09 from the previous quarter.
Analysis: Commercial real estate fundamentals continued to soften in the Chicago suburbs as vacancy increased and negative absorption mounted. However, these losses have slowed compared with previous quarters, potentially signaling that the suburbs may emerge from the recession before Chicago’s CBD. The construction pipeline has begun to dry up while the CBD awaits 2.3 million square feet of new construction deliveries, and the suburbs posted less negative absorption this quarter than did the CBD.
To access the full Chicago Metro Office Trends report and other Grubb & Ellis research publications, visit www.grubb-ellis.com/research.
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