Downtown Chicago office market fundamentals should continue to improve throughout 2012 and a more sustained recovery will likely develop in 2013, while office vacancy in the suburbs is expected to decrease modestly throughout the year, according to a research report by Colliers International.
The Chicago Business District’s vacancy rate continued its descent during the fourth quarter of 2011, ending the year at 15.1 percent, compared to 15.8 percent at the end of 2010, according to the Colliers report. During this most recent down cycle, vacancy peaked at 16.2 percent in the first quarter of 2010. However, modest decreases during the past seven consecutive quarters have allowed for some headway toward recovery, as the current vacancy rate is the lowest reported since the end of 2009.
Further, the sublease vacancy rate has fallen to pre-recessionary levels and is currently at 1.2 percent, which is below the 10-year average sublease vacancy rate of 1.7 percent. In 2009, sublease vacancy peaked at 2.2 percent and has posted steady descents ever since.
However, Gary Denenberg, executive vice president of MB Real Estate, said he does not expect any significant movement in vacancy rates for 2012.
“Right now, despite all of the demand, I expect vacancy rates to climb at a small amount,” he said. “When you look at the change in employment from our peak in 2008 to current, we’ve lost about 6 percent of our workforce. At the same time, we have not shed any office space, so in past recessions, there’s been a fairly close relationship between the employment base and the amount of occupied space.”
Meanwhile, net absorption was positive 296,344 square feet during the fourth quarter of 2011, representing seven consecutive quarters of gains, according to the Colliers report. Net absorption for the year totaled 996,110 square feet, the largest annual gain since 2007. At the end of 2010, net absorption was negative 206,844 square feet. While all three asset classes finished 2011 with positive gains, class B space posted the largest positive improvement with positive 589,694 square feet of net absorption. Class A space totaled positive 264,061 square feet of net absorption for 2011.
The year also finished on a strong note as four of the top five leasing transactions in the CBD took place during the fourth quarter.
“From a sales standpoint, 2011 was really the best year in sales volume, number of transactions, average size of deal and cap rates since the high point of the market, which was 2007,” said John Przybyla, first vice president at Marcus & Millichap. “From an investor demand, and really looking at a core market like Chicago, there was almost $3 billion in sales volume last year in the market.”
The largest transaction was Aon Corp.’s renewal at 200 E. Randolph St., according to the Colliers report. GE Capital renewed and expanded its space by 79,000 square feet to occupy a total of 371,000 square feet at 500 W. Monroe St. Also during the quarter, PricewaterhouseCoopers renewed its 279,000-square-foot lease at 1 N. Wacker Drive and the American Medical Association inked a 275,000-square-foot lease at the former IBM Plaza at 330 N. Wabash Ave. to relocate from its namesake tower at 515 N. State St.
With respect to large transactions, leasing volume improved substantially in 2011, the report states. The year ended with 18 lease transactions containing 100,000 square feet or greater totaling 3.6 million square feet of space. This is a vast improvement over the 7 transactions totaling 1.3 million square feet reported in 2010. As economic fears are starting to subside, tenant confidence should continue improving, resulting in a relatively healthy leasing landscape in 2012, particularly for larger tenants.
Another positive note for the CBD includes Mayor Rahm Emanuel’s job growth initiative, which has resulted in securing several long-term expansion commitments by existing tenants, the Colliers report noted. Over the past year, at least 12 corporations have announced plans to expand their existing operations in Chicago, with a total commitment that exceeds 6,900 new jobs over the next several years. These commitments provide the potential for positive absorption in the future as jobs are gradually added.
“In 2012, there is going to be more demand for some larger space,” Przybyla said. “There are about six to seven companies that have made commitments to hire anywhere from 3,500 employees on the low end to about 7,000 employees on the high end. I think we’re going to see much greater demand across the spectrum for 2012 based on some companies committing to expanding and then really an outlook of about 35,000 to 42,000 new jobs created in Chicago this year.”
The overall vacancy rate in the Chicago suburban office market decreased slightly in 2011, down to 22.3 percent from 22.4 percent at year-end 2010, according to the Colliers report. The Lisle-Naperville market showed the lowest overall vacancy rate of all the markets, ending 2011 at 17.1 percent, while the Northwest market ended 2011 with the highest overall vacancy at 26.9 percent. The overall sublease vacancy rate also decreased to 1.5 percent, down from 2.1 percent at the end of 2010.
“The suburban vacancy rate is going to be a little higher going into the first quarter of this year,” Przybyla said. “In those submarkets in the suburbs, you’re at 20 to 22 percent vacancy. There’s going to be some absorption, but not a lot. I think if we get below 20 percent, to about 18 to low 19 percent, that will be good.”
Significant 2011 lease transactions include CVS Caremark’s 266,000-square-foot renewal at Caremark Towers in Northbrook; ACCO Brands’ 189,000-square-foot lease at Kemper Lakes Business Center in Long Grove; and Sysmex’s 163,000-square-foot lease at 555 Aptakisic Road in Lincolnshire, according to the Collier’s report.
The report also noted that Blackstone Group LP, the world’s largest private-equity firm, purchased Duke Realty Corp.’s suburban office holdings in U.S. cities including Chicago, Dallas and Atlanta in the fourth quarter. The 79-property purchase included Riverway, an 858,711-square-foot, three building property in Rosemont; O’Hare International Office Center, a 516,779-square-foot, two-building property in Rosemont; Atrium II, a 100,952-square-foot property in Arlington Heights; and Executive Towers West, a 653,727-square-foot, three-building asset in Downers Grove.
A 450,614-square-foot property at 500 Park Boulevard, and One Pierce Place, a 578,737-square-foot property, both in Itasca, were recently purchased both by Long Wharf Real Estate Partners, LLC for $73.8 million ($71.65 per square foot). The Northwest market also witnessed numerous non-traditional sales in 2011, while the Lisle-Naperville market witnessed various user sales.