Across the suburban Chicago market, office vacancy inched up in the third quarter as leasing velocity stalled, with only two new leases recorded greater than 50,000 square feet. This trend holds true in the O’Hare submarket, though the finer details paint a more complex image.
Class A takes a hit
Vacancy in the O’Hare submarket, according to the latest report from Colliers International, was up to 15.7 percent, an increase from the 15.0 vacancy rate of the second quarter as tenants such as T-Mobile vacated space in the market. The main contributors to increased vacancy, Class A properties, rose from 12.6 to 13.9 percent between the second and third quarters of 2018. This is still a slight improvement, however, from the 14.0 percent reported during the same time period of 2017.
Despite this vacancy rate increase, O’Hare is still the lowest out of all the suburban submarkets. And the 15.7 percent beats year-over-year market indicators as the vacancy rate this time last year hovered at 16.9 percent. For sublease space, no other suburban submarket was as tight as O’Hare’s 0.3 percent.
The O’Hare submarket lost 88,668 square feet of net absorption, compared to 46,129 square feet of positive net absorption at the end of the second quarter. Class A properties were again the culprit, dropping to negative 108,583 square feet in the third quarter. Contrast that with Class B assets which reported positive 15,174 square feet in the same time period.
No new speculative construction was completed in the O’Hare market during the third quarter of 2018, though there were a handful of build-to-suit projects in various stages of completion. For example, construction continues on Central States Funds’ 150,000-square-foot development at 8655 W. Higgins Road in Chicago. DHL has also begun construction on a 25,000-square-foot build-to-suit on the Pointe O’Hare II site in Rosemont. Both are scheduled for summer 2019 completion.
Construction on “The Pearl District,” Rosemont’s mixed-use development, is near completion. The complex is located at the intersection of Balmoral Avenue and Pearl Street and will be home to several businesses including Rosemont’s first-ever boutique hotel, “The Rose,” which is slated for a December 2018 opening. Other tenants include a Dave & Buster’s and Truluck’s, a seafood and steak house that is now open. The new development is already host to entertainment, restaurants and a minor league baseball stadium.
Proposed projects in the area include O’Hare Corporate Campus and 8201 W. Higgins Road, a 3.5-acre development in Chicago that is being marketed to both office and retail users. If completed, these projects could add 1.4 million square feet to the O’Hare submarket.
Users requiring large spaces have limited options in the O’Hare area as there are currently only six properties that can offer spaces of 100,000 square feet and above, all of which are classified as Class A. Only three of these large block opportunities are located in high quality “true” Class A assets, according to Colliers.
Despite heightened vacancy, the gross asking rents for Class A O’Hare office locations are unmatched in the suburbs. Class A rents increased to $33.10 per square foot gross in the third quarter of 2018, up from $32.95 in the second quarter, while the average asking rate for all classes rose to $21.45 per square foot gross, up from $21.14 in the second quarter.
The O’Hare submarket experienced three major investment sales transactions in the third quarter. Two of the properties are Class A and the third, which fetched the highest price per square foot of the three, is Class B.
Shidler Group acquired the 651,445-square-foot Triangle Plaza from Equity Commonwealth for $141 million and the Blackstone Group sold O’Hare International Center in Rosemont for $64 million to Bridge Investment Group. Saban Capital Group, Inc. sold 2300 E. Devon Avenue in Des Plaines to Easterly Government Properties for $57 million. The 239,331-square-foot, Class B building was able to fetch $238.27 per square foot.
Corporate users have historically been attracted to the O’Hare market’s access to highways, public transportation and the airport. Massive infrastructure changes are ongoing or announced for the region, including the city of Chicago’s commitment to an $8.5 billion expansion to O’Hare International Airport, a hyperloop express tunnel connecting air travelers to the Loop and continued construction on the Elgin-O’Hare Tollway. Perhaps these improvements will have the potential to renew Class A tenant interest in the area.