Options continue to be tight for tenants looking for large contiguous blocks of space in the East-West Corridor, as only nine spaces 100,000 square feet or larger are available, according to a year-end market review and 2014 forecast by NAI Hiffman.
Few of these spaces can be found in the premier Class A buildings in the market. As a result, area landlords have begun to increase asking rental rates and reduce concession packages in these properties, according to NAI Hiffman.
Net absorption in the East-West Corridor increased each quarter of 2013, with the fourth quarter absorbing 260,180 square feet of vacant space, bringing the tally for the year to 390,816 square feet, according to NAI Hiffman’s report. Leasing activity picked up as the year moved along, pushing the vacancy rate 69 basis points below the rate recorded a year ago. NAI Hiffman notes that during the fourth quarter alone, this rate decreased by 37 basis points to end the year with a vacancy rate of 20.42 percent, the lowest seen in the East-West Corridor since 2008.
“The vacancy rate is still comparatively high,” said Matt Ward, senior vice president at The Alter Group. “It’s in the low-20 percent range, which is a high number for a broad market. However, a lot of that vacancy is not homogeneous. Some real estate is really good and some real estate is not. When you think about the large blocks of space that are in buildings considered acceptable by modern corporations, then that vacancy probably drops to around 10 percent. There’s just not a lot of that space out there.”
The East-West Corridor also saw a bit of new construction during the fourth quarter.
Hub Group’s new 130,000-square-foot office building was completed during the fourth quarter at 2000 Clearwater Drive in Oak Brook and construction is now underway on the 72,000-square-foot iMed medical office campus at the corner of 75th Street and Route 59 in Naperville, according to NAI Hiffman’s report.
Ward said many companies are building now because a large portion of the inventory in the East-West Corridor was built in the 1970s and 1980s.
“There’s some acknowledgement in the marketplace out there that the existing inventory that is in the East-West Corridor is really starting to become functionally obsolete,” Ward said. “Companies are saying that with some stability in the global, macro and regional economies, we have to start making some long-term decisions. They’re saying we need to get out of this building that was built in 1975 that doesn’t have the power, the heating and air conditioning systems or the parking that we need to run our business moving forward.”
Ward said there is always a bit of a price premium to move into a new building.
“A sophisticated company will understand that the price premium is really just something at the surface level,” he said. “Once they really start to drill down, they understand how a new building can actually bring the costs more in-line as it relates to a per employee cost. When they start to think like that, then new real estate starts to look much more attractive to them, and we’re starting to see big companies doing that.”
NAI Hiffman notes that the East-West Corridor’s largest sale transaction of the fourth quarter involved The Blackstone Group purchasing the office park known as Central Park of Lisle comprised of the 310,375-square-foot building located at 4225 Naperville Road and the 311,912-square-foot building located at 3333 Warrenville Road in Lisle. The portfolio sold for $116.25 million and also included a 7.47-acre parcel of vacant land. KeHe Distributors signed the largest new lease of the quarter at 1245 E. Diehl Road in Naperville, taking 54,857 square feet in the building, according to NAI Hiffman’s statistics.
Demand for industrial in the area continues to be strong. The I-88 Corridor industrial submarket saw increased tenant and speculative developer demand due to the lack of available land in neighboring submarkets such as Central DuPage, according to an industrial market report by NAI Hiffman. Developers were drawn to the number of larger sized land sites for multi-building developments and easy access to major expressways that the I-88 submarket has to offer. With limited options for “in fill” development opportunities in the Central DuPage and I-55 submarkets, the I-88 submarket has become an area of demand for the last 12 months.
“I believe that the continuation of a strong 2013 is spilling over into 2014,” said David Friedland, principal at Transwestern. “There is extremely low supply, especially for modern, large-box distribution facilities. There are only about two or three buildings that are available over 200,000 square feet in I-88, which is remarkable.”
To combat this, there is some speculative construction taking place in the area. Construction started on a 604,565-square-foot speculative facility during the fourth quarter in North Aurora’s I-88 Gateway Logistics Center, to be completed by the end of 2014, according to NAI Hiffman. Construction also continues on the 350,000-square-foot build-to-suit facility for Ozark Automotive Distributors Inc. at 543 Frontenac Court in Naperville.
“There will be more spec construction,” Friedland said. “I can’t say who’s going to do it, but there are a couple of players that the market is watching. Duke Realty owns a big chunk of land and so does Liberty Property Trust. The market is watching them to see if one of them is going to break first and then there are a few other developers that are trying to buy some land and build a spec building as well.”
The area’s vacancy rate also remained steady between 7 percent and 8 percent over the course of 2013, a rate lower than what the submarket experienced in 2006 and 2007, prior to the downturn, according to NAI Hiffman. Only six options for tenants looking for contiguous blocks of space 100,000 square feet or larger in size are currently available, suggesting significant adjustments to the vacancy rate are unlikely over the coming quarters, the report states.