Although recovery has been slow, the suburban Chicago office market managed to achieve its lowest vacancy level since first quarter 2009, according to a research report by Colliers International.
While some submarkets are improving more quickly than others, the suburban office market continued its pursuit toward recovery throughout 2012. With more than 1.5 million square feet of notable new lease transactions (50,000 square feet or greater) signed in 2012, the suburban office market was able to achieve its lowest vacancy level in more than three years, according to Colliers International’s report. The suburbs witnessed six blocks of new lease transactions greater than 100,000 square feet in 2012 compared to three in 2011.
“I would say demand is getting better,” said Joseph Dvorak, SIOR, executive vice president at Colliers International. “In some of the markets, vacancies have gone down, but it’s improving slowly.”
Despite the recent improvement in market conditions, it remains a tenant’s market as landlords continue to offer aggressive incentive packages, according to the Colliers International report. Tenants are more willing to move if there are sufficient concessions to offset move costs. While the flight to quality still exists in the suburbs, as Class A space begins to tighten, rates are stabilizing and the opportunity for these tenants is diminishing.
“It’s still a tenant driven market. Tenants are still in control,” Dvorak said. “We’re still seeing the values on office buildings being lower than what they were three or four years ago, but they are gradually coming back. It’s a slow progression.”
Overall vacancy in the suburban office market decreased throughout 2012, down to 20.5 percent at year-end 2012 from 21.1 percent at year-end 2011, according to Colliers International. While the O’Hare and Northwest markets showed significant improvement, the Lisle-Naperville market continued to have the lowest overall vacancy rate, ending 2012 at 18.1 percent. Conversely, for the first time in several years, the Oak Brook market ended 2012 with the highest vacancy in the suburbs, closing 2012 at 22.5 percent vacancy. While direct vacancy saw a decrease in 2012, sublease vacancy saw a slight increase, rising to 1.7 percent, compared to 1.5 percent at year-end 2011.
“Last year was fairly strong and had some strong finishes,” said Doug Shehan, senior vice president at Jones Lang LaSalle. “I would say it’s still a bit early to make the judgment for this year. There are a couple of decent sized deals that are getting done in the 50,000- to 100,000-square-foot range, but in general, I think it’s a little too early to tell.”
According to Colliers, notable 2012 lease transactions include Aon Hewitt’s 820,000-square-foot renewal/restructure at 4 Overlook Point in Lincolnshire; Catamaran’s 300,000-square-foot lease at Windy Point in Schaumburg; Robert Bosch Tool Corp.’s 221,000-square-foot renewal at 1800 W. Central Road in Mount Prospect; and Capital One’s 150,000-square-foot lease at Atrium Corporate Center in Rolling Meadows.
Top investment sales of 2012 include the $67 million ($176.15 per square foot) sale of One O’Hare Centre, a 380,360-square-foot property in Rosemont that was purchased by CBRE Global Investors; PacTrust’s 296,312-square-foot, four-property portfolio at Continental Executive Parke in Vernon Hills, which sold to PWA Real Estate LLC for $36.5 million ($123.18 per square foot); and Millbrook Properties’ purchase of 5215 Old Orchard Road, a 209,625-square-foot property in Skokie for $24.7 million ($117.83 per square foot).
Colliers International noted that overall net absorption ended 2012 at positive 736,400 square feet, compared to positive 556,847 square feet in 2011. O’Hare and Northwest were the only suburban markets to achieve overall positive net absorption throughout 2012.
No new construction was delivered to the suburban office market in 2012 and no new developments for multi-tenant properties are planned for completion in 2013, according to Colliers International. However, there is build-to-suit activity throughout the market including a 50,000-square-foot project for Big Ten Conference’s headquarters, which began at 5440 Park Place in Rosemont with delivery expected in September 2013.
Additionally, Midwestern University’s Downers Grove campus expansion will likely be completed in 2013, and Hub Group’s 130,000-square-foot build-to-suit headquarters in Oak Brook is scheduled for delivery in late-2013. Finally, AAOS is considering a potential build-to-suit project at the northwest corner of River and Higgins roads in Rosemont.
There are currently 31 properties in the suburban office market that can accommodate large (100,000 square feet and above) users, according to the Colliers report. Twenty-one of those properties are Class A. While large blocks of space in the O’Hare market are slim, the Northwest market offers the majority of options.
“I do believe the suburbs will continue to attract very large corporate users,” Shehan said. “Oftentimes these large users are looking to be a single tenant in the building. They want their own identity of a single tenant building. That’s something that’s hard to come by downtown.”
However, Shehan said Class B properties continue to struggle.
“The difficult properties would be the Class B, more pedestrian buildings with a lack of amenities,” he said. “The suburban market is aging. Some of these buildings that were built back in the 70s and early 80s have been through their useful life and those are the ones that will struggle. Occasionally, you’re going to see demolition of these properties where their useful life has come to an end.”
Downtown Chicago market
A sluggish first half of the year gave way to healthy demand in the second half, resulting in a decrease in vacancy for the Chicago CBD during 2012 and signs of progress in 2013, according to Colliers.
“There’s a hesitant optimism,” said David Gelfand, executive vice president at Colliers International. “You’ve seen growth in some sectors, you’ve seen stability in some sectors and you’ve seen retrenchment in other sectors. It’s a little bit all over the board. There’s very much an economic potpourri in Chicago in terms of the real estate market downtown.”
Following a flat first half of the year, positive absorption during the second half of 2012 resulted in a vacancy decrease to 14.2 percent, down from 14.5 percent at year-end 2011, according to the Colliers report. Both Class A and B space ended the year with 14.1 percent vacancy. Class B space experienced the largest improvement in vacancy during the year with a 0.7 percent reduction while Class A space posted a 0.3 percent reduction.
Direct vacancy declined from 13.5 percent one year ago to the current rate of 13.1 percent, according to Colliers International. Although showing improvement from this market cycle’s peak rate of 14.2 percent as posted in early-2010, there still is ground to be made up before returning to the 10 percent average rates experienced prior to the financial crisis.
While vacancy may be declining, Gelfand said companies are seeking smaller office sizes.
“You’re often seeing moves where tenants are taking less space with the same amount of employees,” he said. “Corporate America and professional service firms are really focused on savings and the bottom line. Real estate is a necessary evil for many companies and they’re very focused on reducing overhead costs.”
Colliers noted that the first half of 2012 was uneventful with only 18,461 square feet of net absorption in the two quarters combined. However, the third and fourth quarter of the year resulted in a combined 706,681 square feet of net absorption, bolstering the annual total to positive 725,142 square feet.
Although the absorption experienced during the year is less than the 1.2 million square feet experienced in 2011, it still is a positive sign that the market is beginning to improve, according to Colliers. All three building classes posted positive absorption for the year. Class A space ended the year at positive 186,525 square feet while Class B space posted positive 422,539 square feet of net absorption.
“The hot areas in downtown Chicago over the years have been the West Loop and River North,” Gelfand said. “That’s where you’ve seen the greatest amount of growth and the greatest amount of building. However, there’s been a hiatus in terms of new buildings going up and it probably will be 2016 before we see new buildings come out of the ground. The result of that has been a tightening of the marketplace and an increase in net absorption.”
