The East-West corridor’s Class A availability rate fell by a full percentage point (pp) to 22.7 percent in the fourth quarter, according to Savills Studley’s Chicago Suburbs office sector Q4 2014 report. Kevin McLennan, senior managing director at Savills Studley, says that is pretty consistent for the corridor.
“The East-West corridor is never going to outshine the region, or any one of the submarkets, from a positive or negative perspective,” McLennan said. “Historically you’ll find that it remains steady. I think one of the reasons historically you’ll see that is because it’s a really big submarket.”
“It’s the biggest from a rentable area perspective,” McLennan added. “It’s the biggest submarket of all the suburbs. So it has the most square footage to lease, the most Class A, and Class B type buildings.”
Due to the corridor’s huge size, McLennon noted that typically the corridor will see a lot of activity, but there will be vacancies that offset the positive absorption.
“It doesn’t really move the needle much when you see the market statistics,” he said. “The corridor has 40 million square feet, so a percentage point in the corridor is a big deal. The takeaway is that the market was really active in the last quarter. More space was taken off the market than was added.”
During 2014 in the corridor, tenants leased 1.6 million square feet, which was 25.2 percent less than the 2.2 million square feet in deals signed during 2013, according to Savills report.
“Over the last couple of years, leading up to the end of 2014, a lot of big deals were completed well in advance of when they traditionally should have been completed,” McLennan said. “The general rule of thumb is tenants within 12 months of their lease expiration, maybe a little bit longer, typically execute a new lease.”
McLennan noted that what Savills has found is that new leases are actually being done with much more lead time, sometimes as much as two or three years of lease expiration. “That’s why I think the activity looks like it was a little light, and it’s because a lot of the deals were done in the beginning of 2014, end of 2013.”
According to Savills report, leasing activity could pick up if more buildings change hands and new ownership groups choose to provide the capital required to pursue aggressive leasing campaigns, and McLennan agrees.
“From a capital markets perspective, it was kind of lukewarm,” McLennan said. “The activity was healthy but not robust. I think in 2015 you’re going to see robust capital market activity, and when that happens, the transactions that I’m hearing about, they might be some big capital markets transactions that’ll be a catalyst for tenants to get going. As well as allowing tenants to take a hard look at opportunistically can they restructure and save money, and become more efficient as space users. That’ll continue to be the trend.”
One of the notable deals for the corridor involved Cadence Health, who recently signed a short-term 54,798 square foot lease at Keystone (4525 Weaver Parkway). The deal brings its administrative staff closer to two of its cancer treatment centers, and according to the report, in early 2015 Cadence is expected to migrate 170 employees from Central DuPage Hospital in Winfield to the new Keystone location.
“Cadence Health was certainly a notable deal,” McLennan said. “I think healthcare in 2015 is going to be a pretty important driver of market activity—not only in the East-West corridor, but the overall suburbs. There’s some big health systems located in the western suburbs and historically they’re active.”
There were also a lot of lease renewals, and restructures for the East-west corridor.
“Some of these transactions don’t always find themselves on these market reports because often times they’re pretty quiet transactions,” McLennan said. “We completed a lease restructure for CA Technologies in Lisle. That’s an example of a company that needed to basically downsize, and they needed to do it well in advance of their lease expiration. So we partnered with the landlord to come up with some creative solutions to help them do that.”
McLennan said that there’s a lot of that going on throughout the corridor and throughout the year.
“Looking at 2015, I think you’ll continue to see more of that,” he said. “You’ll see some lease restructures, and there are some big transactions out there that haven’t gotten done.”
As for rents, McLennan thinks Class A rents are going to be stable, and if anything, they may increase a little bit.
“For the majority of the big block spaces, I don’t think those are going to change much. But I think traditional mid-range blocks of space—the 20 to 60,000 square foot spaces—those will increase a little bit. Rents in the Class B market I expect to remain the same. That’s the sign of a healthy market, and usually that’s a sign that vacancy rates have gone down a couple quarters in a row, and that’s what we have seen.”
Overall for 2015, McLennan noted that for the East-West corridor he’s cautiously optimistic it’s going to be a busy year.
“Depending on who you ask it has different meanings,” he said. “For a company like ours—we only represent the tenants not the landlords—a good year means a year where our clients, or tenants, still have opportunity to really impact their bottom line.”
“If you were to ask a leasing agent what a good year is, a good year is rates are increasing, my owners are making more money—which goes exactly against what my good year is,” McLennan continued. “I think it’s still a tenant’s market. So the tenants have opportunities, but it’s swinging back to the landlords a little bit. They’re getting a bit of positive news, and ability to increase rent’s a little bit.”
