East-West Submarket: Vacancy near peak; Negative demand expected to continue

Market conditions continued to worsen in the East-West submarket in the 1^st quarter, with the direct vacancy rate rising to 20.5 percent, just shy of the record 20.7 percent rate reached in 2002. With land costs near the lowest in the metropolitan area, especially in the west side of the submarket, it has been subjected to high levels of construction creating an oversupply situation. Decreased demand combined with additions to supply led to 189,550 square feet of negative absorption from the end of last year.

Like much of the country, new construction has plummeted and should allow the East-West submarket to regroup. However, vacancy will likely continue to rise next quarter as leases roll and tenants reduce space requirements. But a large new tenant will help demand in the second quarter. Dover Corporation will move its headquarters to Downers Grove from New York, taking 68,000 square feet. While most leasing activity in the suburbs has been from relocations, this represents new demand in the market.

For MB Real Estate's Outlook on the East-West Submarket and the rest of the Chicago Market, reference our Submarket Snapshots, our new companion piece to the MB Real Estate Chicago Market Overview.

Up Next: West Loop

East Loop Submarket: Vacancy Historically Higher than CBD

The direct vacancy rate in the East Loop submarket climbed from 16.3 percent at the end of 2009 to 18.3 percent in the first quarter of 2010. The East Loop's vacancy rate is the highest of the CBD submarkets. The East Loop is at disadvantage compared to other submarkets in the CBD due to its distance from Union and Ogilvie stations. Tenants who wish to be closer to public transportation can take advantage of falling rental rates and increased concessions in other submarkets when evaluating their office needs, implying that landlords must be even more aggressive in the East Loop. Buildings such as Michigan Plaza offer shuttle services to and from the train stations as an extra amenity to tenants.

Until this year, lackluster demand in the East Loop prevented increases supply. However the completion of an 860,000 square foot addition at 300 East Randolph (Blue Cross Blue Shield Building) earlier this year may add to the submarket's vacancy woes. While much of the newly added space has been occupied by the owner or preleased, four full floors totaling 130,920 square feet remain vacant. Only 367,920 square feet of the addition was put on the market, with the rest occupied by the owner, Blue Cross Blue Shield. Further increases to vacant space stemming from the addition depend on whether or not Blue Cross Blue Shield will vacate space when their leases expire in other East Loop buildings to occupy the space they already own at 300 East Randolph.

For MB Real Estate's Outlook on the East Loop and the rest of the Chicago Market reference our Submarket Snapshots, our new companion piece to the MB Real Estate Chicago Market Overview.

Up Next: East-West Corridor