Central Loop: Occupancy levels continue their slow decline

Demand remained relatively unchanged as the direct vacancy rate rose to 13.6 percent. Albeit at a much slower pace, vacancy increased for the ninth consecutive quarter in the CBD’s second largest submarket.

As was the case last quarter, a slight gain in occupancy in Class A buildings was countered by occupancy decreases in Class B and C buildings. Tenants in the market with space requirements greater than 50,000 square feet continue to have considerable options in the Central Loop. Fifteen direct large blocks (contiguous blocks of vacant space over 50,000 square feet) are available for lease while five sublease large blocks, which typically offer above-average quality existing conditions and lower rental rates than direct counterparts, are on the market with varying expiration dates.

While the net change in occupied space was slight, a few tenants leased significant amounts of space for future occupancy. Project Leadership Associates signed an 11-year lease for 20,068 square feet at 120 South LaSalle as they will relocate from 200 West Adams. Digitas extended its lease until 2021 and expanded by 21,000 square feet for a total of 81,000 square feet at 180 North LaSalle.

The Central Loop, which is mainly occupied by government offices, financial organizations and law firms, will likely continue to see a gradual decline in office occupancy in the near-term. Recent job growth in the financial services sector is not nearly equivalent to employment losses experienced over the past two years. Law firms continue to cut their space requirements as they opt for more efficient workspaces at reduced costs.

The Central Loop’s boundaries are defined by the Chicago River (North), Wells Street (West), State Street (East), and Van Buren Street (South).

For our complete outlook on the Chicago Office market, please reference the MB Real Estate 4^th Quarter 2010 Chicago Market Overview and Submarket Snapshots.

Chicago CBD Office Property Sales Ramp Up in 2010

With investment activity at a near standstill in 2009, 11 multi-tenant office properties in Chicago’s Central Business District (CBD) changed hands in 2010. Investors showed interest in each end of the spectrum as the majority of transactions involved either core or distressed properties. While properties in large coastal cities (i.e. New York, Boston, and San Francisco) received most of the national attention, Chicago was home to 3 of the 10 largest transactions in the United States during 2010.

The largest transaction in Chicago, and 3^rd largest in the United States, occurred when KBS Realty Advisors purchased 300 North LaSalle for $655 million. At $503 per square foot, the transaction was the largest in Chicago’s history on a per square foot basis. The sales of 71 South Wacker and 353 North Clark, which both closed during the fourth quarter, marked the 4^th and 10^th largest office transactions in the U.S. at $625 and $385 million, respectively.

With investment activity picking up at the end of 2010, MB Real Estate expects transaction velocity to continue through 2011. Investors, both foreign and domestic, will continue to seek core assets as well as value-add plays in the CBD.

For our complete outlook on the Chicago Office market, please reference the MB Real Estate 4^th Quarter 2010 Chicago Market Overview and Submarket Snapshots.

MBRE Market Beat - February 2011: When will a new building break ground in Chicago's CBD?

O'Hare Submarket: Vacancy rate improved since 2009, but still highest in Suburban Chicago

For the third straight quarter, O’Hare experienced positive absorption, signaling that the submarket may have reached bottom. However, the direct vacancy rate is still the highest in Suburban Chicago. But without significant job growth, vacancies are expected to remain at elevated levels.

O’Hare was home to two of the largest investment sales of the fourth quarter. The 631,445 square foot Triangle Plaza complex at 8750 and 8770 West Bryn Mawr in Chicago was purchased by CommonWealth REIT for $96.25 million. The Class A complex, which traded for $152 per square foot, was approximately 90 percent leased at the purchase date.

The other large sale in O’Hare occurred when Colony Capital purchased 5100 North River Road in Schiller Park from RREEF for $17.4 million, or $125 per square foot. The sale price for the fully leased building was roughly 27 percent less than what RREEF paid in 2007.

Complementing the 15 available direct large blocks (contiguous space of 50,000 square feet or greater) was the addition of an 118,666 square foot sublease block at 5450 North Cumberland Avenue in Chicago. The sublandlord, Océ-USA Holding, has an existing lease which runs through February 2020. The current supply of large blocks gives tenants considerable options and pressures landlords to lower rental rates and increase concessions to lure new tenants.

The O’Hare submarket is located in northwestern Cook County, with major cities including northwestern Chicago, Elk Grove Village, and Rosemont. 

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

East-West Submarket: Uptick in demand; Navistar closes on HQ purchase

Suburban Chicago’s largest submarket experienced a small increase in demand for the second consecutive quarter. Vacancy rates fell slightly in the fourth quarter but remain near the record highs reached at the end of 2003. With no new deliveries planned in the near future, MB Real Estate expects demand to gain momentum after job growth is sustained. 

Several large lease transactions were signed in the East-West corridor during the fourth quarter. Health Care Service Corporation extended their lease and will expand at 120 West 31^st Street in Downers Grove to occupy a total of 177,000 square feet. Technology firm TriZetto signed a 40,748 square foot lease at 1240 East Diehl Road in Naperville. The new office is slightly smaller than what they currently occupy at 500 Technology Drive. SunCoke Energy announced that they are relocating their headquarters from Knoxville, Tennessee to 40,000 square feet at the Arboretum Lakes complex in Lisle. 

Navistar International closed on the purchase of the 1.2 million square foot campus at 2601-2701 Lucent Lane in Lisle for $33 million, or $27 per square foot. As a result Navistar’s former office, a roughly 250,000 square foot block at 4201 Winfield Road in Warrenville, is now available for sublease through January 2016. Wanxiang America purchased the vacant, 329,770 square foot building at 1200 Warrenville Road in Warrenville for $9.4 million, or $29 per square foot. The group plans to invest $47 million to renovate the four-story building. 

The East-West submarket encompasses Cook, DuPage, Kane, Kendall, and Will Counties, with major cities including Downers Grove, Lisle, Naperville, and Oak Brook. 

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