A Capital Constrained Environment: Why Have Deal Terms Stayed Steadier Than Expected?

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O'Hare Submarket: Highest vacancy rate in the suburbs, but performer in second quarter

The O’Hare submarket’s vacancy rate has been elevated since 2002 and continues to top the Suburban submarkets at 27.5 percent. Proximity to one of the busiest airports in the nation and excellent highway access make the O’Hare submarket appealing to office tenants, but a surplus of inventory has plagued the area. However recent figures and events suggest that demand may be stabilizing.



With roughly 132,000 square feet in positive absorption, O’Hare was the only suburban submarket that experienced increased demand in the second quarter. Each building class saw a slight increase in occupancy. Tenants who moved into significant amounts of space during the second quarter include Deerfield Capital Management (25,470 square feet at One O’Hare Centre) and U.S. Foodservice (23,841 square feet at 6133 North River Road).

Early in the third quarter, U.S. Cellular renewed their lease at Citicorp Plaza and expanded from 197,506 to 212,000 square feet Retaining large clients such as U.S. Cellular is crucial to the health of the submarket, as tenants with similar space requirements have recently left the suburbs to take advantage of falling rental rates in downtown Chicago.

Adding to the supply of office space during the second quarter was the delivery of the 119,000 square foot Rosemont Corporate Center. Two tenants currently occupy the building: Cisco Systems is leasing 81,000 square feet while Skyline Advanced Technology Services is 7,000 square feet. The entire fourth floor remains available for lease.

Although the general outlook remains bleak the O’Hare submarket will benefit from a lack of new construction. For positive absorption to continue, landlords will need to offer aggressive lease packages to attract new tenants. Unfortunately with more and more businesses staying put, it is unlikely that the submarket can generate enough demand in the short-term to significantly increase occupancy.

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

River North: Demand increases, 300 N. LaSalle under contract

The River North Submarket experienced the greatest increase in demand as the direct vacancy rate dropped from 16.4 percent just a quarter ago to 14.6 percent. While last quarter’s positive absorption of nearly 235,000 square feet is a promising sign, the submarket is very volatile.

Tenants moved their offices from other submarkets and into River North reducing vacant office space. The recently constructed properties continued to gain occupancy. Littler Mendelson occupied 36,000 square feet at 321 North Clark after moving from 200 North LaSalle in the Central Loop. Intercontinental Exchange also migrated from the Central Loop and moved into 24,000 square feet at 353 North Clark. Older, but renovated, 350 West Mart also saw significant leasing activity. At a later date, Getco will move into 100,000 square feet there when they relocate from 141 West Jackson.

The biggest story in the River North Submarket last quarter was the pending sale of 300 North LaSalle. KBS Realty Advisors agreed to purchase the one-year-old building from Hines Interests L.P. for approximately $655 million, roughly $503 per square foot, a record. It is Chicago’s first example of high demand for trophy buildings in global cities. With nearby 353 North Clark now on the market, further interest will be tested.

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

Up Next: O’Hare Submarket

MB Real Estate releases Second Quarter 2010 Chicago Market Overview & Submarket Snapshots

MB Real Estate is excited to release our Second Quarter 2010 Chicago Market Overview. The report tracks historical data, analyzes trends, and provides a comprehensive outlook for the Chicago Central Business District (CBD) and Suburban markets.

In the second quarter, Chicago’s CBD experienced roughly 130,000 square feet in negative absorption elevating its direct vacancy rate to 16.1 percent. In the Suburban market, the direct vacancy rate rose to 22.4 percent as a result of over 250,000 square feet in negative absorption. The Chicago Market Overview analyzes the job market, how it has impacted office demand, and how it will impact the office forecast. Click on the image below to view the report.

Also be sure to read our Second Quarter 2010 Chicago Submarket Snapshots, an in-depth analysis and review of the major events that took in each of the submarkets the MB Real Estate tracks. As expected, a majority of Chicago’s CBD and Suburban submarkets saw reduced leasing activity and decreases in occupancy. Click on the image below to learn about the performance of each submarket and the respective impact each had on the overall market.

Up Next: Chicago’s River North Submarket

West Loop: High-end space retains demand; UBS cuts space

During the first quarter demand for office space continued to fall in the CBD’s largest submarket as the direct vacancy rate reached 17.0 percent, approaching its historical high. Populated primarily with financial service firms, insurance companies, law firms, and corporate headquarters, the West Loop has been the most desirable submarket due to its proximity to public transportation and stock of some of the city’s largest and newest buildings.

The magnitude of negative absorption surpassed all other submarkets, but since the West Loop is the largest, it was not severe on a percentage basis. While Class A buildings were basically stable, the West Loop’s B and C experienced negative demand.

Five tenants took advantage of the soft market by signing new large deals, leases 20,000 square feet or greater, at Class A properties in the West Loop.

In addition, the 1.34 million square foot 1 N. Wacker renewed the lease of its namesake tenant, UBS, to a 10-year lease for 393,000 square feet. However this involves a 59,000 square foot reduction from their current space.

As companies, such as UBS, look to consolidate their office space after job cuts and slowdowns in hiring, demand will continue its decline.

For MB Real Estate's Outlook on the West 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: MB Real Estate releases its second quarter Chicago Market Overview and Submarket Snapshots.

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