Tag Archives: Office Leasing Conditions
At a glance…
- Chicago office vacancy remains above ‘equilibrium’ by four points (14.4%), yet virtually unchanged from the previous quarter.
- Rental rates continue to soften, slipping to $28.30 per rentable square foot (rsf), a decrease from last quarter’s $29.25.
- Landlords continue to be aggressive in negotiating to retain existing tenants.
- The bulk of market activity involves flight to quality in the leasing market with tenants taking advantage of historically low pricing.
- Office space absorption figures suggest a slight increase in overall demand and leasing activity. Absorption is positive 80,622 rsf for the quarter, compared to the previous quarter of negative 27,582 rsf.
- Sublease vacancy decreased to 2,511,330 available rsf from 2,658,482 available rsf
- Many companies have excess, underutilized space. The bulk of this ‘shadow space’ must be absorbed before a healthy market returns
Issues impacting Chicago office space, and many other markets, include: high unemployment, housing foreclosures and weak pricing, stagnant economic growth and diminished financial reserves of the small business.
We expect the recovery to move slowly for commercial office space in Chicago.
Major transactions this quarter:
- Groupon at 303 E Wacker (150,000 rsf short term sublease expansion)
- PNC Bank at 1N Franklin (116,000 rsf renewal/expansion)
- University Health Consortium at 155 N Wacker Drive (Relocation to 56,290 rsf)
- Crain’s Communications at 150 N Michigan Avenue (Relocation to 54,425 rsf)
New construction may be coming:
A new, 1 million rsf office tower may be coming to the downtown market in 2014. In November 2010, Trammell Crow and Insite Real Estate announced their plans to construct the tower at 301 S Wacker Drive. Alter Group and White Parks Realty are also eyeing 625 W Adams as a site for a 490,000 rsf office tower. Finally, Fifield and CBRE are alleged to be planning a 350,000 to 425,000 rsf office tower at 601 W Monroe.
Where is the opportunity?
There is a lack of A+ prime -view, high-rise space. What little there is will not be discounted as much as tenants would like to see. However, great opportunities continue to exist in the B and B+ building segment. Landlords under pressure are looking to minimize the negative market forces by packaging creative deal structures.
It’s a great time to be a tenant in the market. Don’t be one without excellent representation.
Sam Chandon, global chief economist of Real Capital Analytics writes an excellent article at The New York Observer titled: Why the Rosier Employment Report Still Falls Short. To summarize, he believes the recent employment report paints a very optimistic picture about the rise of jobs and the overall improvement of the economy. After all, February saw the largest one-month improvement in jobs added to the US market since May 2010. However, due to factors such as the slow rate of job growth and rising global political and economical conditions, the commercial real estate sector, in particular, may see a slower increase in business than expected.
“In areas that are more directly relevant for prime office-space demand, the results have been consistently disappointing. Information services reported no increase in jobs in February. In the financial services sector, employment fell by 2,000 jobs over the month; and this sector has almost 50,000 fewer jobs than a year earlier. While many financial institutions have reported robust recoveries in profit levels, these gains have yet to translate into an observable improvement in the sector’s overall employment levels.”
We agree with Chandon. One month of job gains does not a trend make.
For tenants, the next two years will offer an opportunity to secure dramatically low cost office space. Here’s why:
CURRENT MARKET CONDITIONS
The unemployment rate increased from 8.1% in February to 8.5% in March. Adding insult to injury, January job losses were revised from 655,000 non-farm payrolls to 741,000. Since the recession officially began in December 2007, the economy has lost 5.1 million jobs with almost two-thirds (3.3 million) of the decrease occurring in the last 5 months. Many are saying we’re skidding across the bottom of this severe recession but I disagree.
Commercial real estate is just beginning to show weakness that will eventually cripple many owners and force a wave of bankruptcies. In fact, 525 W. Van Buren was the first building to be sold in Chicago’s central business district for $130 million, $6 million less than what the seller or investor paid for it five years ago. This transaction is the first example of a significant downtown commercial real estate property changing hands for less than the seller paid. Read more…