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Chicago Suburban Office Market Small Step Towards Recovery

The suburban office market has taken another small step toward recovery, with vacancy falling to the lowest level since early 2009 but still harsh.

Overall vacancy during the third quarter was 24.2 percent, down from 24.4 percent in the previous two quarters and 24.5 percent a year earlier, according to Chicago-based commercial real estate firm Jones Lang LaSalle Inc. It is the most encouraging number since the first quarter of 2009, when vacancy was 23.9 percent.

The last time vacancy was below 20 percent was the second quarter of 2007, before the recession.

It will likely be years before landlords regain the upper hand in leasing or for office building values to rise significantly, said tenant broker Diana Riekse, an executive vice president at Jones Lang LaSalle.

“It’s hard for buyers to get excited about the suburbs,” said Ms. Riekse, who specializes in the west suburban market along Interstate 88, the East-West Tollway. “We need a good six quarters of positive net absorption before people get excited about it from a landlord perspective.”

Demand for space was a meager 195,818 square feet during the third quarter, nudging the year-to-date total to just 315,615. Demand is measured by net absorption, the change in the amount of leased and occupied space compared with the previous period.

That expansion pales in comparison with the 895,418 square feet Zurich North America announced it will vacate in Schaumburg in 2016. The subsidiary of the Swiss insurer said in September that it will build a new headquarters on the campus of communications device manufacturer Motorola Solutions Inc., which is also in the northwest suburb.

Zurich has not disclosed the size of the new building, but the announcement will mean some heavy lifting for the building’s Oak Brook-based owner, Retail Properties of America Inc., which is faced with holding two empty towers.

“Everybody’s talking about Zurich,” Ms. Riekse said. “That’s going to be a step back for Schaumburg, but not for three years.”
Of the six submarkets in the Chicago suburbs, Lake County maintained the highest overall vacancy, at 28.3 percent, while Cook County remained the lowest, at 16.5 percent.

SHORTAGE OF BIG DEALS

The weak absorption of space is simply because of a shortage of big deals. Just two new leases of more than 100,000 square feet have been signed in 2013, compared with 10 in 2012.

The third quarter was highlighted by college bookstore chain Follett Corp.’s 163,000-square-foot lease at Westbrook Corporate Center in west suburban Westchester, the largest deal of the year to date.

But small deals prevailed, with nine other leases of at least 20,000 square feet, including Power Construction Co. LLC’s 35,000-square-foot deal at 8750 W. Bryn Mawr Ave. near O’Hare International Airport.

Cutting back space when leases are up for renewal has become commonplace nationally, as companies seek more open layouts that encourage collaboration and save space. In many cases, reducing space prompts tenants to move to higher-quality and better-located buildings, since it’s often easier to move than to try to rebuild space while workers are present, Ms. Riekse said.

Another troubling trend for the suburbs has been tenants migrating downtown in pursuit of young, urban workers. Companies with deep roots in the suburbs are now exploring alternatives to a complete move into the city, such as creating satellite offices, she said.

Loft buildings in areas close to the Kennedy Expressway, such as River West, are becoming popular destinations for those small offices.
“Right now it’s a small percentage (of tenants) that actually do it, but I’d say half of them are evaluating it,” Ms. Riekse said.

Source: Crains Chicago Business Ryan Ori October 07, 2013
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