Chicago Suburban office vacancy falls to 14-year low

Even as some of their most recognizable tenants continue moving workers downtown, suburban office landlords keep filling up their vacant space.

Overall suburban vacancy fell to 19 percent during the third quarter, the lowest level in 14 years, according to Chicago-based Jones Lang LaSalle. That’s a big drop from 20.3 percent vacancy in the second quarter, and 23.4 percent a year earlier.

Vacancy in Chicago’s suburbs is in the teens for the first time since 2007. Vacancy peaked at 25.4 percent in 2010 during the early years of a prolonged real estate downturn.

Amid an improving economy, many companies are expanding again or making long-term commitments to office space in the suburbs.

“There’s a pipeline of companies that weren’t making big decisions, and were doing short-term (lease) renewals instead,” said tenant broker Jim Rose, a JLL vice president who is active in the northwest and O’Hare submarkets. “Those companies that were putting all their decisions on hold are now creating a ton of activity. We see it with contractors, with architects, all across the industry. Tenant confidence is really high right now.”

The vacancy drop belies the broader narrative about the office market that has developed as several big tenants have decided to ditch the suburbs for the city. The latest round of high-profile moves downtown includes Kraft Heinz’s deal to move its headquarters to the Aon Center from Northfield and Schaumburg-based Motorola Solutions’ headquarters shift to 500 W. Monroe St. Omaha, Neb.-based ConAgra Foods is moving its headquarters to Chicago’s Merchandise Mart, a deal that includes closing the company’s Naperville office.

Meanwhile, Oakbrook-based McDonald’s was close to a lease of more than 350,000 square feet at Prudential Plaza before halting the deal, at least for the moment.

“Those are big-time names, so there’s a reason they’re grabbing the headlines,” Rose said. “But there’s a lot more tenants out there than four. There’s still a huge number of tenants that aren’t looking downtown and are re-committing to the suburbs.”

Chicago Suburban Vacancy Lowerst in 14 Years

Although some tenants are focused on urban locations in order to recruit and retain younger workers, the suburban market is experiencing a revival in part because of pent-up demand for extra space, Rose said. After years of putting off long-term real estate commitments because of a shaky economy, tenants that are entrenched in the suburbs have now begun relocating to new space or adding on to their longtime offices, he said.

Demand—as measured by net absorption, the change in the amount of leased and occupied space—increased by 603,860 square feet in the third quarter. Net absorption has been greater than 600,000 square feet, or larger than many suburban office buildings, in three of the past six quarters.

Relocations that contributed to absorption included Baxter International spinoff Baxalta’s headquarters move to all of a 257,191-square-foot building in Bannockburn, and pasta maker Barilla—which was displaced by the Baxalta deal—relocating its American headquarters to a 75,260-square-foot building in Northbrook.

Large leases signed in the third quarter, which will affect future vacancy figures after the tenants move, include the decision by the North American unit of London-based financial services firm HSBC to consolidate almost 1,500 local employees to 162,396 square feet in Arlington Heights. In the second-largest deal, Horizon Pharma plans to triple its head count when it moves its U.S. headquarters to about 133,000 square feet in the former Solo Cup headquarters space in Lake Forest.

Lake County remained the submarket with the highest vacancy, at 24.2 percent, down from 24.9 percent in the previous period. The lowest vacancy remained in suburban Cook County, at 9.9 percent, down from 12.2 percent a quarter earlier.

Northwest suburban vacancy was the second-highest at 20.4 percent, and that area faces additional space coming back to the market in Schaumburg as Zurich North America prepares to vacate its nearly 900,000-square-foot, two-tower complex for a new campus. Motorola Solutions also plans to sell its excess suburban space after moving the headquarters downtown.

Source: Chicago Real Estate Daily October 12th, 2015 Ryan Ori

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