Hopes for Chicago Suburban Office Vacancy Rates

Randolph J. Taylor MBA, CCIM, Broker
Coldwell Banker Commercial 

Vacancy Chart
 Suburban office landlords may have begun the slow crawl toward recovery.

Overall office vacancy rates in Chicago’s suburbs fell a notch to 24.4 percent in the first quarter, according to Chicago-based Jones Lang LaSalle Inc. That’s down from 24.5 percent in the previous quarter and 24.6 percent a year earlier.

Following a year of negative net absorption — the change in the amount of leased and occupied space — demand increased, with 136,775 square feet of positive absorption in the first quarter. That is “a blip” in a suburban market of 98.4 million square feet, said tenant representative Gregg Raus, an executive vice president at Jones Lang LaSalle. And the vacancy rate is still well above sub-20 percent pre-recession levels.

Nonetheless, Mr. Raus senses more optimism among suburban landlords, as at least eight tenants are scouting the market for at least 100,000 square feet of new space.

Meanwhile, office investors who bought at the real estate peak and were unable to compete on rents in recent years are being replaced by new owners entering the market at a considerably lower cost, allowing them to be more aggressive in inking new leases.

“I think that’s going to drive activity in the next few quarters,” Mr. Raus said. “I don’t think I’ve seen this much optimism in quite a while. Companies are starting to feel comfortable in their business, to the point where they’re willing to spend time and money on real estate decisions.”

Landlords that have more flexibility to offer low rents include a venture of Dallas-based Lincoln Property Co., which paid $23.5 million, or just $47 per square foot, for the three-building Greenspoint Office Park in northwest suburban Hoffman Estates. In Rolling Meadows, a Chicago-based venture of Walton Street Capital LLC and GlenStar Properties LLC has agreed to pay about $59 million, or about $65 per square foot, for Continental Towers, a three-building office complex that was repossessed by a loan servicer.

Both complexes have big chunks of available space — in the case of Greenspoint, an entire 147,412-square-foot building it hopes to fill with a single tenant. Working in Lincoln’s favor is a relative lack in the suburbs of big blocks of space that large tenants need.

“That’s what attracted us to this deal,” said Lincoln Vice President Peter Kelly. “There have probably been a half-dozen deals like this over the past year or two, and they’ve done well. If you have a new owner with fresh capital at a new basis, it tends to be a winning formula.”

The lack of competition for larger blocks offset concerns about 26.9 percent overall vacancy in the northwest submarket, behind only the Lake County (27.3 percent) and western east-west (27.1) submarkets in unused space, he said.

Lincoln plans aesthetic improvements at Greenspoint, where it already has 25,000 square feet in new leases, Mr. Kelly said.

“Anybody who’s willing to buy an older building with a lot of vacant space and make improvements to bring it to modern-day standards, they could hit a home run,” Mr. Raus said. “For Class A tenants, there really aren’t a lot of large blocks out there.”

Tenants also are rethinking the way they use office space, which could generate leasing activity, Mr. Raus said.

“It’s too expensive and disruptive to stay in place and do a remodel,” Mr. Raus said. “Companies are moving to a more collaborative environment, and I think you’re going to see that dictating moves rather than renewals.”

Of course, demand for office space ultimately comes down to hiring: If companies are adding employees, they need more space to accommodate them. The U.S. Labor Department said Friday that U.S. employers added just 88,000 workers to their payrolls in March, well below forecasts and the smallest gain in nine months. And job growth in the Chicago area is expected to fall this year, to 25,000 jobs, down from 36,000 last year, according to Moody’s Analytics.

In the largest new lease of the first quarter, Advocate Health Care signed a 139,470-square-foot deal to move its headquarters to Highland Landmark I in Downers Grove. Advocate, the state’s largest health care system, is moving from Oak Brook.

Other large deals included the Association Management Center moving to 47,129 square feet near O’Hare International Airport and Loyola University Medical Center renewing and expanding to 45,612 square feet in west suburban Westchester.

By: Ryan Ori April 08, 2013 Chicago Real Estate Daily Powered by Crains Chicago Business

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