SECTION TITLE SECTION SUBTITLE
THIRD
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2013
CENTRAL BUSINESS DISTRICT
SECTION #
CHICAGO
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FIRST QUARTER 2013 | CHICAGO MARKET OVERVIEW
1
T H I R D Q UA RT E R
2013 CHICAGO
MARKET OVERVIEW
TABLE OF CONTENTS SE CT ION ONE
CHICAGO ECONOMY 01 Economic Analysis
SE CT ION T WO
CHICAGO CENTRAL BUSINESS DISTRICT
MARKET OVERVIEW
02 Chicago CBD Executive Summary SUPPLY 03 New Development 04 Sublease Space 05 Large Blocks of Direct Availability DEMAND 06 Vacancy Rates 07 Large Deals 08 Absorption FEATURES
2013
09 10 11 12 13
Lease Comparables Investment Sales Forecast Submarket Map Market Statistics
SE CT ION T H RE E
SUBURBAN CHICAGO 14 Suburban Chicago Executive Summary SUPPLY
The Chicago Market Overview is published quarterly by MB Real Estate.
15 New Developments 16 Sublease Space 17 Large Blocks of Direct Availability
To obtain additional copies or for further information, please contact:
181 West Madison Street, Suite 4700 Chicago, Illinois 60602 (312) 726-1700 www.mbres.com
DEMAND 18 Vacancy Rates 19 Large Deals 20 Absorption FEATURES 21 22 23 24 25
Gross Asking Rents Investment Sales Forecast Submarket Map Market Statistics
SE CT ION FOUR
ADDITIONAL INFORMATION 26 Glossary 27 About MB Real Estate
CHICAGO ECONOMY ECONOMIC ANALYSIS Despite the term “uncertainty” creeping back into the country’s dialogue, job growth in Chicago picked up slightly with total non-farm employment levels growing 1.4 percent on a year-over-year basis. Still recovering, Chicago is expected to become one of the 10 top cities worldwide in economic competitiveness by 2025 according to the Economist Intelligence Unit. Year-over-year growth in employment for Chicago-Naperville-Joliet MSA officeusing industries grew a combined 3.5 percent during the third quarter. This was the largest quarterly growth in Professional and Business Services and Financial Activities since 2000 and marks the highest level of employment in the overall job market since before the recession.
CHICAGO ECONOMIC ANALYSIS
SECTION ONE
Companies such as Google and GoHealth moving and expanding in Chicago’s Central Business District (CBD) have brightened the job outlook as these new jobs have the potential to induce further job growth in industries such as hospitality, commerce and law. Enrico Moretti, a Professor of Economics at the University of California, Berkeley, argues that the job multiplier potential in metropolitan centers is strong, especially for a tech position which could create as many as five additional jobs. Mayor Emanuel has continued to attract these new companies and jobs to the CBD, with nearly 2,000 new jobs announced in the third quarter alone. As many of them are in the tech industry, they have the potential to create many more secondary jobs. Midwest hiring expectations were muted going into the fourth quarter as many sectors, especially Transportation & Utilities, Government and Leisure & Hospitality, have slowed due to the approaching congressional fiscal deadlines. According to Manpower, a workforce solutions agency, 18 percent of employers in the Midwest expect to increase their staff levels by the end of the year, down from 22 percent last quarter. The Construction sector, approaching their slow winter season, has also severely pulled back on hiring expectations. Of most concern for the Commercial Real Estate community, fewer employers in the Professional and Business Services sector expect to increase their workforce, dropping nearly 10 percent to 18 percent. Even so, the percentage expecting to decrease their workforce also declined, meaning many employers expect their workforce levels to stabilize. Chicago continues to lead Illinois out of the 2008 recession as one of the few metros in the state to be firmly in recovery as judged by Moody’s Economy.com. Strong growth in the city’s tech population in River North and the West Loop has provided a strong foundation for the private sector. Chicago has also benefitted from a young, highly educated workforce that has influenced many companies to relocate to the city. Additionally, Chicago is the tourism hub of the Midwest and will benefit from this source of income in which many neighboring states cannot depend on. While these demand drivers are cause for optimism, longstanding weaknesses in the city as well as in Illinois continue to damper the recovery. Among these, Moody’s cites an old and aging infrastructure as well as uncertainty in the city and state’s fiscal health as the main detractors. State and national fiscal uncertainty notwithstanding, the economic outlook of Chicago continues to improve. Consistent job growth in office-using industries has improved employment in the city and recent moves by large companies such as AT&T to bring in new jobs bode well for the future. Yet overall job growth remains anemic and will need to improve to have a significant impact on Chicago unemployment. MBRE’s baseline forecast expects the rate of positive absorption to slowly increase over the next two years, resulting in a steadily declining vacancy rate. Sources: MBRE Research, BLS, Crain’s Chicago Business, World Business Chicago, Manpower, Moody’s Economy.com
CHICAGO EMPLOYMENT WELL BELOW PEAK AND RECOVERING SLOWLY Chicago MSA Employment (thousands, SA)
4,700 4,600
4.593 million
Peak: 4.569 million
4,500 4,400 4.390 million
4,300
Peak-toTrough -7.46%
4,200 Trough: 4.228 million
4,100 4,000 Oct-98
Current: 4.435 million Apr-00
Oct-01
Apr-03
Oct-04
Apr-06
Oct-07
Apr-09
Oct-10
Apr-12
Oct-13
THIRD QUARTER 2013 | CHICAGO MARKET OVERVIEW
1
CENTRAL BUSINESS DISTRICT EXECUTIVE SUMMARY The CBD continues to perform at post-recession highs with 299,000 square feet in third quarter positive absorption causing the direct vacancy rate to drop 20 basis points to 14.5 percent. With third quarter year-to-date absorption at 852,000 square feet, the highest it’s been since 2007, demand in the CBD has been consistent with MBRE’s baseline forecast of a modest, but accelerating, recovery in the near term. Key Indicators: • CBD direct vacancy is at its lowest level since 2009 and is down 100 basis points on a year-over-year basis. Class C space rebounded strongly with 100,000 square feet in positive absorption while Class A demand plummeted, losing 125,000 square feet of occupancy. Class B buildings continue to power the CBD recovery. •
Beitler Real Estate is likely to deliver the 23-story, $140 million development at 200 West Randolph in 2015. The building, if delivered, will be the first new CBD office building since 2010. Hines, which broke ground on its 444 West Lake building during the first quarter, plans to begin vertical construction by December 2013 with completion of the building slated for mid-2016. There are 11 sites in total that have been actively marketed to prospective anchor tenants.
•
Large user (tenants who occupy at least 20,000 square feet) activity continued at a rapid pace in the third quarter. Over 620,000 square feet in leases were signed compared to 452,000 square feet in the second quarter. McDermott Will & Emery signed the largest lease of the year at 225,000 square feet when they agreed to anchor the new development at 444 West Lake.
•
Excluding Class A new deals, average net initial rates increased across the CBD market. Class C buildings saw average net initial rates for new deals increase 10.2 percent as inventory shrinks in the segment due to conversion of outdated buildings.
•
Underutilized space remains a concern to the outlook of the market despite the excess space slowly being filled. Companies such as McDermott Will & Emery, which downsized its space requirement at 444 West Lake, are right-sizing their space requirements to reflect reduced headcounts and more efficient layouts. Other risks include: increased national and state tax rates; reduced storage and server space needs due to digital archiving and cloud computing; and increased healthcare costs.
•
The CBD continues to benefit from strong demand drivers that include: a highly sought-after labor force; rapidly expanding tech and health care firms; a tightening market with no new supply expected until 2015; and increased corporate confidence.
CHICAGO ECONOMIC ANALYSIS
SECTION TWO
With over 1.7 million square feet in net positive absorption over the last five quarters, the outlook of the CBD market continues to improve. Adding to the optimism is the fact that investment activity is at levels not seen since 2006 and new development speculation continues at a rapid pace. That said, turbulence in the Class C segment continues to fuel uncertainty in the long term viability of the recovery as does anemic job growth in Chicago. Therefore, MB Real Estate’s baseline forecast predicts improving positive absorption rates over the next two years, resulting in a steadily declining vacancy rate.
CBD VACANCY AND YEAR-END ABSORPTION SUMMARY Direct Vacancy 3Q2013 Central Loop East Loop N. Michigan Ave. River North South Loop West Loop CBD Chicago Total Net Absorption 3Q2013 Central Loop East Loop N. Michigan Ave. River North South Loop West Loop CBD Chicago Total
A
Change from 2Q2013
10.3% 15.6% 16.5% 10.4% 27.4% 13.3% 13.0%
1.1% 1.3% 0.2% -0.2% -0.2% -0.2% 0.3%
B
Change from 2Q2013
14.9% 24.1% 18.9% 6.4%
-0.1% 0.5% -5.5% -0.2%
11.0% 16.0%
0.1% -0.5%
C
Change from 2Q2013
Total
Change from 2Q2013
15.4% 13.1% 21.6% 10.0% 23.0% 15.4% 15.0%
-0.3% -0.9% 1.5% -0.7% -1.1% -1.6% -0.6%
13.3% 18.6% 19.1% 9.1% 25.1% 13.1% 14.5%
0.3% 0.1% -1.4% -0.4% -0.6% -0.3% -0.2%
A
B
C
Total
(144,185) (51,973) (8,582) 7,684 2,206 69,377 (125,473)
29,939 (25,121) 255,757 36,117
25,060 54,262 (94,885) 14,108 2,972 96,003 97,521
(89,185) (22,831) 152,290 57,909 5,178 195,814 299,174
30,434 327,126
Numbers in parentheses are negative
THIRD QUARTER 2013 | CHICAGO MARKET OVERVIEW
2
Potential new developments vie for anchor tenants, financing •
•
There are currently 17 tenants in the marketplace seeking spaces greater than 100,000 square feet. Yet with only 9 contiguous blocks of Class A space greater than 100,000 square feet, large tenants have limited relocation options. The proposed Beitler development at 200 West Randolph plans to take advantage of these users who are looking for lower profile space and do not want to wait until 2016 for new inventory. Conversions remain popular as a former meat processing facility at 210-20 North Green is slated to be turned into a boutique office building by Shapack Develepmont. The renovation of the six-story building is expected to be completed in 2014 and is already fully leased to WeWork, a collaborative workspace provider. Just west of the CBD’s official boundaries, Sterling Bay is redeveloping a 545,000 square foot former cold storage facility at 1000 West Fulton. The project, dubbed 1K Fulton should be delivered in the first quarter of 2014 and is now 40 percent preleased to two tenants after Google agreed to occupy 200,000 square feet.
% Leased (Avg)
2000 - 2013 INVENTORY ADDITIONS 2000 - 5 Properties 2001 - 2 Properties 2002 - 2 Properties 2003 - 0 Properties 2004 - 1 Property 2005 - 2 Properties 2006 - 2 Properties 2007 - 0 Properties 2008 - 2 Properties 2009 - 3 Properties 2010 - 1 Expansion 2011 - 0 Properties 2012 - 0 Properties 2013 - 0 Properties Total - 20 Properties
2,870,576 904,436 2,236,364 0 1,300,000 2,500,143 1,320,498 0 728,254 3,652,913 933,710 0 0 0
sf sf sf sf sf sf sf sf sf sf sf sf sf sf
16,446,894 sf
UNDER CONSTRUCTION/ANNOUNCED 444 West Lake 200 West Randolph Total
95.8% 86.9% 94.6% 0.0% 100.0% 97.4% 96.9% 0.0% 70.6% 81.4% 92.9% 0.0% 0.0% 0.0%
% Leased
900,000 sf 414,000 sf
25.0% 0.0%
1,314,000 sf
2000-2013 INVENTORY ADDITIONS Delivered (2000-2012) Delivered (2013)
16,446,894 sf 0 sf
Total Under Construction/Announced Proposed Inventory
16,446,894 sf 1,314,000 sf 4,922,564 sf
Total
6,236,564 sf
•
MB Real Estate has identified 11 sites with proposed buildings ranging from 350,000 to 1.3 million square feet. While many of these sites will require at least 50 percent preleasing to secure financing, increased Class A demand in the CBD has led financiers to ease these requirements.
•
OUTLOOK: The amount of new development will be dependent on not only the number of large tenants seeking trophy space and available Class A large blocks, but also on how much risk financiers are willing to take on by lowering their pre-leasing requirements. Increased demand through 2016 is expected to be great enough to warrant further development of new office buildings.
NO NEW DELIVERIES EXPECTED UNTIL 2015 4,000,000
20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0%
3,000,000 2,000,000 1,000,000 0 (1,000,000) (2,000,000) 2002
2003
2004
2005
New Construction Delivery (square feet)
2006
SUPPLY
•
No new developments were formally announced this quarter. Hines broke ground on its 45-story building at 444 West Lake earlier this year and are looking to continue preleasing after agreeing to terms with McDermott Will & Emery. The developer obtained $300 million from Montreal-based Ivanhoe Cambridge and an additional $29.5 million from the City of Chicago for a surrounding park that will cover the nearby Metra tracks. Hines is hoping to finish the park and begin vertical construction by December, with completion still slated for mid-2016.
CENTRAL BUSINESS DISTRICT
NEW DEVELOPMENT
2007
2008
2009
2010
Absorption (square feet)
2011
2012
YTD 2013
Direct Vacancy Rate %
THIRD QUARTER 2013 | CHICAGO MARKET OVERVIEW
3
Sublease availability declines as does large block availability Total available sublease space decreased nearly 100,000 square feet to 3.1 million square feet and was accompanied by a decrease in large sublease block availability.
•
The number of large sublease blocks in excess of 50,000 square feet decreased by one to 13. Zurich offset the removal of an additional large block when they began marketing 72,000 square feet of their former space at 10 South Riverside. The Swiss insurance company is seeking a subtenant for their space on the 5th and 6th floors through May 2014.
•
GoHealth occupied Career Education’s 90,000 square foot 5th floor sublease at 222 Merchandise Mart. They are consolidating three downtown locations. AT&T continues to market nearly 240,000 square feet at 225 West Randolph through December 2022.
•
Outlook: Sublease availability continues to shrink, although the 13 large blocks that make up over a third of total sublease space continue to drag down the market. As companies reconsider employee headcounts and space efficiency, sublease availability will fluctuate and could decrease as corporate confidence improves.
YEAR-TO-DATE SUBLEASE AVAILABILITY INCHES DOWN
SUPPLY
•
CENTRAL BUSINESS DISTRICT
SUBLEASE SPACE
7,000,000 6,000,000 5,000,000 4,000,000
4,644,911
3,714,187
2,376,184
2,404,109
3,158,562
4,201,801
3,576,846
2,897,711
3,214,365
3,184,045
0
4,467,890
1,000,000
5,458,623
2,000,000
6,164,679
3,000,000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
YTD 2013
LARGE BLOCKS (MORE THAN 50,000 SQUARE FEET) OF SUBLEASE SPACE CURRENTLY AVAILABLE CLASS A Building Address
Size (sf)
Occupancy
Expiration
Floor(s)
Sublandlord
550 W Jackson Blvd 131 S Dearborn St 77 W Wacker Dr 35 W Wacker Dr 1 N Wacker Dr 131 S Dearborn St
170,606 128,622 87,312 75,000 65,496 64,125
Negotiable Vacant 60 Days 90 Days Vacant Vacant
August 2019 October 2017 February 2022 December 2024 March 2015 October 2017
2-8 7-8 14-17 35-37 19-20 10
Newedge USA Citadel United Airlines Winston & Strawn Merrill Lynch Citadel
Total - 6 Spaces
591,161
CLASS B Building Address
Size (sf)
Occupancy
Expiration
Floor(s)
Sublandlord
225 W Randolph St 600 W Chicago Ave 350 W Mart Ctr 10 S Riverside Plz 205 N Michigan Ave
238,778 117,101 83,729 71,972 65,463
Negotiable Vacant Vacant May 2014 90 Days
December 2022 November 2015 January 2016 Negotiable April 2016
22-30 2 4 5-6 5-7
AT&T Level 3 Communications AT&T Zurich MCI, Inc.
Total - 5 Spaces
577,043
Italicized addresses indicate space is new on the market
THIRD QUARTER 2013 | CHICAGO MARKET OVERVIEW
4
Slight decrease in large block availability •
The number of directly available blocks greater than 50,000 square feet decreased by one to 71. Class C buildings continued to shed large blocks, down one to 14 while the Class A segment saw a significant increase, up three to 32. 440 South LaSalle, the only Class A building in the South Loop, added another large block as multiple smaller leases broke up the contiguous block from the 18th to the 26th floor. In total, the building has over 255,000 square feet in directly available space, nearly 25 percent of the building’s space, spread between four large contiguous blocks.
•
One Class B large block was removed from 175 West Jackson as a small lease broke up the contiguous space on the 5th floor. The building is still struggling with three blocks between 65,000 and 70,000 square feet.
•
MB Real Estate has identified 37 tenants actively seeking 50,000 square feet or more in the CBD. Yet, with 71 blocks available, the market continues to struggle with this glut of space. Coupled with the ability to prelease new inventory as well as the ability to renew, large tenants have a multitude of options.
CLASS B
Building Address 130 E Randolph St * 222 N LaSalle St 303 E Wacker Dr * 130 E Randolph St * 410 N Michigan Ave 231 S LaSalle St * 130 E Randolph St 600 W Chicago Ave * 303 E Wacker Dr 401 N Michigan Ave 1 N Dearborn St * 2 N LaSalle St 120 S LaSalle St ** 333 S Wabash Ave * 300 S Riverside Plz 222 Merchandise Mart Plz 175 W Jackson Blvd 175 W Jackson Blvd 111 E Wacker Dr 10 S Riverside Plz 233 N Michigan Ave 175 W Jackson Blvd * 230 W Monroe St 200 N LaSalle St * 222 Merchandise Mart Plz * 25 Blocks
Size (sf)
Submarket
256,738 229,025 188,949 156,667 145,259 132,336 129,578 117,101 110,481 104,990 97,261 96,753 94,995 92,473 90,450 68,829 68,539 67,794 67,216 67,147 67,028 65,930 60,182 58,543 56,323 2,690,587
East Loop Central Loop East Loop East Loop North Michigan Avenue Central Loop East Loop River North East Loop North Michigan Avenue Central Loop Central Loop Central Loop East Loop West Loop River North Central Loop Central Loop East Loop West Loop East Loop Central Loop West Loop Central Loop River North
515 N State St 500 W Monroe St * 200 E Randolph St * 233 S Wacker Dr 540 W Madison St * 101 E Erie St 10 S Dearborn St 233 S Wacker Dr 111 S Wacker Dr 227 W Monroe St 233 S Wacker Dr * 36 E Grand Ave 455 N Cityfront Plaza Dr 440 S LaSalle St 30 S Wacker Dr * 333 W Wacker Dr 1 S Wacker Dr 311 S Wacker Dr 77 W Wacker Dr * 131 S Dearborn St 311 S Wacker Dr * 440 S LaSalle St 200 E Randolph St 321 N Clark St * 222 W Adams St * 200 E Randolph St 980 N Michigan Ave * 440 S LaSalle St * 233 S Wacker Dr ** 227 W Monroe St 440 S LaSalle St 1 S Wacker Dr * 32 Blocks
CLASS C
Building Address 311 W Monroe St 401-465 E Illinois St 111 N Canal St 11 S LaSalle St 111 N Canal St 111 N Canal St 401 S State St ** 350 W Mart Ctr 350 W Mart Ctr * 360 N Michigan Ave 740 N Rush St ** 33 S State St 350 W Mart Ctr 211 E Chicago Ave 14 Blocks
Size (sf)
Submarket
350,906 311,049 306,163 278,177 250,553 217,569 166,346 125,553 114,686 97,716 91,807 91,316 89,854 87,402 86,573 80,736 74,363 67,983 67,342 67,326 65,150 65,061 64,952 61,431 59,436 54,710 54,489 53,143 52,268 51,423 50,843 50,595 3,706,921
North Michigan Avenue West Loop East Loop West Loop West Loop North Michigan Avenue Central Loop West Loop West Loop West Loop West Loop North Michigan Avenue North Michigan Avenue Central Loop West Loop West Loop West Loop West Loop Central Loop Central Loop West Loop South Loop East Loop River North West Loop East Loop North Michigan Avenue South Loop West Loop West Loop South Loop West Loop
Size (sf)
Submarket
354,017 210,000 147,319 146,313 130,947 117,680 110,898 87,404 87,393 76,855 71,501 70,107 64,639 53,052 1,728,125
West Loop North Michigan Avenue West Loop Central Loop West Loop West Loop East Loop River North River North East Loop North Michigan Avenue East Loop River North North Michigan Avenue
SUPPLY
•
CLASS A
Building Address
CENTRAL BUSINESS DISTRICT
LARGE BLOCKS OF DIRECT AVAILABILITY
Italicized addresses indicate space is new on the market * Block of space is for future occupancy **Block of space will be vacated in the upcoming quarter
THIRD QUARTER 2013 | CHICAGO MARKET OVERVIEW
5
Volatility in submarkets clouds downward trend in CBD vacancy rates Direct vacancy in the CBD continued to decrease, down another twenty basis points to 14.5 percent during the third quarter and is now the lowest it has been since 2009. For the first time since 2011, Class A buildings saw the direct vacancy rate increase, up 30 basis points to 13.0 percent. The Class B segment experienced over 325,000 square feet in positive absorption, causing the direct vacancy rate to drop 50 basis points to 16 percent. Direct vacancy rates in Class C buildings decreased for the first time in a year, down 60 basis points to 15.0 percent.
•
The River North submarket’s direct vacancy gained back much of what it lost during the second quarter as its direct vacancy rate dropped 40 basis points to 9.1 percent. It remains the tightest segment in the CBD. The North Michigan Avenue submarket saw the largest decline in direct vacancy, down 140 basis points to 19.1 percent off a strong performance by its Class B segment. The Central Loop saw the largest increase, up 30 basis points to 13.3 percent.
•
OUTLOOK: MB Real Estate expects some volatility in vacancy rates on a quarterly basis. However, economic trends suggest that the pace at which the direct vacancy rate has declined will continue and in some cases accelerate through 2013 as large tenants bringing new demand, such as Google (Motorola Mobility), take occupancy.
HISTORIC DIRECT VACANCY: SIGNIFICANT DROP IN VACANCY RATE
DEMAND
•
CENTRAL BUSINESS DISTRICT
VACANCY RATES
18% 16% 14% 12%
11.4%
13.7%
14.6%
15.7%
17.6%
14.3%
11.7%
11.5%
15.3%
16.0%
15.4%
15.1%
14.5%
8%
9.8%
10%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
YTD 2013
HISTORIC YEAR-END DIRECT VACANCY MARKET BY CLASS: CLASS B AND C BUILDINGS FALL 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2000
2001
2002 Class A
2003
2004
2005
2006
2007
Class B
2008
2009
2010
2011
2012
YTD 2013
Class C
THIRD QUARTER 2013 | CHICAGO MARKET OVERVIEW
6
New large lease activity explodes in the third quarter McDermott Will & Emery signed the largest lease of the year during the third quarter and will relocate from 227 West Monroe into the new development at 444 West Lake when it is delivered. Shedding over 10,000 square feet, the law firm will anchor 225,000 square feet during its 20 year lease.
•
Zurich American, an insurance company out of Switzerland, signed a 107,000 square foot, 12 year lease at 300 South Riverside, which includes part of the space being vacated by AIG. Relocating from 10 South Riverside, they plan to move 500 employees to the location by 2015.
•
New large lease transactions greater than 20,000 square feet picked up significantly from the second quarter. 10 new deals totaling 624,000 square feet were signed in the third quarter as compared to just seven new deals totaling 450,000 square feet in the second quarter.
•
OUTLOOK: Confidence continues to grow throughout the commercial real estate market indicating large deal activity will remain strong through 2013. Two major unknowns remain: the effect that possible new developments will have on real estate decisionmaking; and how much under utilized space remains to be shed in the CBD.
DEMAND
•
CENTRAL BUSINESS DISTRICT
LARGE DEALS
LARGE LEASE TRANSACTIONS NEW Tenant
Type
Submarket
Building Address
McDermott Will & Emery Zurich American GoHealth LLC I Tech PricewaterhouseCoopers PC Mall Cleverbridge Wells Fargo Legal & General Merge Healthcare Total - 10 Deals
Relo Relo New New New New New New New Relo
West Loop West Loop River North West Loop West Loop West Loop River North West Loop West Loop River North
444 W Lake 300 S Riverside 222 Merchandise Mart 222 S Riverside 1 N Wacker 300 S Riverside 350 N Clark 10 S Wacker 71 S Wacker 350 N Orleans
Size (sf) 225,000 107,852 90,000 34,362 32,562 30,000 29,000 26,782 26,000 22,000 623,558
RENEWAL/EXPANSION/SUBLEASE Tenant
Type
Submarket
Building Address
Size (sf)
Options Clearing Corporation Lightspeed Financial Total - 2 Deals
Ren Ren
West Loop West Loop
1 N Wacker 200 S Wacker
57,000 23,000 80,000
Abbreviations: Cons - Consolidation Cont - Contraction Exp - Expansion Relo - Relocation Ren - Renewal Sub - Sublease
THIRD QUARTER 2013 | CHICAGO MARKET OVERVIEW
7
Strong absorption levels remain despite lack of demand for Class A space Net quarterly, positive absorption totaled 299,000 square feet as all classes but Class A properties posted positive absorption. Class A buildings reversed trends and posted 125,000 square feet in net negative absorption.
•
Class B buildings continued to drive quarterly absorption, posting 327,000 square feet in positive absorption, the second straight quarter in which absorption in the segment was over 300,000 square feet. The trend of Class C conversions will continue to help Class B landlords as tenants upgrade their space to take advantage of suppressed rental rates.
•
The Central and East Loop were the only submarket to experience declines in occupancy, posting 89,000 and 23,000 square feet in net negative absorption, respectively. The Central Loop has struggled with companies relocating with the CBD such as McKinsey & Co. that recently left 10 South Dearborn for 300 East Randolph.
•
OUTLOOK: The continuing repurposing and renovation of Class C buildings suggests that demand will increase for the rest of the market as tenants upgrade their space. While MBRE projects yearly positive absorption in 2013, possible new developments and tepid hiring will continue to temper market enthusiasm.
DEMAND
•
CENTRAL BUSINESS DISTRICT
ABSORPTION
HISTORIC ABSORPTION: ON PACE FOR STRONGEST YEAR SINCE RECESSION 3,000,000
2,665,184
2,500,000
2,566,896
2,000,000 1,500,000 852,727
913,519
1,000,000
472,780
500,000 0 (186,015)
(500,000) (1,000,000)
(790,475)
2001
2002
2003
(720,154)
(830,377)
(844,381) (1,144,784)
(1,500,000)
(136,763)
2004
2005
2006
2007
2008
(509,999)
2009
2010
2011
2012
YTD 2013
HISTORIC ABSORPTION BY SUBMARKET: POSITIVE YEAR-TO-DATE ABSORPTION ACROSS CLASSES 2,000,000 1,500,000 1,000,000 500,000 0 (500,000) (1,000,000) 2006 Central Loop
2007 East Loop
2008
2009
2010
North Michigan Avenue
2011
River North
2012 South Loop
YTD 2013 West Loop
THIRD QUARTER 2013 | CHICAGO MARKET OVERVIEW
8
Turbulence remains in net rental rates
Class A initial rental rates fell 1.3 percent for new leases, but grew 1.7 percent for renewals. Concessions were mixed, reflecting volatility in the Class A market. Average tenant improvement allowances increased over 13 percent for new and renewal deals, up to $5.61 and $2.65 per square foot per lease year, respectively. Rent abatement decreased for both new and renewal deals. This ambiguity in Class A leases suggests landlords are still working to find an equilibrium level that best entices new tenants.
•
Class B initial rates increased for both new leases and renewals, up 2.6 percent and 5.9 percent respectively. Continued positive absorption suggests landlords will continue to increase rental rates as demand remains high with Class C tenants looking to upgrade their space.
•
Class C initial rates saw a significant increase, 10.2 percent, for new leases but dropped 4.7 percent for renewals. In turn, concessions dropped dramatically for renewal deals as many outdated Class C inventory is being removed from the market.
•
OUTLOOK: As the CBD market continues to tighten, landlords have begun to increase rents to take advantage of the landlords’ market. This is especially true in Class B properties where the drop in vacancy has been most significant. Initial rates in Class A buildings, which have experienced high demand for multiple quarters, have seen little change while concessions are expected to continue to decrease. Class C buildings, many of which are undergoing renovation or converting to alternative uses, have seen asking rates and concessions fluctuate as landlords try to find the ideal balance to attract new users.
FEATURES
•
CENTRAL BUSINESS DISTRICT
LEASE COMPARABLES
AVERAGE LEASE TERMS ON NEW AND RENEWAL DEALS NEW DEALS
AVERAGE NET INITIAL RATE
AVERAGE TENANT IMPROVEMENT
AVERAGE ABATEMENT (MONTHS)
AVERAGE TERM (YEARS)
A
B
C
A
B
C
A
B
C
A
B
C
4Q2012 - 3Q2013
$19.56
$16.21
$15.12
$42.13
$32.11
$24.06
6.3
5.5
4.3
7.5
6.2
4.9
4Q2011 - 3Q2012
$19.81
$15.80
$13.73
$35.04
$31.82
$23.72
6.3
6.4
5.6
7.3
6.8
6.1
4Q2010 - 3Q2011
$20.23
$14.67
$12.45
$46.58
$27.88
$28.28
8.1
6.9
4.9
8.1
6.9
5.9
4Q2009 - 3Q2010
$19.63
$15.55
$11.13
$41.01
$27.07
$18.45
8.6
6.9
6.0
8.0
6.6
5.8
4Q2008 - 3Q2009
$20.83
$15.88
$12.75
$40.38
$34.24
$32.57
6.8
4.9
4.8
8.5
7.1
7.6
4Q2007 - 3Q2008
$21.58
$16.97
$14.51
$44.08
$37.90
$26.53
4.4
4.2
3.8
8.1
6.8
7.1
4Q2006 - 3Q2007
$18.94
$14.78
$13.19
$47.06
$38.64
$19.97
5.4
5.5
3.0
8.2
7.2
5.5
4Q2005 - 3Q2006
$17.57
$13.12
$14.54
$44.87
$37.85
$17.76
6.9
4.6
2.4
8.1
6.9
5.1
4Q2004 - 3Q2005
$17.40
$12.57
$9.92
$48.03
$41.35
$28.30
7.5
6.8
4.6
9.9
8.2
7.1
4Q2003 - 3Q2004
$16.79
$12.95
$9.30
$40.64
$41.90
$15.19
5.3
6.7
3.4
9.6
8.8
5.7
4Q2002 - 3Q2003
$19.75
$14.16
$10.99
$38.42
$35.19
$22.63
2.6
4.5
2.1
8.3
8.8
6.5
4Q2001 - 3Q2002
$22.45
$15.66
$14.67
$30.31
$27.74
$27.52
1.6
1.2
1.8
7.4
8.3
6.1
4Q2000 - 3Q2001
$22.45
$16.40
$15.01
$28.48
$26.07
$28.90
0.9
0.1
0.7
7.7
8.0
7.5
RENEWAL DEALS
AVERAGE NET INITIAL RATE
AVERAGE TENANT IMPROVEMENT
AVERAGE ABATEMENT (MONTHS)
AVERAGE TERM (YEARS)
A
B
C
A
B
C
A
B
C
A
B
C
4Q2012 - 3Q2013
$19.44
$15.68
$12.48
$15.62
$10.81
$7.02
4.6
4.1
3.0
5.9
5.3
4.0
4Q2011 - 3Q2012
$19.11
$14.81
$13.10
$11.80
$10.70
$13.27
4.2
3.0
2.3
5.0
4.2
4.1
4Q2010 - 3Q2011
$18.83
$14.17
$12.12
$19.57
$9.81
$8.86
5.4
4.5
4.4
6.4
4.5
4.6
4Q2009 - 3Q2010
$19.95
$15.75
$10.61
$22.48
$9.24
$6.66
7.3
4.3
6.1
6.3
4.8
5.1
4Q2008 - 3Q2009
$19.09
$16.84
$14.24
$19.20
$16.51
$14.80
3.7
3.2
2.8
5.8
5.2
5.3
4Q2007 - 3Q2008
$21.98
$15.77
$15.17
$18.72
$16.43
$11.64
2.2
2.9
2.0
6.7
5.5
6.7
4Q2006 - 3Q2007
$17.44
$14.22
$16.24
$23.91
$17.27
$16.06
6.4
1.7
1.5
7.4
7.1
6.4
4Q2005 - 3Q2006
$16.23
$13.24
$15.40
$23.83
$17.58
$9.71
4.9
3.3
1.2
7.7
6.6
5.4
4Q2004 - 3Q2005
$16.69
$12.46
$12.04
$26.27
$20.46
$4.44
5.3
2.9
0.8
8.2
8.1
4.6
4Q2003 - 3Q2004
$17.74
$13.28
$9.80
$22.44
$19.18
$11.10
2.4
3.5
1.3
8.8
7.1
6.4
4Q2002 - 3Q2003
$20.05
$14.25
$10.29
$17.08
$12.32
$5.59
1.2
2.5
0.7
6.7
7.0
5.2
4Q2001 - 3Q2002
$20.80
$15.60
$13.32
$16.71
$12.53
$8.69
0.4
0.6
0.1
8.1
6.9
4.7
4Q2000 - 3Q2001
$23.80
$16.86
$11.03
$9.86
$7.57
$0.00
0.0
0.2
0.0
5.4
7.6
2.0
*Lease metrics are compared on a four-quarter basis instead of calendar year, allowing full years of data comparison.
THIRD QUARTER 2013 | CHICAGO MARKET OVERVIEW
9
Investment activity poised for a strong end to 2013 Third quarter investment activity slowed as compared to the previous quarter, with four buildings trading and another six under contract to be sold.
•
Beacon Capital Partners purchased 300 South Wacker for $113 million, or $220 per square foot. The seller, Harbor Group International last purchased the 512,000 square foot Class B building in 2006 for under $95 million. The $113 million purchase price translates’ to a 6.3 percent in-place capitalization rate for the 83 percent leased building.
•
A joint venture between CBRE Global Investors, John Buck and Korea Post have agreed to terms to purchase 161 North Clark from Tishman Speyer Properties. The 1.1 million square foot Class A building is expected to trade for nearly $313 million, or $284 per square foot.
•
OUTLOOK: While the third quarter saw a significant decrease in square footage sold as compared to the second quarter, nearly 3.7 million square feet were placed on the market. This, coupled with the over 2.6 million square feet currently under contract, sets the stage for a strong end to an already strong 2013.
INVESTMENT SALES: SLOWDOWN IN ACTIVITY SETS UP STRONG FINISH TO 2013 Building Address
Sale Date
Size (sf)
Price
Price per sf * Class Seller
200 S Wacker
New On Market
755,000
$227,000,000
$301
A
1 N Franklin
New On Market
621,246
$200,000,000
$322
A
20 N Clark
New On Market
381,345
$58,500,000
$153
B
200 S Michigan 10 N Dearborn 131 S Dearborn 500 W Madison (5.5% retail)
New On Market New On Market On Market
359,560 80,228 1,504,364
$70,000,000 -
$195 -
On Market
1,457,470
$460,000,000
$316
Status (Buyer or Listing Agent)
B B A
Sam Zell Partnership Tishman Speyer Properties L.P. JV Hamilton Partners & Multi-Employer Property Trust Equus Capital Partners Rosemont Realty Dearborn Capital Group
Marketing (JLL) Marketing (Avison Young) N/A
A
General Electric Co.
Marketing (HFF)
Marketing (HFF)
Marketing (HFF) Marketing (CBRE)
311 S Wacker
On Market
1,300,000
$312,000,000
$240
A
225 W Randolph
On Market
853,250
$275,000,000
$322
B
111 W Jackson
On Market
558,388
$135,000,000
$242
B
122 S Michigan 125 S Clark 541 N Fairbanks 555 W Monroe 20 S Clark 208 S LaSalle (Office/Retail) 332 S Michigan 55 E Washignton (Floors 1-12) 309 W Washington
On Market On Market On Market On Market On Market
512,369 494,967 430,715 419,000 363,657
$69,000,000 $150,000,000 $60,000,000
$160 $358 $165
C B B A B
Shorenstein Properties & Fremont Realty Kushner Companies Michael Silberberg/David Werner Ivor Braka Chicago Public Schools Golub & Co. Principal Global M & J Wilkow
On Market
355,411
$60,000,000
$169
C
Michael Reschke
Marketing (HFF)
On Market
319,401
-
-
C
Ivor Braka
Marketing (JLL)
On Market
192,000
-
-
C
Morgan Reed Group
Marketing (CBRE)
On Market
93,610
$14,700,000
$157
C
Ibrahim Shihadeh Tishman Speyer Properties L.P.
Marketing (Kiser Group) CBRE Global Investors, John Buck / Eastdil Secured
TIER REIT
Ivanhoe Cambridge / HFF
161 N Clark
Under Contract
1,100,000
$312,600,000
$284
A
10 S Riverside 120 S Riverside
Under Contract
705,000 814,000
$410,000,000
$270
B
180 N LaSalle
Under Contract
770,191
$126,000,000
$164
B
216 W Jackson 444 N Wabash
Under Contract Under Contract
176,622 65,800
$25,000,000 $8,200,000
$142 $125
C B
625 N Michigan Ave
Under Contract
343,072
$108,000,000
$315
B
32 W Randolph
Under Contract
226,666
$13,250,000
$58
C
300 S Wacker
3rd Qtr 2013
512,436
$112,700,000
$220
B
360 N Michigan
3rd Qtr 2013
260,000
$57,000,000
$219
C
Joseph Chetrit
540 N LaSalle
3rd Qtr 2013
65,100
$6,300,000
$97
C
Joseph Lagoa
811 W Evergreen
3rd Qtr 2013
45,448
$3,100,000
$68
C
Dvorkin Holdings LLC
All Sales
3rd Qtr 2013
882,984
$179,100,000
Berkley Properties LLC (Michael Silberberg) Farbman Group Dvorkin Holdings LLC Lone Star Funds / Anglo Irish Bank David & Barbara Kalish Harbor Group International
FEATURES
•
CENTRAL BUSINESS DISTRICT
INVESTMENT SALES
Marketing (Eastdil Secured) Marketing (HFF) Marketing (HFF) Marketing Marketing Marketing Marketing Marketing
(JLL) (Undecided) (Eastdil Secured) (CBRE) (JLL)
Beacon Capital Partners JV Marc Realty / HFF Khaldoun Fakhoury Tribeca Holdings London / HFF Undisclosed / CBRE Beacon Capital Partners JV Oxford Capital Group / Angelo, Gordon & Co. JV Wolcott Group / Blue Star Properties South Street Capital
$151
*Price per square foot - based off estimated selling price for new to market buildings
THIRD QUARTER 2013 | CHICAGO MARKET OVERVIEW
10
Recovery continues to gain steam The CBD direct vacancy rate continued to trend downward, in line with MBRE’s baseline forecast. Strong absorption in Class B and C properties caused the decline in vacancy.
Total Historic and Forecasted Inventory (sf)
Total Historic & Forecasted Occupancy (sf)
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
120,434,748 119,972,770 118,691,577 121,440,276 122,776,164 124,713,268 125,037,423 126,452,643 128,385,650 126,478,575 125,626,639 125,269,078 130,038,076 130,539,796 130,649,210 131,044,641 131,100,323 131,100,323
104,939,294 106,058,995 106,744,585 109,533,759 108,743,284 107,598,500 106,754,119 106,568,104 105,737,728 108,402,912 110,969,808 110,833,045 110,112,891 109,602,891 110,516,410 111,238,394 112,369,210 113,157,636
1997-2012 Absorption Avg:
606,481
YTD 2013 Absorption:
852,727
Direct Vacancy % 12.9% 11.6% 10.1% 9.8% 11.4% 13.7% 14.6% 15.7% 17.6% 14.3% 11.7% 11.5% 15.3% 16.0% 15.4% 15.1% 14.3% 13.7%
FEATURES
Third quarter activity slowed for much of the commercial real estate market as political uncertainty remerged as a major concern for the outlook of the economy. This combined with lackluster job growth continues to stall a sustainable and long-term recovery. Even so, strong demand drivers give reason to be optimistic and suggest an improving office market. Investment activity, although muted during the third quarter, is poised to finish 2013 strong with over 12.5 million square feet on the market and another 2.7 million square feet under contract to be sold. Mayor Emanuel has committed himself to attracting new jobs for Chicago’s world-class labor force. This focus will be helped in the long-term by Chicago’s diversified and centralized economy which will soon become a top global competitor. Google’s substantial commitment to the CBD will electrify the recovery and the market, much like what was seen in the Chelsea office submarket in New York City with the commitment by Google in 2010. Additionally, while Class C properties continue to lag behind the overall market, repurposing of these buildings and the resulting trend of tenants upgrading their space has increased demand in Class A and B segments. As this movement matures, demand will eventually grow for the diminished Class C inventory.
Year
CENTRAL BUSINESS DISTRICT
FORECAST
Total projected inventory based on addition of projects currently under construction Occupancy is forecast based on proprietary assumptions regarding the Chicago MSA’s total employment change and the office industry’s historical performance which trails the overall economy.
While the long-term outlook of the Chicago CBD office market is positive, more immediate market externalities need to be eliminated before substantial growth can be realized. Tenants right-sizing due to shrinking space per-employee requirements, cloud technology and digital archiving, for example, will cause absorption rates to fluctuate in coming quarters. Once this excess space has been removed from existing leases, expect net absorption to rise with smaller and less frequent fluxes. Finally, new developments such as 444 West Lake pose a risk to the Class A segment as the influx of inventory will cause occupancy levels to fall. Yet by the time these buildings are delivered, MBRE expects demand to warrant the introduction of new space, and any vacancies in well-capitalized assets should be quickly absorbed. Considering these factors, MBRE forecasts improving occupancy over the next two years, resulting in a steadily declining vacancy rate.
HISTORIC & PROJECTED VACANCY: STRONG GROWTH IN OCCUPANCY OVER THE NEXT TWO YEARS 135,000,000
20% 18%
130,000,000
16%
125,000,000
14% 12%
120,000,000
10% 115,000,000
8% 6%
110,000,000
4%
105,000,000
2% 0%
100,000,000 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Total Historic and Forecasted Inventory (sf)
Total Historic & Forecasted Occupancy (sf)
Direct Vacancy %
THIRD QUARTER 2013 | CHICAGO MARKET OVERVIEW
11
CENTRAL BUSINESS DISTRICT
SUBMARKET MAP
FEATURES THIRD QUARTER 2013 | CHICAGO MARKET OVERVIEW
12
CENTRAL LOOP
RBA (sf)
YTD Absorption (sf)
3rd Quarter Absorption (sf)
Direct Vacancy (sf)
Direct Vacancy %
Occupancy (sf)
Sublease Vacancy (sf)
Total Vacancy Rate (Direct + Sublease) %
Class A
13,578,707
(174,352)
(144,185)
1,399,514
10.3%
12,179,193
484,116
13.9%
Class B
14,294,823
169,791
29,939
2,133,166
14.9%
12,161,657
394,984
17.7%
Class C
8,613,272
11,575
25,060
1,329,351
15.4%
7,283,920
42,155
15.9%
Total
36,486,802
7,014
(89,185)
4,862,031
13.3%
31,624,771
921,255
15.9%
EAST LOOP
RBA (sf)
YTD Absorption (sf)
3rd Quarter Absorption (sf)
Direct Vacancy (sf)
Direct Vacancy %
Occupancy (sf)
Sublease Vacancy (sf)
Total Vacancy Rate (Direct + Sublease) %
4,055,639
96,471
(51,973)
633,631
15.6%
3,422,008
56,565
17.0%
10,612,436
129,193
(25,121)
2,552,748
24.1%
8,059,688
163,815
25.6%
Class C
8,327,093
53,251
54,262
1,094,485
13.1%
7,232,608
63,730
13.9%
Total
22,995,168
278,915
(22,831)
4,280,864
18.6%
18,714,305
284,110
19.9%
N. MICHIGAN AVE.
RBA (sf)
YTD Absorption (sf)
3rd Quarter Absorption (sf)
Direct Vacancy (sf)
Direct Vacancy %
Occupancy (sf)
Sublease Vacancy (sf)
Total Vacancy Rate (Direct + Sublease) %
Class A
3,949,554
52,725
(8,582)
652,028
16.5%
3,297,526
180,046
21.1%
Class B
4,715,247
214,711
255,757
892,956
18.9%
3,822,291
44,044
19.9%
Class C
4,247,013
(143,705)
(94,885)
917,487
21.6%
3,329,527
74,931
23.4%
Total
12,911,814
123,731
152,290
2,462,471
19.1%
10,449,343
299,021
21.4%
RIVER NORTH
RBA (sf)
YTD Absorption (sf)
3rd Quarter Absorption (sf)
Direct Vacancy (sf)
Direct Vacancy %
Occupancy (sf)
Sublease Vacancy (sf)
Total Vacancy Rate (Direct + Sublease) %
Class A
3,986,211
25,388
7,684
413,665
10.4%
3,572,546
50,038
11.6%
Class B
3,797,587
61,380
36,117
243,356
6.4%
3,554,231
289,115
14.0%
Class C
5,483,326
(86,710)
14,108
548,939
10.0%
4,934,387
155,859
12.9%
Total
13,267,124
57
57,909
1,205,960
9.1%
12,061,164
495,012
12.8%
SOUTH LOOP
RBA (sf)
YTD Absorption (sf)
3rd Quarter Absorption (sf)
Direct Vacancy (sf)
Direct Vacancy %
Occupancy (sf)
Sublease Vacancy (sf)
Total Vacancy Rate (Direct + Sublease) % 27.4%
Class A
1,019,325
23,888
2,206
279,030
27.4%
740,295
0
Class C
1,133,096
3,329
2,972
260,417
23.0%
872,680
0
23.0%
Total
2,152,421
27,217
5,178
539,447
25.1%
1,612,975
0
25.1%
WEST LOOP
RBA (sf)
YTD Absorption (sf)
3rd Quarter Absorption (sf)
Direct Vacancy (sf)
Direct Vacancy %
Occupancy (sf)
Sublease Vacancy (sf)
Total Vacancy Rate (Direct + Sublease) %
Class A
27,182,769
390,691
69,377
3,603,984
13.3%
23,578,785
861,322
16.4%
Class B
9,775,799
21,702
30,434
1,071,218
11.0%
8,704,581
249,969
13.5%
Class C
6,328,426
3,401
96,003
976,998
15.4%
5,351,428
73,356
16.6%
Total
43,286,994
415,793
195,814
5,652,200
13.1%
37,634,794
1,184,647
15.8%
TOTALS
RBA (sf)
YTD Absorption (sf)
3rd Quarter Absorption (sf)
Direct Vacancy (sf)
Direct Vacancy %
Occupancy (sf)
Sublease Vacancy (sf)
Total Vacancy Rate (Direct + Sublease) %
Class A
53,772,206
414,811
(125,473)
6,981,852
13.0%
46,790,354
1,632,087
16.0%
Class B
43,195,892
596,776
327,126
6,893,443
16.0%
36,302,448
1,141,927
18.6%
Class C
34,132,226
(158,860)
97,521
5,127,677
15.0%
29,004,549
410,031
16.2%
Total CBD
131,100,323
852,727
299,174
19,002,972
14.5%
112,097,351
3,184,045
16.9%
FEATURES
Class A Class B
CENTRAL BUSINESS DISTRICT
MARKET STATISTICS
Numbers in parentheses are negative
THIRD QUARTER 2013 | CHICAGO MARKET OVERVIEW
13
SUBURBAN CHICAGO
SECTION THREE
SUBURBAN CHICAGO EXECUTIVE SUMMARY After Suburban Chicago’s fast start to 2013, in which the direct vacancy fell over 50 basis points, the third quarter saw another strong quarter with net positive absorption of 173,000 square feet. This was due in large part to Class B buildings, which posted over 112,000 square feet in net positive absorption. Coupled with inventory being removed from the market either through demolition or repurposing, the direct vacancy rate fell 20 basis points to 22.6 percent. Key Indicators: •
Every submarket in the Suburban market experienced net positive absorption with the North submarket being the most in demand. The EastWest market was the only submarket not to see a decline in its direct vacancy rate as the 38,000 square feet in net positive absorption seen in the submarket was negligible considering the 40 million square feet of overall inventory.
•
Class C properties, after struggling the previous quarter, experienced strong demand during the third quarter with net positive absorption of 60,000 square feet. The Class A segment experienced virtually no activity throughout the Suburban market.
•
AT&T continues to market its combined 1.4 million square feet of sublease space between its corporate campus and a smaller building in Hoffman Estates. Sub-lessors of large blocks are finding it difficult to sublease their space, since much of it is short-term, outdated, and competing against several direct options.
•
Despite the second largest lease of the year being signed by Follett Corporation at 3 Westbrook Corporate Center in Westchester, large deal activity slowed even further during the third quarter. The Suburban market continues to rely on growth from within and has struggled to attract new users.
•
Class A and B rental rates declined across all submarkets as landlords look to spur absorption rates. Class C properties were the only building segment to experience a net increase in year-over-year average direct gross asking rents.
•
Outdated product, especially in formerly single tenant buildings, plagues the suburbs and fuels the high direct vacancy rate. Some prominent firms, such as Allstate, are faced with the decision to tear down outdated corporate campuses, which are less in vogue then in the 1990s.
While recent absorption numbers, coupled with the removal of outdated product, have combined to lower the direct vacancy rate for three straight quarters, there are still significant demand factors holding back a more robust recovery. Continuing corporate relocations to the CBD, underutilized space, increasing corporate taxes, and a lack of public transit remain the biggest risks to the market.
SUBURBAN VACANCY AND YEAR-TO-DATE ABSORPTION SUMMARY Direct Vacancy 3Q2013 East-West North Northwest O'Hare Suburban Chicago Total Net Absorption 3Q2013 East-West North Northwest O'Hare Suburban Chicago Total
A
Change from 2Q2013
B
Change from 2Q2013
C
Change from 2Q2013
Total
Change from 2Q2013
20.0% 21.5% 21.2% 17.9% 20.5%
0.6% -0.2% -0.1% -0.4% 0.1%
23.4% 16.7% 31.2% 30.5% 25.0%
-1.0% 0.1% -0.4% 0.9% -0.4%
24.3% 18.8% 28.9% 36.6% 26.5%
0.0% -3.0% 0.7% -0.9% -0.7%
21.8% 19.9% 25.0% 24.8% 22.6%
0.0% -0.4% -0.1% -0.1% -0.2%
A
B
C
Total
(86,390) 26,529 24,135 35,916 191
138,179 (10,306) 23,414 (38,518) 112,770
(13,599) 78,197 (14,564) 10,041 60,074
38,191 94,420 32,985 7,439 173,035 Numbers in parentheses are negative
THIRD QUARTER 2013 | CHICAGO MARKET OVERVIEW
14
Speculative construction remains elusive No new speculative office developments were announced as construction has been limited to a select number of build-to-suit projects. With Class A direct vacancy on the rise, there is simply no demand to justify new, multitenant product.
•
The American Academy of Orthopedic Surgeons plans to build a five-story, 165,000 square foot headquarters in Rosemont, less than two blocks away from their current headquarters. In a market awash with Class A large block availability, the surgeons group was attracted by the new development as it will allow them to have full control over the design, technology and management of the building. The development will receive tax-increment-financing totaling an estimated $12 million and is expected to deliver in early 2015.
•
The Hub Group and the Big Ten Conference broke ground on their build-to-suit headquarters in August 2012. The Big Ten Conference’s 50,000 square foot headquarters at 5440 Park Place in Rosemont is now expected to be delivered in October 2013. The Hub Group’s 130,000 square foot building located at 200 Clearwater Drive in Oak Brook is expected to be completed in November 2013.
•
OUTLOOK: The Suburban market, accounting only for competitive, multi-tenant properties, has 25.3 million square feet of vacant space. With several vacant corporate headquarters, including properties formerly occupied by United Airlines, Allstate and Motorola Mobility, this glut of vacant space has made speculative construction unfeasible. With an overabundance of space and cautious developers, new construction will not happen until demand and job growth justify new inventory.
SUPPLY
•
SUBURBAN CHICAGO
NEW DEVELOPMENT
NEW DELIVERIES PIPELINE 2013 Deliveries Building Address
Size (sf)
% Leased
Submarket
Comments
Due Date
Comments Broke ground August 2012 and expected to be completed in November 2013. Build-to-suit headquarters for the Hub Group. Broke ground August 2012 and expected to be completed in September 2013. Build-to-suit headquarters for the Big Ten Conference.
Total - 0 Properties
Under Construction Building Address 2000 Clearwater Dr, Oak Brook
5440 Park Pl, Rosemont
Size (sf) % Pre-leased 130,000
100.0%
November 2013
50,000
100.0%
October 2013
Total - 2 Properties
Proposed Building Address
Size (sf) % Pre-leased
Due Date
Comments
Numerous multi-tenant properties, but none set to break ground
THIRD QUARTER 2013 | CHICAGO MARKET OVERVIEW
15
Little change in Suburban sublease availability •
The amount of available sublease space continued to shrink during the third quarter, down 20,000 square feet to 3.2 million square feet. Nearly 2.4 million square feet are located in Class A buildings which represents over 15 percent of total Class A vacant square footage.
•
Two large sublease blocks were removed during the third quarter. The largest was 701 East 22nd Street in Lombard where Emdeon, a provider of revenue and payment cycle management in the healthcare system, occupied The Marketing Store’s 50,000 square foot sublease. Capital One, after agreeing to relocate to the CBD, is marketing a 490,000 square foot block that expires in May 2016 at 26525 North Riverwoods Boulevard in Mettawa.
•
OUTLOOK: Sublease space has proven problematic for sub-lessors to lease. Despite making up nearly 13 percent of total vacancy, this space has been unable to compete with directly available space. This is due in large part to the fact that much of the available sublease space is short-term and outdated, causing availability to remain elevated in the coming years.
SUBURBAN CHICAGO
SUBLEASE SPACE
SUPPLY
HISTORIC YEAR-END SUBLEASE AVAILABILITY: STEEP DROP IN CLASS A SUBLEASE 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 2002
2003
2004
2005
Class A
2006
2007
2008
2009
2010
Class B
2011
2012
YTD 2013
Class C
LARGE BLOCKS (MORE THAN 50,000 SQUARE FEET) OF SUBLEASE SPACE CURRENTLY AVAILABLE Class A Size (sf)
Occupancy
Expiration
Submarket
Sublandlord
2000 W AT&T Dr, Hoffman Estates 26525 N Riverwoods Blvd, Mettawa 3 Overlook Pt, Lincolnshire 4201 Winfield Rd, Warrenville 1000 Milwaukee Ave, Glenview 3500 Lacey Rd, Downers Grove 1200 Lakeside Dr, Bannockburn 150 E Pierce Rd, Itasca 2441 Warrenville Rd, Lisle 2455 Corporate West Dr, Lisle
1,207,245 492,948 290,143 249,996 177,487 156,855 106,016 97,750 91,268 54,000
Negotiable 42,491 Vacant Vacant 30 Days Vacant Vacant Negotiable Vacant November 2013
August 2016 June 2021 February 2017 Negotiable April 2017 May 2014 May 2023 July 2019 January 2016 June 2023
Northwest North North East-West North East-West North Northwest East-West East-West
AT&T Capital One Hewitt Associates Navistar AON Hillshire Brands Catalyst Rx Jewel-Osco SXC Health Solutions Group Claymore Securities
Total - 10 Spaces
2,923,708
Size (sf)
Occupancy
Expiration
Submarket
Sublandlord
2001 Lakewood Blvd, Hoffman Estates 750 N Commons Dr, Aurora
239,250 112,605
Negotiable 30 Days
Negotiable September 2017
Northwest East-West
AT&T Westell Technologies
Total - 2 Spaces
351,855
Building Address
Class B Building Address
Italicized addresses indicate space is new on the market
THIRD QUARTER 2013 | CHICAGO MARKET OVERVIEW
16
Size of large blocks grow •
The total number of direct, available large blocks decreased by four despite total square footage increasing nearly 600,000 square feet. Class A saw the largest decrease, losing three blocks. Much of the increase in square footage came from 1000 Milwaukee Avenue in Glenview. Two blocks totaling 220,000 square feet were combined, resulting in a decline in the number of large blocks and the addition of nearly 200,000 square feet. This was the result of Aon Warranty Group vacating two additional floors, making the entire block contiguous.
•
Furthermore, two large blocks greater than 200,000 square feet were added at 1421 West Shure Drive in Arlington Heights and 4201 Winfield Road in Warrenville. This offset the square footage lost from the various small blocks removed. There are now eight large blocks over 200,000 square feet available in the Suburban market, up from five in the second quarter.
CLASS B Building Address
City
2850 W Golf Rd 1421 W Shure Dr ** 1000 E Woodfield Rd * 3890 Salem Lake Dr 5450 N Cumberland Ave 2350-2360 E Devon Ave 700 N Wood Dale Rd 171 Covington Dr 300 Bauman Ct 703-709 W Algonquin Rd 4242 N Harlem Ave 2250 W Pinehurst Blvd 544 Lakeview Pky 2000 S Finley Rd 1350 E Touhy Ave 333 E Butterfield Rd 814 Commerce Dr 27545 Diehl Rd 999 E Touhy Ave 2211 Butterfield Rd 2400 E Devon Ave 21 Blocks of Space
Rolling Meadows Arlington Heights Schaumburg Long Grove Chicago Des Plaines Wood Dale Bloomingdale Wood Dale Arlington Heights Norridge Addison Vernon Hills Lombard Des Plaines Lombard Oak Brook Warrenville Des Plaines Downers Grove Des Plaines
Size (sf)
Submarket
279,286 218,661 183,488 150,000 143,525 142,596 125,323 110,063 104,518 96,213 93,155 85,536 84,237 78,300 71,367 67,195 66,882 62,440 59,710 52,891 51,053 2,326,439
Northwest Northwest Northwest Northwest O'Hare O'Hare Northwest Northwest Northwest Northwest O'Hare Northwest North East-West O'Hare East-West East-West East-West O'Hare East-West O'Hare
CLASS C Building Address
City
3501 Algonquin Rd 2-4-6 Genesee St 2100 Swift Dr * 3 Blocks of Space
Rolling Meadows Waukegan Oak Brook
Size (sf)
Submarket
138,483 75,996 58,450 479,374
Northwest North East-West
City
600 N US Highway 45 * 1000 Milwaukee Ave * 21440 Lake Cook Rd 700 Oakmont Ln 4201 Winfield Rd * 2400 Cabot Dr 5550 Prairie Stone Pky * 1701 Golf Rd 300 Tower Pky 2895 Greenspoint Pky 2655 Warrenville Rd * 2441 Warrenville Rd * 3333 Beverly Rd 1 Overlook Pt 200 N Martingale Rd 1707 N Randall Rd 1 Pierce Pl ** 2355 Waukegan Rd 8420 W Bryn Mawr Ave ** 25 Tri State International 1707 N Randall Rd 200 N Martingale Rd 75 Tri State International 535 E Diehl Rd 1600 N Randall Rd 425 N Martingale Rd 2550 W Golf Rd 3 Parkway Blvd N 5100 River Rd * 4343 Commerce Ct * 333 Knightsbridge Pky 3050 Highland Pky * 2135 CityGate Ln 1333 Butterfield Rd 1000 Royce Blvd ** 10255 W Higgins Rd 3000 Lakeside Dr 701 Warrenville Rd 4201 Lake Cook Rd 1200 Lakeside Dr 410 Warrenville Rd ** 2100 Sanders Rd 300 Park Blvd 2 Pierce Pl 9500 W Bryn Mawr Ave 2275 Half Day Rd 1222 Hamilton Pky 7400 N Caldwell Ave 3010 Highland Pky 750 Warrenville Rd * 50 Blocks of Space
Libertyville Glenview Deer Park Westmont Warrenville Lisle Hoffman Estates Rolling Meadows Lincolnshire Hoffman Estates Downers Grove Lisle Hoffman Estates Lincolnshire Schaumburg Elgin Itasca Bannockburn Chicago Lincolnshire Elgin Schaumburg Lincolnshire Naperville Elgin Schaumburg Rolling Meadows Deerfield Schiller Park Lisle Lincolnshire Downers Grove Naperville Downers Grove Oakbrook Terrace Rosemont Bannockburn Lisle Northbrook Bannockburn Lisle Northbrook Itasca Itasca Rosemont Bannockburn Itasca Niles Downers Grove Lisle
Size (sf)
Submarket
1,121,186 405,039 277,200 256,767 249,996 217,718 193,601 183,506 175,545 150,603 149,896 148,423 129,000 111,327 109,716 109,076 106,766 106,495 104,164 95,771 87,012 86,310 86,036 83,792 82,800 81,862 81,222 79,101 74,988 74,804 74,728 74,319 70,537 70,251 70,000 69,695 68,384 67,233 66,000 64,858 63,409 61,438 60,939 60,904 60,680 58,099 54,150 54,000 51,357 50,662 6,491,365
North North Northwest East-West East-West East-West Northwest Northwest North Northwest East-West East-West Northwest North Northwest Northwest Northwest North O'Hare North Northwest Northwest North East-West Northwest Northwest Northwest North O'Hare East-West North East-West East-West East-West East-West O'Hare North East-West North North East-West North Northwest Northwest O'Hare North Northwest North East-West East-West
SUPPLY
•
CLASS A Building Address
SUBURBAN CHICAGO
LARGE BLOCKS OF DIRECT AVAILABILITY
Italicized addresses indicate space is new on the market * Block of space is for future occupancy **Block of space will be vacated in the upcoming quarter
THIRD QUARTER 2013 | CHICAGO MARKET OVERVIEW
17
Direct vacancy rates continue to drop The segment’s Class A role as top performer in the Suburban market was reversed during the third quarter. They were the only class to not see its direct vacancy fall. Even so, Class A properties continue to be the most in demand with direct vacancy rates 500 basis points below Class B and C buildings.
•
The overall direct vacancy rate fell 20 basis points to 22.6 percent. Entirely due to Class B and C buildings, both segments saw their direct vacancy rates fall 50 basis points to 25 percent and 26.5 percent respectively.
•
The large drop in Class C direct vacancy rates is positive news for a Suburban market that had been relying largely on strong absorption numbers from Class A buildings. Class B buildings also provided a needed boost to the Suburban market and continue to approach pre-recession direct vacancy rates.
•
OUTLOOK: While the direct vacancy rate fell for the third straight quarter, this was due as much to the removal of inventory, and not traditional absorption. This is indicative of weakness in the overall market. Realisticly, demand will need to become more consistent throughout the building classes for vacancy rates to drop below 20 percent.
DEMAND
•
SUBURBAN CHICAGO
VACANCY RATES
HISTORIC YEAR-END VACANCY RATES BY SUBMARKET: NORTHWEST SHOWS STRONG IMPROVEMENT 30% 25% 20% 15% 10% 5% 0% 2002
2003
2004
East-West
2005
2006
North
2007
2008
2009
Northwest
2010
2011
O'Hare
2012 YTD 2013
Total Suburban
HISTORIC YEAR-END VACANCY RATES BY CLASS: ALL CLASSES DECREASE SLIGHTLY 30% 25% 20% 15% 10% 5% 0% 2002
2003 Class A
2004
2005
2006 Class B
2007
2008 Class C
2009
2010
2011
2012 YTD 2013
Total Suburban
THIRD QUARTER 2013 | CHICAGO MARKET OVERVIEW
18
Size of large deals shrink in struggling market Deals in excess of 20,000 square feet remained scarce in the Suburban market. Much of the absorption seen in the suburbs has come from small users or through growth in existing companies.
•
Symrbia, a healthcare program developer and provider, signed a 27,000 square foot lease at 28100 Torch Parkway in Warrenville. Power Construction agreed to occupy 45,000 square feet on the 5th and 6th floor of the building located at 8750 West Bryn Mawr Avenue in Chicago.
•
In the second largest lease of the year, Follett Corporation agreed to consolidate multiple suburban locations into 160,000 square feet at 3 Westbrook Corporate Center in Westchester. Their 11 year lease will accommodate 750 of the educational material distributor’s employees.
•
OUTLOOK: While the Suburban market has shown the ability to attract new users in recent quarters, they have not been large enough to cause significant relief to recent occupancy losses. For the market to see a sustained recovery, the suburbs will need to find and exploit new demand drivers similar to those seen in the CBD.
DEMAND
•
SUBURBAN CHICAGO
LARGE DEALS
LARGE LEASE TRANSACTIONS NEW Tenant
Type
Submarket
Building Address
Follett Corp Power Construction AIM Symbria Rittal Corp Total - 5 Deals
Relo New New New Relo
East-West O'Hare North East-West East-West
3 Westbrook Corporate Ctr., Westchester 8750 W Bryn Mawr Ave., Chicago 540 Lake Cook Rd, Deerfield 28100 Torch Pkwy, Warrenville 10 N. Martingale Crd, Schaumburg
Size (sf)
Tenant
Type
Submarket
Building Address
Size (sf)
SAC Donlen Corp Total - 2 Deals
Sub Ren
Northwest North
1501 E Woodfield Rd., Schaumburg 2100 E Lake Rd., Buffalo Grove
32,055 23,263 55,318
160,000 45,021 31,559 26,610 Undisclosed 263,190 *
RENEWAL/EXPANSION/SUBLEASE
Abbreviations: Cons - Consolidation Cont - Contraction Exp - Expansion Relo - Relocation Ren - Renewal Sub - Sublease * Total does not take Rittal Corp’s relocation into consideration
THIRD QUARTER 2013 | CHICAGO MARKET OVERVIEW
19
Class A properties slow overall market •
Year-to-date absorption, at positive 736,000 square feet, is well above the yearly average of 300,000 square feet and looks to continue growing as quarterly absorption was a positive 173,000 square feet.
•
Demand has been inconsistent across building segments, with building classes alternately dominating quarterly absorption. This is indicative of an unstable market that needs to see stronger job growth and more significant demand drivers to produce consistent and sustainable growth.
SUBURBAN CHICAGO
ABSORPTION
SUBURBAN CHICAGO ABSORPTION BY CLASS: MOMENTUM GATHERS STEAM 1,500,000 1,000,000 DEMAND
500,000 0 (500,000) (1,000,000) (1,500,000) 2005
2006
2007
2008
Class A EAST-WEST
2005
2006
Class A
102,299
Class B
389,014
Class C
2009
2010
Class B
2012
YTD 2013
Class C
2007
2008
2009
2010
366,688
542,281
(259,973)
(595,372)
484,869
(203,072)
(2,062)
(259,196)
85,269
(125,850)
(108,813)
(87,441)
Total
576,582
725,707
230,396
NORTH
2005
2006
Class A
196,403
Class B
164,357
Class C Total
2011
2011
2012
YTD 2013
(219,164)
299,247
(457,450)
315,825
67,827
(152,069)
92,876
(56,775)
(179,177)
7,017
55,114
(5,912)
44,266
(349,476)
(1,033,744)
(144,319)
202,292
(370,486)
303,316
2007
2008
2009
2010
2011
2012
YTD 2013
(100,049)
615,115
(240,617)
(207,914)
(312,238)
(261,008)
(365,450)
30,544
316,207
355,510
(60,982)
(38,575)
(319,078)
33,814
131,363
83,673
12,697
(39,440)
26,935
(2,048)
(104,195)
(40,044)
(90,151)
8,074
98,174
373,457
176,718
997,560
(303,647)
(350,684)
(671,360)
(317,345)
(226,013)
212,391
YTD 2013
NORTHWEST
2005
2006
2007
2008
2009
2010
2011
2012
Class A
225,865
(488,651)
10,333
(302,930)
(388,945)
(21,262)
(632,282)
379,728
(10,321)
Class B
(234,681)
12,266
(164,112)
(261,498)
(310,263)
(295,928)
(383,730)
(19,395)
194,155
Class C
(216,898)
(15,371)
(51,429)
(28,362)
(35,167)
(192,091)
(48,617)
41,909
20,733
Total
(225,714)
(491,756)
(205,208)
(592,790)
(734,375)
(509,280)
(1,064,629)
402,242
204,566
O'HARE
2005
2006
2007
2008
2009
2010
2011
2012
YTD 2013
Class A
(55,786)
189,235
11,636
(256,325)
(134,526)
209,180
40,666
81,456
36,088
Class B
53,945
7,915
(81,167)
(51,601)
(80,925)
70,376
14,041
26,266
(6,032)
Class C
(204,597)
90,170
(50,022)
(35,696)
62,815
(10,855)
(14,567)
17,442
(14,519)
Total
(206,438)
287,320
(119,553)
(343,622)
(152,637)
268,701
40,140
125,164
15,536
TOTALS
2005
2006
2007
2008
2009
2010
2011
2012
YTD 2013
Class A
468,781
(32,777)
1,179,365
(1,059,845)
(1,326,757)
(343,484)
(553,378)
(361,716)
372,135
Class B
372,635
821,257
(92,841)
(376,143)
(688,960)
(476,802)
(487,944)
231,110
215,021
Class C
(323,529)
(90,491)
(183,329)
(153,547)
(255,724)
(235,972)
(98,221)
61,512
148,654
Total
517,887
697,989
903,195
(1,589,535)
(2,271,441)
(1,056,259)
(1,139,542)
(63,094)
735,810
Numbers in parentheses are negative
THIRD QUARTER 2013 | CHICAGO MARKET OVERVIEW
20
Landlords continue to decrease asking rental rates to combat high vacancies Excluding Class C buildings, gross asking rents have fallen in every submarket over the past year. Class A rates decreased 3.5 percent, Class B rates are down 2.6 percent while Class C rents rose 0.7 percent on a year-over-year basis. Landlords hope that more attractive rates will spark demand
•
Class C buildings in the North submarket were the only building in that class to experience a decrease in gross asking rents, down 3.0 percent on a year-over-year basis.
•
O’Hare, the only Suburban submarket to have year-to-date net negative absorption, had the second largest decline in gross asking rents, decreasing 4.2 percent on a year-over-year basis. Absorption has yet to respond to these decreases.
•
Class B and C direct rates are at their lowest levels in over 15 years while Class A is near its in 2010 low.
•
OUTLOOK: After consecutive quarters of decreased rental rates, the Suburban market has struggled to respond with sustained increases in occupancy. With an overall market direct vacancy rate of 22.7 percent, rents will have to stay depressed to reach prerecession occupancy
FEATURES
•
SUBURBAN CHICAGO
GROSS ASKING RENTS
AVERAGE GROSS ASKING RATES BY CLASS AND SUBMARKET Average Direct Gross Asking Rent East-West North Northwest O'Hare Suburban Chicago Total
A
Change over last year
B
Change over last year
C
Change over last year
Total
Change over last year
$22.06 $19.83 $19.39 $21.90 $20.79
-1.1% -1.4% -9.9% -3.2% -3.5%
$17.81 $19.04 $15.68 $18.04 $17.54
-0.2% -2.8% -3.0% -9.8% -2.6%
$15.37 $16.03 $12.86 $16.13 $15.15
0.2% -3.0% 0.4% 1.3% 0.7%
$20.04 $19.26 $17.73 $19.82 $19.24
0.7% -1.5% -7.4% -4.2% -2.4%
ASKING RATES CONTINUE TO HIT RECORD LOWS $26 $24 $22 $20 $18 $16 $14 3Q2002 3Q2003 3Q2004 3Q2005 3Q2006 3Q2007 3Q2008 3Q2009 3Q2010 3Q2011 3Q2012 3Q2013 Class A
Class B
Class C
THIRD QUARTER 2013 | CHICAGO MARKET OVERVIEW
21
Investment activity remains steady in an unsteady Suburban market The largest transaction during the quarter was the sale of Schaumburg’s 1750 and 1900 East Golf Road to Sovereign Partners for $40 million. Pearlmark Real Estate, the seller, attempted to sell the portfolio with an additional building at 1700 East Golf Road (2 Century Centre) but split the sale when they found a separate buyer for the third property. Boxer Property purchased the 212,000 square foot 2 Century Centre for $20 million.
•
A joint venture led by David Companies sold The Crossings portfolio at 1420 and 1520 Kensington Road in Oak Brook to Adventus Real Estate for $35.5 million, 78 percent more than when they purchased it out of distress.
•
TA Associates Realty is marketing its 209,000 square foot building at 215 Shurman Boulevard in Naperville. The building is 83 percent leased and its largest anchor, Travelers Insurance, leases 111,000 square feet through 2018.
•
OUTLOOK: The Suburban market is beginning to see investors with real money and access to capital who are looking for an investment market outside of the CBD where prices are being aggressively bid up. Higher average yields compared to the CBD will continue to drive investments in the Suburban market where well-located Class A and stabilized Class B properties continue to be in-demand.
FEATURES
•
SUBURBAN CHICAGO
INVESTMENT SALES
INVESTMENT SALES: INVESTMENT ACTIVITY ACCELERATES
On the Market: 3rd Quarter 2013 Building Address
Submarket
Size (sf)
Price
PSF *
Class Seller
Status (Listing Agent)
600 N. U.S. 45, Libertyville
North
1,121,186
-
-
B
On Market (Binswanger Corp)
Corporate 500 Center, 500-540 N Lake Cook Rd, North Deerfield
697,672
-
-
A
GE Capital
On Market (JLL)
1411-1435 Lake Cook Rd, Deerfield
North
574,605
$85,000,000
$148
B
Walgreen Co.
On Market (JLL)
215 Shurman Blvd., Naperville
East-West
209,344
-
-
A
TA Associate Realty
New On Market (CBRE)
1603 Orrington Ave, Evanston
North
338,000
$64,000,000
$189
A
Lowe Enterprises
On Market (CBRE)
1925 West Field Court, Lake Forest
North
100,000
-
-
A
Duke Realty
New On Market (CBRE)
Investment Sales: 3rd Quarter 2013 Building Address
Submarket
Size (sf)
Price
PSF *
Class Seller
Buyer
1750 & 1900 East Golf Rd., Schaumburg
Northwest
432,000
$40,000,000
$93
A
Pearlmark Real Estate
Sovereign Partners
1411-1435 Lake Cook Rd., Deerfield
North
407,905
$40,000,000
$98
B
Walgreen Co.
Realty Income Corporation
The Crossings, 1420 & 1520 Kensington Rd., Oak Brook
East-West
303,510
$35,500,000 $117
A
David Companies, Arthur Goldner
Adventus Realty Trust
1700 East Golf Rd., Schaumburg
Northwest
212,212
$20,000,000
$94
A
Pearlmark Real Estate
Boxer Property
2400 Cabot Dr., Lisle
East-West
202,500
-
-
B
HDG Mansure
Walton Street Capital / Glenstar Properties
*Price per square foot - based off estimated selling price for new to market buildings
THIRD QUARTER 2013 | CHICAGO MARKET OVERVIEW
22
Stagnant quarter highlights daunting obstacles faced by Suburban market Since the fourth quarter of 2011, the suburbs have experienced average quarterly absorption of 182,000 square feet with absorption in six of the last eight quarters being in excess of 100,000 square feet. Occupancy levels, plummeting during the recession, have returned to peak levels seen in 2007 as direct vacancy rates have dropped over 100 basis points over the last two years. While third quarter numbers indicate a continuation of this trend, the Suburban market is far from the type of sustainable recovery needed to bring direct vacancy rates down to historical lows.
The lack of speculative construction will help the near term stability of the Suburban market but former owneroccupied properties that are now vacant continue to weigh on the overall market. Because of the constraint on supply and improved demand, MB Real Estate expects direct vacancy rates to continue their sluggish decline through 2013. Much of the expected absorption will likely be due to discounted rental rates and incremental growth within existing companies.
Total Historic and Forecasted Inventory (sf)
Total Historic & Forecasted Occupancy (sf)
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
90,601,193 91,989,948 95,078,215 98,744,696 103,270,399 108,254,000 109,769,838 110,090,266 110,423,452 111,030,084 110,806,221 111,175,875 112,080,944 112,218,212 112,374,614 112,250,112 112,311,826 112,311,826 112,311,826
82,039,636 85,388,879 88,016,285 90,321,332 93,033,912 92,247,968 91,258,173 88,104,389 90,452,884 90,970,771 91,668,760 92,571,955 90,982,420 87,973,132 86,916,873 85,761,730 86,203,123 87,024,588 87,881,419
1996-2012 Absorption Avg:
304,268
YTD 2013 Absorption:
735,810
Direct Vacancy % 9.4% 7.2% 7.4% 8.5% 9.9% 14.8% 16.9% 20.0% 18.1% 18.1% 17.3% 16.7% 18.8% 21.6% 22.7% 23.6% 23.2% 22.5% 21.8%
FEATURES
Faced with stiff competition from one of the fastest growing metros in the country, consecutive quarters of large net positive absorption should not be expected. Even so, the Suburban market must address its lack of demand drivers to prevent this anomaly of negative absorption from becoming the norm. To attract large users and entice existing companies to expand, attracting top talent to the suburbs is of utmost importance. Additionally, inter-suburban public transportation is necessary to compete with the ease of travel seen in downtown Chicago, which is an important factor in attracting city dwellers and the young labor force.
Year
SUBURBAN CHICAGO
FORECAST
Total projected inventory based on addition of projects currently under construction Occupancy is forecast based on proprietary assumptions regarding the Chicago MSA’s total employment change and the office industry’s historical performance which trails the overall economy.
HISTORIC & PROJECTED VACANCY: 115,000,000
25%
110,000,000
20%
105,000,000 15%
100,000,000 95,000,000
10%
90,000,000 5%
85,000,000 80,000,000
0% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Total Historic and Forecasted Inventory (sf)
Total Historic & Forecasted Occupancy (sf)
Direct Vacancy %
THIRD QUARTER 2013 | CHICAGO MARKET OVERVIEW
23
SUBURBAN CHICAGO
SUBMARKET MAP
FEATURES THIRD QUARTER 2013 | CHICAGO MARKET OVERVIEW
24
3rd Quarter Absorption (sf)
Direct Direct Vacancy Vacancy (sf) %
Sublease Vacancy (sf)
Total Vacancy Rate (Vacancy + Sublease) %
16,581,115
822,324
24.0%
11,111,156
555,679
27.3%
RBA (sf)
YTD Absorption (sf)
Class A
20,731,732
315,825
(86,390)
4,150,617
20.0%
Class B
14,512,725
(56,775)
138,179
3,401,569
23.4%
Class C
5,138,597
44,266
(13,599)
1,246,777
24.3%
3,891,820
10,166
24.5%
Total
40,383,055
303,316
38,191
8,798,964
21.8%
31,584,091
1,388,169
25.2%
NORTH
RBA (sf)
YTD Absorption (sf)
3rd Quarter Absorption (sf)
Occupancy (sf)
Sublease Vacancy (sf)
Total Vacancy Rate (Vacancy + Sublease) %
Class A
16,879,427
30,544
26,529
3,630,550
21.5%
13,248,877
914,457
26.9%
Class B
7,365,090
83,673
(10,306)
1,228,226
16.7%
6,136,864
127,633
18.4%
Class C
2,504,245
98,174
78,197
471,377
18.8%
2,032,868
20,331
19.6%
Total
26,748,762
212,391
94,420
5,330,153
19.9%
21,418,609
1,062,421
23.9%
NORTHWEST
RBA (sf)
YTD Absorption (sf)
3rd Quarter Absorption (sf)
Occupancy (sf)
Sublease Vacancy (sf)
Total Vacancy Rate (Vacancy + Sublease) %
Class A
18,505,818
(10,321)
24,135
3,920,724
21.2%
14,585,094
513,543
24.0%
Class B
9,612,050
194,155
23,414
3,001,152
31.2%
6,610,898
65,329
31.9%
Direct Direct Vacancy Vacancy (sf) %
Direct Direct Vacancy Vacancy (sf) %
Occupancy (sf)
Class C
2,544,100
20,733
(14,564)
735,043
28.9%
1,809,057
30,734
30.1%
Total
30,661,968
204,566
32,985
7,656,920
25.0%
23,005,049
609,606
27.0%
O'HARE
RBA (sf)
YTD Absorption (sf)
3rd Quarter Absorption (sf)
Occupancy (sf)
Sublease Vacancy (sf)
Total Vacancy Rate (Vacancy + Sublease) %
Direct Direct Vacancy Vacancy (sf) %
Class A
7,882,422
36,088
35,916
1,414,546
17.9%
6,467,875
148,028
19.8%
Class B
4,339,260
(6,032)
(38,518)
1,323,890
30.5%
3,015,370
24,017
31.1%
Class C
2,487,882
(14,519)
10,041
910,603
36.6%
1,577,280
440
36.6%
Total
14,709,564
15,536
7,439
3,649,039
24.8%
11,060,525
172,485
26.0%
TOTALS
RBA (sf)
YTD Absorption (sf)
3rd Quarter Absorption (sf)
Occupancy (sf)
Sublease Vacancy (sf)
Total Vacancy Rate (Vacancy + Sublease) %
Class A
63,999,399
372,135
191
13,116,438
20.5%
50,882,961
2,398,352
24.2%
Class B
35,829,125
215,021
112,770
8,954,838
25.0%
26,874,287
772,658
27.1%
Class C
12,674,825
148,654
60,074
3,363,800
26.5%
9,311,025
61,671
27.0%
Total Suburban
112,503,348
735,810
173,035
25,435,075
22.6%
87,068,273
3,232,681
25.5%
Direct Direct Vacancy Vacancy (sf) %
FEATURES
EAST-WEST
SUBURBAN CHICAGO
MARKET STATISTICS
Numbers in parentheses are negative
THIRD QUARTER 2013 | CHICAGO MARKET OVERVIEW
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ADDITIONAL INFORMATION GLOSSARY Absorption: The net change in occupied space over a given period of time. Unless otherwise noted, Net Absorption includes direct and sublease space.
Rental Rates: The annual costs of occupancy for a particular space quoted on a per square foot basis.
Asking Rent: The published rental rate for a space in a building, which may vary from the rent which is negotiated upon by the tenant and landlord.
Sales Price: The total dollar amount paid for a particular property at a particular point in time.
Central Business District: The designations of Central Business District (CBD) and Suburban refer to a particular geographic area within a metropolitan statistical area (MSA) describing the level of real estate development found there. The CBD is characterized by a high density, well organized core within the largest city of a given MSA.
SF: Abbreviation for Square Feet.
Class: A classification used to describe buildings, with Class A reflecting the highest quality and Class C reflecting the lowest quality.
Submarkets: Specific geographic boundaries that serve to delineate a core group of buildings that are competitive with each other and constitute a generally accepted primary competitive set, or peer group. Submarkets are building type specific (office, industrial, retail, etc.), with distinct boundaries dependent on different factors relevant to each building type. Submarkets are non-overlapping, contiguous geographic designations having a cumulative sum that matches the boundaries of the Market they arelocated within.
Direct Vacant Space: Space that is being offered for lease directly from the landlord or owner of a building, as opposed to space being offered in a building by another tenant (or broker of a tenant) trying to sublet a space that has already been leased. Initial Rate: The contracted starting rental rate for the first term of a lease. Inventory: The square footage of buildings that have received a certificate of occupancy and are able to be occupied by tenants. Calculated by adding the Rentable Building Area (RBA) of all properties in a market or submarket. Large Block: The amount of contiguous space available in a building in terms of square footage. Contiguous spaces over 50,000 square feet are considered large by MB Real Estate. Lease Comparable: Comparables are properties with characteristics that are similar in nature. Their signing lease rates and other contracted elements are aggregated to analyze contracted market conditions as opposed to asking market conditions. Market: Geographic boundaries that serve to delineate core areas that are competitive with each other and constitute a generally accepted primary competitive set of areas. Markets are building type specific and are non-overlapping contiguous geographic designations. Markets can be further subdivided into Submarkets. Net Rental Rate: A rental rate that excludes certain expenses that a tenant could incur in occupying office space. Such expenses are expected to be paid directly by the tenant and may include janitorial costs, electricity, utilities, taxes, insurance and other related costs. Preleased Space: The amount of space in a building that has been leased prior to its construction completion date, or certificate of occupancy date. Price/SF: Calculated by dividing the price of a building (either sales price or asking sales price) by the Rentable Building Area (RBA). Rentable Building Area (RBA): The total building square footage that can be occupied by or assigned to a tenant for the purpose of determining a tenant’s rental obligation. Generally, RBA includes a percentage of common areas including all hallways, main lobbies, bathrooms, and telephone closets.
CHICAGO MARKET OVERVIEW
SECTION FOUR
Sublease Space: Space that has been leased by a tenant and is being offered for lease back to the market by the tenant with the lease obligation. Sublease space is sometimes referred to as sublet space.
Suburban: The Suburban and Central Business District (CBD) designations refer to a particular geographic area within a metropolitan statistical area (MSA). Suburban is defined as including all office inventory not located in the CBD. Tenant Improvement: Those changes to property to accommodate specific needs of a tenant. TIs include installation or relocation of interior walls or partitions, carpeting or other floor covering, shelves, windows, toilets, etc. The cost of these is negotiated in the lease. Total Vacant Space: Direct plus sublease vacant space. Under Construction: The status of a building that is in the process of being developed, assembled, built or constructed. A building is considered to be under construction after it has begun construction and until it receives a certificate of occupancy. Vacancy Rate: A measurement expressed as a percentage of the total amount of physically vacant space divided by the total amount of existing inventory. Under construction space generally is not included in vacancy calculations. Vacancy rate can be based on direct, sublease, or total vacant space. Vacant Space: Space that is not currently occupied by a tenant, regardless of any lease obligation that may be on the space. Vacant space could be space that is either available or not available. For example, sublease space that is currently being paid for by a tenant but not occupied by that tenant, would be considered vacant space. Likewise, space that has been leased but not yet occupied because of finish work being done, would also be considered vacant space. YTD: Abbreviation for Year-to-Date. Describes statistics that are cumulative from the beginning of a calendar year through whatever time period is being studied.
THIRD QUARTER 2013 | CHICAGO MARKET OVERVIEW
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MB REAL ESTATE
ABOUT MB REAL ESTATE
At MB Real Estate, our corporate mission is to maximize the value of our clients’ real estate by creating timely and innovative solutions that meet their unique needs and objectives. We offer the highest level of real estate support with our team of committed, results-driven experts in asset and facilities management, leasing, tenant representation, development, project management, and investment services. Supported by dedicated accounting, marketing, human resources, and information technology teams, our unique full-service firm is an industry leader in local and national corporate real estate.
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GARY A. DENENBERG Executive Vice President & Managing Director of Leasing Services
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JOHN T. MURPHY President
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THIRD QUARTER 2013 | CHICAGO MARKET OVERVIEW
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