T H I R D Q U A R T E R
2 012
CHICAGO MARKET OVERVIEW
T H I R D Q UA RT E R
2 012 CHICAGO MARKET OVERVIEW
TABLE OF CONTENTS SE CT ION ONE
CHICAGO ECONOMY 01 Economic Analysis SE CT ION T WO
CHICAGO CENTRAL BUSINESS DISTRICT 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
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 T h e C h ic a g o M a r ke t O v e r v i e w i s p ubl i s h e d q u a r t e r l y by M B R e a l E s ta te. To o b t a in ad d i ti o n a l co pi e s o r fo r fur the r in f or ma ti o n , p l e a s e c o nta c t:
SUPPLY
15 New Developments 16 Sublease Space 17 Large Blocks of Direct Availability DEMAND
JAC K GAV IN Senior Research Coordinator 1 8 1 We st M a d i s o n S tre e t, S ui te 4 7 0 0 Ch ic a go, I l l i no i s 6 0 6 0 2 (312) 726-1700 w w w. m b r e s . c o m
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 As evidenced in Chicago and at the national level, jobs are being created at a perpetually sluggish pace. As of August, the city’s unemployment rate was 9.1 percent, which is well above the national average of 7.8 percent. Office-using employment sectors have slowly, but steadily added jobs. Total employment is up 3.7 percent year-over-year in the city’s business and professional service sector and up 2.8 percent in financial services. However, the pace of hiring in each has not accelerated since 2010. In contrast to previous quarters, local hiring prospects have weakened for the end of 2012. According to a recent survey conducted by Manpower, 18 percent of Chicago-area employers plan to hire during the fourth quarter, while 11 percent plan to cut staff. The results show that a net 7 percent of employers plan to hire, which is far below the net 19 percent reported last quarter. The net employment outlook for the U.S. was a positive 11 percent, further demonstrating the hiring gap witnessed between Chicago and rest of the country. Reasons for this cautious hiring outlook include uncertainty towards China’s growth and its effect on the U.S., the upcoming presidential elections, and the “fiscal-cliff,” which refers to looming year-end spending cuts and tax increases.
C H I C A G O E C O N O M I C A N A LY S I S
SECTION ONE
The economic recovery remains challenged, but Chicago-based technology companies are committed to creating jobs Despite a steady decline in its unemployment rate, Chicago’s economy continues to be “at risk” according to Moody’s Economy.com. Chicago benefits from being the major business, distribution, and financial hub of the Midwest. It also has a large talent pool, strong educational institutions, and relatively high per capita income. However, Economy.com cites that the city suffers from high taxes, infrastructure in need of repair, below-average population growth and poor local fiscal health. These concerns have prompted companies to consider relocating their operations. In response, state and local governments have had to offer lucrative incentive packages to retain such companies. Aside from an otherwise mediocre outlook, the local economy’s major bright spot is Chicago’s emergence as a hub for technology and start-up companies. After acquiring Motorola Mobility, Google pledged to stay in the Chicago area by signing a 15-year lease to relocate 3,000 employees downtown from suburban Libertyville. In addition, Mayor Rahm Emanuel announced that 21 Chicagobased technology companies pledged to collectively create more than 2,000 jobs in Chicago by 2015. Local tech incubators Excelerate Labs and 1871 continue to foster start-up companies in hopes of developing the next Groupon or GrubHub. In addition, Mayor Emanuel, World Business Chicago, and local business leaders have teamed up to implement The Plan for Economic Growth and Jobs, which is focused on accelerating economic development in the Chicago metropolitan area. Considering the factors above, Chicago’s economic outlook continues to be mixed. Total employment in the Chicago MSA fell 7.4 percent peak-to-trough and has only rebounded 2.4 percent since its low point in December 2009. Compared to the 2001 recession, total employment fell further and has been markedly slower to recover. If jobs continue to be created at a tepid pace, the Chicago office market is expected to experience a slow, drawn-out recovery. MB Real Estate’s baseline forecast expects intermittent quarters of positive and negative absorption, resulting in a slight decline in vacancy over the next two years. Sources: MBRE Research, BLS, Chicago Sun-Times, Crain’s Chicago Business, World Business Chicago, Moody’s Economy.com
CHICAGO EMPLOYMENT WELL BELOW PEAK AND RECOVERING SLOWLY
THIRD QUARTER 2012 | CHICAGO MARKET OVERVIEW
1
CENTRAL BUSINESS DISTRICT EXECUTIVE SUMMARY Despite slow job growth, the CBD experienced over 475,000 square feet of positive absorption during the third quarter. This marks the largest quarterly occupancy increase since the third quarter of 2007. Key Indicators: • Direct vacancy fell 30 basis points to 15.4 percent. Each building class saw a decline in vacancy, with Class B buildings experiencing the largest drop. The River North, Central Loop, and West Loop submarkets continue to outperform the overall market. Only the South Loop experienced negative absorption.
CENTRAL BUSINESS DISTRICT
SECTION TWO
• No new developments were announced this quarter. During the fourth quarter, Hines plans to break ground on a 45-story, 900,000 square feet tower at 444 West Lake, with completion slated for mid-2016. There are 11 other sites that have been actively marketed to prospective anchor tenants. • Technology companies continue to bolster the market. Google (Motorola Mobility) signed a new, 15-year, 572,000 square foot lease at the Merchandise Mart. The firm will relocate 3,000 employees from Libertyville beginning in early 2013. In addition, Mayor Emanuel announced that 21 Chicago-based technology firms have pledged to create a combined 2,000 jobs by 2015. • Class A rental rates for new transactions are down 1.2 percent on a year-over-year basis. However, concessions have also fallen during the same time frame. Average tenant improvement allowances have fallen 11.3 percent while average rent abatement has declined by 12.0 percent. • Underutilized space remains the biggest concern to the outlook of the market. Other risks include: fear of another recession and the “fiscal cliff”; residual effects of the Eurozone crisis; shrinking space requirement per employee; reduced storage needs due to digital archiving; reduced server space needs due to cloud computing; and increased corporate tax rates in Illinois. • Potential upsides to the outlook include: the increased trend of businesses relocating to the CBD; rapidly expanding tech firms; no new supply expected until at least 2016; and increased corporate confidence. Despite the solid demand witnessed during the third quarter, slow job growth and tenants eliminating underutilized space are expected to mute a recovery. MB Real Estate’s baseline forecast expects intermittent quarters of positive and negative absorption, resulting in a slight decline in vacancy over the next two years.
CBD VACANCY AND YEAR-TO-DATE ABSORPTION SUMMARY Direct Vacancy 3Q2012 Central Loop East Loop N. Michigan Ave. River North South Loop West Loop CBD Chicago Total Net Absorption 3Q2012 Central Loop East Loop N. Michigan Ave. River North South Loop West Loop CBD Chicago Total
A 9.4% 18.5% 18.8% 11.5% 28.8% 14.9% 14.1%
Change from 2Q2012 -0.8% 0.0% -3.3% -1.2% 8.4% 0.2%
-0.3%
B
Change from 2Q2012
15.8% 24.4% 24.0% 6.4%
-0.1% 1.1% -2.7% -3.4%
10.8% 16.9%
-0.7%
-1.9%
C 16.4% 15.1% 19.3% 9.8% 24.0% 16.2% 15.6%
Change from 2Q2012 -1.6% 0.1% 4.4% -0.8% -0.7% -0.6%
-0.1%
Total
Change from 2Q2012
13.6% 20.0% 20.9% 9.4% 26.2% 14.2% 15.4%
-0.6% 0.6% -0.4% -1.7% 3.4% -0.4% -0.4%
A
B
C
Total
29,357 (10,423) 111,736 46,250 3 (93,731) 83,191
109,694 (2,308) 26,978 80,428
109,904 44,522 (46,415) (66,834) (12,095) (9,511) 19,570
248,954 31,791 92,299 59,844 ( 12,092) 54,442 475,237
157,684 372,476
Numbers in parentheses are negative
THIRD QUARTER 2012 | CHICAGO MARKET OVERVIEW
2
444 West Lake slated for 2016 completion
• No new developments were announced this quarter. During the fourth quarter, Hines will break ground on a 45-story, 900,000 square foot building at 444 West Lake. The developer obtained $300 million to construct the building from Montreal-based Ivanhoe Cambridge and an additional $29.5 million from the City of Chicago for a surrounding park. Completion is slated for mid2016.
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 Total - 20 Properties
• Just outside of the CBD’s official boundaries, Sterling Bay is redeveloping a 385,000 square foot former cold storage facility at 1000 West Fulton. SRAM became the building’s first tenant by preleasing 77,000 square feet. • In addition to 444 West Lake, MB Real Estate has identified 10 proposed new development sites ranging from 350,000 to 1.3 million square feet. While 60 percent preleasing is a typical benchmark, Hines has demonstrated that construction can occur with nontraditional financing. • OUTLOOK: The amount of new construction will be fueled by the number of large tenants seeking space and the constraint of large blocks of Class A space. A smaller development has the potential to be delivered before 444 West Lake. By 2016, demand is expected to be great enough to warrant new office developments.
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
sf sf sf sf sf sf sf sf sf sf sf sf sf
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%
16,446,894 sf
UNDER CONSTRUCTION/ANNOUNCED 444 West Lake
900,000 sf
Total
900,000 sf
S U P P LY
• Prompting the construction at 444 West Lake, and potentially a smaller development, is the constraint on large, contiguous space. There are 10 contiguous blocks of Class A space greater than 100,000 square feet on the market. This is compared to 13 tenants who are actively evaluating the CBD for at least 100,000 square feet.
% Leased (Avg)
2000 - 2012 INVENTORY ADDITIONS
CENTRAL BUSINESS DISTRICT
NEW DEVELOPMENT
% Leased 0.0%
2000-2012 INVENTORY ADDITIONS Delivered (2000-2011) Delivered (2012)
16,446,894 sf 0 sf
Total Under Construction/Announced Proposed Inventory
16,446,894 sf
Total
900,000 sf 4,922,564 sf
5,822,564 sf
NO NEW DELIVERIES EXPECTED UNTIL 2016
THIRD QUARTER 2012 | CHICAGO MARKET OVERVIEW
3
Sublease availability drops, but number of large blocks is on the rise
• The amount of total available sublease space decreased by 4.1 percent and is now just above 3.1 million square feet. • United Airlines continues to market the 8th through 19th floors at 77 West Wacker for sublease. The 240,000 square foot block has a term through February 2022 and is competitive with the largest direct blocks of Class A space. • Law firm Drinker Biddle & Reath subleased 52,000 square feet to another law firm, Ropes & Gray, on the 32nd and 33rd floors of 191 North Wacker. • Despite a drop in total availability, three new blocks became available this quarter. Locke, Lord Bissell & Liddell and R.R. Donnelley are each looking to sublet two floors at 111 South Wacker. Edwards Wildman, a private equity and venture capital law firm, is marketing 51,000 square feet at 225 West Wacker.
SUBLEASE AVAILABILTY UP FROM LAST YEAR, BUT BELOW LONG-TERM AVERAGE
S U P P LY
• OUTLOOK: The amount of available sublease space is historically an indicator of corporate confidence. The current amount of available space is still well below the historical average of 3.6 million square feet. Companies continue to reconsider employee headcount and space efficiency, causing sublease availability to fluctuate.
CENTRAL BUSINESS DISTRICT
SUBLEASE SPACE
LARGE BLOCKS (MORE THAN 50,000 SQUARE FEET) OF SUBLEASE SPACE CURRENTLY AVAILABLE CLASS C LASS A Size (sf) (sf) Size
O ccupancy Occupancy
Expiration Expiration
Floor(s) Floor(s)
Sublandlord Sublandlord
77 77 W Wacker Wacker Dr Dr Dearborn St 131 S Dearborn Dearborn St 131 S Dearborn Wacker Dr 1 N Wacker Wacker Dr Dr 111 S Wacker 111 S Wacker Wacker Dr Dr Riverside 100 N Riverside 225 W Wacker Wacker Dr Dr
240,108 128,622 64,125 55,437 55,400 54,200 52,660 51,120
Negotiable Negotiable Vacant Vacant Vacant Vacant Vacant Vacant Negotiable Negotiable January January 2013 Negotiable Negotiable Days 30 Days
FFebruary ebruary 2022 O October ctober 2017 O October ctober 2017 M March arch 2015 January January 2021 May May 2015 M May ay 2023 M arch 2022 March
8-19 7-8 10 19-20 45-46 37-38 7-8 26-27
United Airlines Airlines United Ci Citadel tadel Ci Citadel tadel M Merrill errill Lynch Lynch Liddell Locke, Locke, Lord, Lord, Bissell Bissell & Liddell R.R. R.R. Donnelley Donnelley Hostway Hostway Cor Corporation poration Edwards W ildman Edwards Wildman
TTotal otal - 8 Spaces Spac es
650,552 650,552
Building Building AAddress ddress
CLASS C LASS B Size Size (sf) (sf)
O Occupancy ccupancy
Expiration Expiration
Floor(s) Floor(s)
Sublandlord Sublandlord
225 225 W RRandolph andolph SStt 350 W Mart Mart Ctr Ctr A ve Chicago 600 W C hicago Ave 222 N LaSalle LaSalle St 180 N LaSalle LaSalle St
238,778 138,225 117,101 78,974 61,011
VVacant acant Vacant Vacant Vacant Vacant Vacant Vacant Vacant Vacant
D ecember 2022 December JJanuary anuary 2016 N ovember 2015 November M ay 2014 May JJuly uly 2015
22-30 3-5 2 17-18 5-7
AT&T AT&T AT&T AT&T Lev el 3 Communications Communications Level M errill LLynch ynch Merrill Accenture Accenture
TTotal otal - 5 Spaces Spac es
634,089 634,089
Building Building AAddress ddress
Italicized addresses indicate space is new on the market
THIRD QUARTER 2012 | CHICAGO MARKET OVERVIEW
4
Number of Class A options increase
• The number of directly available, contiguous blocks greater than 50,000 square feet stayed at 65. The number of available Class A large blocks increased by four. • The number of available large, Class B blocks decreased by one while the number of Class C blocks was reduced by three. The largest Class C block removed was a 68,000 square foot space at 33 South State, which was leased to Walgreens e-Commerce Institute. • The largest new block this quarter is 218,000 square feet at 101 East Erie. The space, currently leased to Draft FCB, will be available for March 2014 occupancy as the advertising agency relocates to 185,000 square feet at 875 North Michigan.
CLASS B Building Address 130 E Randolph St * 410 N Michigan Ave * 222 N LaSalle St * 303 E Wacker Dr 303 E Wacker Dr 200 N LaSalle St 130 E Randolph St * 333 S Wabash Ave 350 W Mart Ctr * 130 E Randolph St 300 S Riverside Plz * 401 N Michigan Ave * 1 N Dearborn St 120 S LaSalle St 350 W Mart Ctr 175 W Jackson Blvd 175 W Jackson Blvd 111 E Wacker Dr 233 N Michigan Ave ** 350 W Mart Ctr 222 Merchandise Mart Plz 303 E Wacker Dr * 303 E Wacker Dr * 23 Blocks
Size (sf)
Submarket
256,720 213,054 199,132 182,782 165,827 164,586 155,829 140,000 130,380 128,948 128,948 104,726 97,261 94,995 87,393 68,539 67,725 67,216 67,028 64,661 63,193 59,704 52,553 2,761,200
East Loop North Michigan Avenue Central Loop East Loop East Loop Central Loop East Loop East Loop River North East Loop West Loop North Michigan Avenue Central Loop Central Loop River North Central Loop Central Loop East Loop East Loop River North River North East Loop East Loop
500 W Monroe St 515 N State St * 200 E Randolph St 233 S Wacker Dr 101 E Erie St * 440 S LaSalle St * 227 W Monroe St * 10 S Dearborn St * 233 S Wacker Dr * 161 N Clark St * 233 S Wacker Dr 455 N Cityfront Plaza Dr 30 S Wacker Dr 540 W Madison St 333 W Wacker Dr 311 S Wacker Dr 1 S Wacker Dr * 1 S Wacker Dr 77 W Wacker Dr 440 S LaSalle St * 980 N Michigan Ave 321 N Clark St 233 S Wacker Dr 222 W Adams St 1 S Wacker Dr 200 E Randolph St 440 S LaSalle St * 233 S Wacker Dr 233 S Wacker Dr 233 S Wacker Dr 525 W Van Buren St ** 31 Blocks
Size (sf)
Submarket
392,063 350,906 340,959 293,706 217,569 159,539 139,883 139,165 125,553 116,964 91,807 89,854 85,831 84,031 80,736 76,497 76,202 74,363 67,342 67,322 62,384 61,431 60,817 59,436 56,669 54,708 53,143 52,450 52,268 51,979 51,538 3,687,115
West Loop North Michigan Avenue East Loop West Loop North Michigan Avenue Central Loop West Loop Central Loop West Loop Central Loop West Loop North Michigan Avenue West Loop West Loop West Loop West Loop West Loop West Loop Central Loop Central Loop North Michigan Avenue River North West Loop West Loop West Loop East Loop Central Loop West Loop West Loop West Loop West Loop
S U P P LY
• MB Real Estate has identified 37 tenants actively seeking 50,000 square feet or more in the CBD. However, with 66 blocks available, a glut of space exists in the market. Coupled with the ability to renew, large tenants continue to have a multitude of options.
CLASS A Building Address
CENTRAL BUSINESS DISTRICT
LARGE BLOCKS OF DIRECT AVAILABILITY
CLASS C Building Address 309-311 W Monroe St * 401-465 E Illinois St 11 S LaSalle St 435-445 N Michigan Ave 401 S State St 619 S LaSalle St 740 N Rush St 360 N Michigan Ave 33 S State St 111 N Canal St 104 S Michigan Ave 11 Blocks
Size (sf)
Submarket
214,490 210,000 150,166 129,947 110,898 89,000 77,394 76,855 70,107 57,800 56,808 1,243,465
West Loop North Michigan Avenue Central Loop North Michigan Avenue East Loop South Loop North Michigan Avenue East Loop East Loop West Loop East Loop
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 2012 | CHICAGO MARKET OVERVIEW
5
Direct vacancy rate falls due to strong demand for Class B buildings
• The direct vacancy rate in the CBD fell 0.3 percent during the quarter to 15.4 percent. The total vacancy rate decreased by 0.4 percent to 17.8 percent due to a reduction in available sublease space. • Demand was strongest in Class B buildings as the direct vacancy rate for this segment fell 60 basis points to 16.9 percent. • Direct vacancy in Class A buildings fell slightly to 14.1 percent and to 15.6 percent in Class C buildings. • OUTLOOK: MB Real Estate expects direct vacancy to be volatile through the intermediate term, oscillating between slightly positive and negative changes.
DEMAND
HISTORIC DIRECT VACANCY: UNCHANGED YEAR TO DATE
CENTRAL BUSINESS DISTRICT
VACANCY RATES
HISTORIC YEAR-END DIRECT VACANCY MARKET STATISTICS BY CLASS: CLASS B STILL HIGHEST
THIRD QUARTER 2012 | CHICAGO MARKET OVERVIEW
6
Google’s Merchandise Mart lease highlights an active quarter
• Google (Motorola Mobility) signed a 15-year, 572,000 square foot lease at 222 Merchandise Mart. The search engine giant will be the largest tenant in the CBD’s largest building as they relocate 3,000 employees from Libertyville. As a result, several existing tenants will relocate within the building or explore alternative buildings. • United Airlines expanded by an additional 205,000 square feet at Willis Tower, giving it 830,000 square feet total at the building. Draft FCB signed a 15-year lease for 185,000 square feet at the John Hancock Center. The advertising agency will consolidate locations from 101 East Erie and 633 North St. Clair. Northwestern University’s Feinberg School of Medicine has already signed a lease to backfill the 62,000 square feet that will be vacated at Draft FCB’s 633 North St. Clair office.
CENTRAL BUSINESS DISTRICT
LARGE DEALS
• Grosvenor Capital Management renewed and expanded to 96,000 square feet at 900 North Michigan. A majority of large renewal transactions included expansions, which will result in a net increase to occupancy. • OUTLOOK: Tenants have shown increased confidence in real estate decision-making as economic fears slowly ease. Large deal activity should continue to be robust, but several companies evaluating the market are expected to shed space from their current footprint. DEMAND
LARGE LEASE TRANSACTIONS NEW Tenant
Type
Submarket
Building Address
Google United Airlines Draft FCB SRAM AIG GSA Army Corp of Engineers Northwestern University - Feinberg School of Medicine GE Transportation Shopper Trak CBIZ Gibraltar The Marketing Store HNTB Mintel ThyssenKrupp Walgreens (IT Group) Sheppard Mullin Manifest Digital Hyper Marketing Total - 18 Deals
New Exp/Relo Relo New Relo New New New Relo Relo New Relo New New New New New New
River North West Loop North Michigan Ave West of West Loop West Loop Central Loop North Michigan Ave West Loop West Loop West Loop Central Loop West Loop West Loop Central Loop West Loop Central Loop East Loop East Loop
222 Merchandise Mart 233 S Wacker 875 N Michigan 1000 W Fulton 500 W Madison 231 S LaSalle 633 N St Clair 500 W Monroe 233 S Wacker 225 W Wacker 55 W Monroe 1 S Wacker 333 W Wacker 111 W Jackson 120 S Riverside 70 W Madison 35 E Wacker 104 S Michigan
Size (sf)
Tenant
Type
Submarket
Building Address
Size (sf)
Citadel Grosvenor Capital Management Guggenheim Partners Cramer-Krasselt Walgreens e-Commerce Institute CEDA Ropes & Gray BBDO Illinois CPA Society Clayco InnerWorkings Comcast Spotlight Total - 12 Deals
Ren/Cont Ren/Exp Ren/Exp Ren Exp Ren Sub Exp Ren Ren/Exp Exp Ren/Exp
Central Loop North Michigan Ave West Loop East Loop East Loop Central Loop West Loop East Loop West Loop East Loop River North North Michigan Ave
131 S Dearborn 900 N Michigan 227 W Monroe 225 N Michigan 33 S State 208 S LaSalle 191 N Wacker 225 N Michigan 550 W Jackson 35 E Wacker 600 W Chicago 444 N Michigan
225,000 96,462 80,000 75,735 67,698 58,179 51,682 51,128 22,128 21,689 20,000 20,000 789,701
572,000 205,000 185,000 77,000 74,460 63,678 61,750 53,972 52,000 38,142 31,348 31,000 26,167 25,329 25,172 24,886 23,000 22,572 1,592,476
RENEWAL/EXPANSION/SUBLEASE
Abbreviations: Cont - Contraction
Exp - Expansion
Relo - Relocation
Ren - Renewal
Sub - Sublease
THIRD QUARTER 2012 | CHICAGO MARKET OVERVIEW
7
All three building classes experience positive absorption
• Net quarterly absorption totaled 475,000 square feet, which is the largest quarterly occupancy increase in five years. • Absorption was slightly positive in Class A and C buildings. Class B buildings saw strong demand and experienced 372,000 square feet of net positive absorption as the flight to quality trickles down to Class B space. • Absorption was positive in each submarket besides the South Loop. River North remains the tightest submarket, with 293,000 square feet absorbed year-to-date. • OUTLOOK: Despite the strong quarter, tepid hiring and shrinking workspaces will combat new demand brought to the CBD. MBRE expects intermittent quarters of positive and negative absorption throughout 2012.
CENTRAL BUSINESS DISTRICT
ABSORPTION
HISTORIC ABSORPTION: MODEST POSITIVE ABSORPTION SEEN YEAR-TO-DATE DEMAND
HISTORIC ABSORPTION BY SUBMARKET: RIVER NORTH LEADING THE WAY THUS FAR IN 2012
THIRD QUARTER 2012 | CHICAGO MARKET OVERVIEW
8
Rents slowly rise as concessions begin to taper
• Lease metrics are compared on a four-quarter basis instead of calendar year, allowing full years of data comparison. • Average rental rates for Class A buildings fell 1.2 percent for new transactions but rose 3.7 percent for renewals from the previous year. However, tenant improvement allowances have fallen 11.3 percent for new deals year-over-year and 21.6 percent for renewals. The drop in concessions signals that net effective rents for Class A buildings may be on the rise and supports the positive net absorption in Class B as some tenants are priced out of the highest quality buildings. • Class B initial rates for new transactions are up 6.2 percent and down 1.4 percent for renewals. Concessions are mixed as tenant improvement allowances have increased but free rent has decreased for new transactions.
CENTRAL BUSINESS DISTRICT
LEASE COMPARABLES
• Initial rates for Class C increased by 6.2 percent for new and 8.1 percent for renewal transactions. However, there is disconnect with respect to demand, as 463,000 square feet of occupancy has been lost year-to-date. F E AT U R E S
• OUTLOOK: The Class A and B segments experienced significant positive absorption in 2011 and in the first three quarters of 2012. Therefore, Class A and B net effective rental rates may continue to grow. Class C net effective rents have also increased, but such buildings have lost over one million square feet of occupancy over the eight quarters. As a result, we expect Class C net effective rates to decline in upcoming quarters to compensate.
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
4Q2011 - 3Q2012
$19.88
$15.57
$13.18
$36.04
$31.35
$22.19
6.2
6.3
5.9
7.0
6.7
6.1
4Q2010 - 3Q2011
$20.12
$14.66
$12.36
$47.07
$27.59
$27.73
8.1
6.8
5.0
8.2
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
4Q1999 - 3Q2000
$21.05
$15.87
$15.17
$24.57
$27.68
$28.79
0.1
0.0
0.2
8.2
6.8
6.2
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
4Q2011 - 3Q2012
$19.43
$14.40
$13.03
$10.83
$8.83
$9.68
3.9
2.9
2.4
4.8
4.0
3.8
4Q2010 - 3Q2011
$18.73
$14.20
$12.05
$18.17
$10.02
$9.16
5.3
4.5
4.1
6.3
4.4
4.5
4Q2009 - 3Q2010
$20.13
$15.75
$10.61
$17.51
$8.97
$5.95
5.7
4.1
5.3
5.7
4.8
5.2
4Q2008 - 3Q2009
$19.09
$16.84
$14.24
$18.34
$15.97
$13.61
3.8
3.1
2.6
5.7
5.1
6.5
4Q2007 - 3Q2008
$21.98
$15.77
$15.17
$19.05
$15.38
$12.14
2.5
2.5
2.3
6.8
5.7
6.6
4Q2006 - 3Q2007
$17.44
$14.22
$16.24
$17.89
$16.95
$12.33
4.5
2.5
1.2
6.7
6.1
5.9
4Q2005 - 3Q2006
$16.23
$13.24
$15.40
$23.25
$17.00
$10.29
4.3
3.2
0.7
6.9
6.4
5.4
4Q2004 - 3Q2005
$16.69
$12.46
$12.04
$24.90
$21.86
$4.25
5.4
3.0
0.8
8.6
8.2
4.8
4Q2003 - 3Q2004
$17.74
$13.28
$9.80
$22.41
$19.78
$11.09
2.4
3.5
1.1
8.3
7.1
6.8
4Q2002 - 3Q2003
$20.05
$14.25
$10.29
$17.30
$13.45
$7.39
1.1
2.5
0.3
7.0
7.0
6.4
4Q2001 - 3Q2002
$20.80
$15.60
$13.32
$16.90
$14.51
$8.37
0.7
0.7
0.1
7.8
6.5
4.8
4Q2000 - 3Q2001
$23.80
$16.86
$11.03
$8.47
$7.71
$0.00
0.0
0.1
0.0
5.0
7.5
2.3
4Q1999 - 3Q2000
$21.50
$15.88
$13.71
$11.98
$14.07
$5.67
0.0
0.0
0.0
5.4
7.9
5.2
All rates are shown as net and do not include tax and operating costs for building. Numbers will be revised as new data are reported in subsequent quarters
THIRD QUARTER 2012 | CHICAGO MARKET OVERVIEW
9
Investors shift focus to Class B and C assets in hopes of achieving higher yields
• Four buildings and a portion of another were sold while three buildings were placed under contract during the second quarter. For the second consecutive quarter no Class A buildings traded. • The highest price paid on a per square foot basis was Alliance Partners’ purchase of 300 West Adams for $202 per square foot. The building’s previous ownership group purchased the building in 2007 for only $91 per square foot. During their hold, the joint venture of Sterling Bay and Annenberg Investments renovated the building and raised occupancy from 68 to 93 percent. • A joint venture of Lincoln Property and PIMCO purchased 230 West Monroe for just over $91 million, equating to $146 per square foot. Next door, The Farbman Group and Lubert Adler Funds acquired 200 West Monroe for $139 per square foot.
CENTRAL BUSINESS DISTRICT
INVESTMENT SALES
• The aggregate square footage and transaction value for year-to-date investment sales has already exceeded year-end 2011 totals. With approximately 2.5 million square feet and $432 million of transactions under contract, 2012 is shaping up to be a much more active year.
Sale Date
540 W Madison 875 N Michigan (office/parking)
New On Market
1,111,925
$352,000,000 $317
A
New On Market
856,000
$214,000,000 $250
A
111 W Washington New On Market
580,000
$100,000,000 $172
C
125 S Wacker 555 W Monroe 205 W Wacker
New On Market New On Market New On Market
566,454 419,000 263,650
$120,000,000 $212 $150,000,000 $358 $29,000,000 $110
B A C
123 W Madison
New On Market
79,039
300 N LaSalle (Up to 49% Stake) 130 E Randolph 180 N Stetson 122 S Michigan 20 S Clark 332 S Michigan 32 W Randolph 540 N LaSalle
Size (sf)
Price per sf * Class Seller
Building Address
On Market
1,302,901
On Market On Market On Market On Market On Market On Market On Market
1,192,357 976,137 512,369 363,657 319,401 226,666 65,100
Under Contract
Price
$5,400,000
$68
C
- $600
A
Bank of America JV Deutsche Bank & NorthStar Realty Harbor Group International Tishman Speyer Principal Global 205 Chicago Partners Canadian Imperial Bank of Commerce
Status (Buyer or Listing Agent) Marketing (JLL) Marketing (CBRE) Marketing (Jones Lang LaSalle) Marketing (Eastdil Secured) Marketing (CBRE) Marketing (HFF) Marketing (CBRE)
KBS REIT 2
Marketing (HFF)
BentleyForbes
Marketing (CBRE)
$60,000,000 $165 $13,250,000 $58 $10,000,000 $154
B A C B C C C
1,195,170
$230,000,000 $192
A
111 N Canal Under Contract 550 W Washington Under Contract
924,800 372,000
$100,000,000 $108 $112,000,000 $301
C A
Marketing (Jones Lang LaSalle) Marketing (Jones Lang LaSalle) Marketing (Jones Lang LaSalle) Marketing (CB Richard Ellis) Marketing (CBRE) Harbor Group International (Eastdil TIAA-CREF Secured) Albert Frank & Co. Sterling Bay Cos. Beacon Capital Partners MetLife (Eastdil Secured)
230 W Monroe
3rd Qtr 2012
623,524
$91,300,000 $146
B
GE Pension Trust
200 W Monroe
3rd Qtr 2012
538,890
$75,000,000 $139
B
GE Pension Trust
311 W Monroe
3rd Qtr 2012
384,885
$44,000,000 $114
C
AREA Partners
300 W Adams
3rd Qtr 2012
252,847
$51,000,000 $202
C
560-566 W Lake (Floors 6-7)
3rd Qtr 2012
58,000
1 S Wacker
$500,000,000 $231
$5,300,000
$91
C
F E AT U R E S
INVESTMENT SALES: YTD SQUARE FOOTAGE AND TRANSACTION VALUE ALREADY EXCEEDS 2011 TOTALS
Ivor Braka M & J Wilkow Ivor Braka David & Barbara Kalish Joseph Lagoa
Sterling Bay JV Annenberg Investments United Way of Metropolitan Chicago
Lincoln Property JV PIMCO / HFF Farbman Group JV LubertAdler Funds / HFF Archon Group JV Golub & Co. / Eastdil Secured Alliance Partners / CBRE The Academy of General Dentistry
*Price per square foot - based off estimated selling price for new to market buildings
THIRD QUARTER 2012 | CHICAGO MARKET OVERVIEW
10
A slow recovery continues to be expected
As previously forecasted, the CBD has experienced intermittent quarters of positive and negative absorption. As a result, the CBD’s direct vacancy rate is unchanged compared to the end of 2011. Growth has been slow but new demand has been building in the CBD. The performance of the office market is directly affected by the labor market. During past recessions, there was a strong correlation between occupancy and total employment. Occupancy is currently less than 0.1 percent below its 2007 peak, while employment is 5.2 percent below peak. Thus, MBRE continues to forecast a slow rebound because firms still have more space than their headcounts warrant.
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
120,244,884 120,434,748 119,972,770 118,691,577 121,440,276 122,776,164 124,713,268 125,037,423 126,452,643 128,385,650 126,478,575 125,626,639 125,269,078 130,038,076 130,539,796 130,649,210 131,099,590 131,099,590
101,285,488 104,939,294 106,058,995 106,744,585 109,533,759 108,743,284 107,598,500 106,754,119 106,568,104 105,737,728 108,402,912 110,969,808 110,833,045 110,112,891 109,602,891 110,516,410 111,035,131 111,268,555
Direct Vacancy % 15.8% 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% 15.3% 15.1%
F E AT U R E S
The CBD has strong demand drivers, which prompted several companies to expand or relocate operations downtown to take advantage of public transportation and the growing pool of young talent. Tech companies will continue to expand their presence. Google has signed a 15-year, 572,000 square foot lease at the Merchandise Mart.
Year
CENTRAL BUSINESS DISTRICT
FORECAST
In spite of the new demand generated in the CBD, multiple 1996-2011 Absorption Avg: 624,814 obstacles are likely to mute the recovery. Many tenants YTD 2012 Absorption: 303,666 are reducing their square footage upon lease expirations. Total projected inventory based on addition of projects currently under construction Such firms seek to be more efficient with workspaces and have adopted alternative workplace strategies such as 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. hotelling, which refers to employees sharing unassigned workstations as they alternate working from the office, at home, or at other locations. Also archives are going digital, and server rooms are being replaced by cloud technology. Chicago’s unemployment rate has fallen from 11.3 percent a year ago to 9.1 percent, but remains elevated compared to the 8.1 percent national average. Collectively, these factors will dampen the effects of new demand.
HISTORIC & PROJECTED VACANCY: OCCUPANCY TO INCREASE SLIGHTLY OVER THE NEXT TWO YEARS
THIRD QUARTER 2012 | CHICAGO MARKET OVERVIEW
11
CENTRAL BUSINESS DISTRICT
SUBMARKET MAP
F E AT U R E S THIRD QUARTER 2012 | 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) %
13,571,480
31,952
29,357
1,280,767
9.4%
12,290,713
614,835
14.0%
14,215,057
98,849
109,694
2,249,108
15.8%
11,965,950
370,240
18.4%
Class C
8,626,430
46,683
109,904
1,413,063
16.4%
7,213,367
34,316
16.8%
Total
36,412,967
177,484
248,954
4,942,937
13.6%
31,470,030
1,019,391
16.4%
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) %
Class A
4,040,431
85,071
(10,423)
749,410
18.5%
3,291,021
145,837
22.2%
Class B
10,520,472
76,928
(2,308)
2,568,404
24.4%
7,952,068
103,121
25.4%
Class C
8,438,390
(138,832)
44,522
1,272,951
15.1%
7,165,439
58,278
15.8%
Total
22,999,292
23,166
31,791
4,590,765
20.0%
18,408,528
307,236
21.3%
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) % 22.0%
Class A
3,956,391
95,122
111,736
745,109
18.8%
3,211,282
124,494
Class B
4,691,737
30,625
26,978
1,125,066
24.0%
3,566,671
23,463
24.5%
Class C
4,341,239
(309,531)
(46,415)
838,142
19.3%
3,503,097
43,690
20.3%
Total
12,989,367
(183,785)
92,299
2,708,317
20.9%
10,281,050
191,647
22.3%
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) % 13.3%
Class A
3,998,711
162,482
46,250
460,265
11.5%
3,538,446
73,436
Class B
3,681,438
123,796
80,428
234,463
6.4%
3,446,975
231,713
12.7%
Class C
5,598,724
6,678
(66,834)
548,821
9.8%
5,049,904
179,736
13.0%
Total
13,278,873
292,955
59,844
1,243,549
9.4%
12,035,325
484,885
13.0%
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) %
Class A
1,019,325
(82,285)
3
293,197
28.8%
726,128
10,830
29.8%
Class C
1,185,970
(38,499)
(12,095)
284,903
24.0%
901,067
2,005
24.2%
Total
2,205,295
(120,784)
(12,092)
578,100
26.2%
1,627,195
12,835
26.8%
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
27,105,356
(145,784)
(93,731)
4,036,826
14.9%
23,068,530
893,257
18.2%
Class B
9,725,125
289,976
157,684
1,054,535
10.8%
8,670,590
135,631
12.2%
Class C
6,383,314
(29,562)
(9,511)
1,036,572
16.2%
5,346,742
86,800
17.6%
Total
43,213,795
114,630
54,442
6,127,933
14.2%
37,085,862
1,115,688
16.8%
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
53,691,693
146,558
83,191
7,565,574
14.1%
46,126,119
1,862,689
17.6%
Class B
42,833,829
620,172
372,476
7,231,576
16.9%
35,602,253
864,168
18.9%
Class C
34,574,068
(463,064)
19,570
5,394,451
15.6%
29,179,616
404,825
16.8%
Total CBD
131,099,590
303,666
475,237
20,191,601
15.4%
110,907,989
3,131,682
17.8%
F E AT U R E S
Class A Class B
CENTRAL BUSINESS DISTRICT
MARKET STATISTICS
Numbers in parentheses are negative
THIRD QUARTER 2012 | CHICAGO MARKET OVERVIEW
13
SUBURBAN CHICAGO EXECUTIVE SUMMARY From 2008 to 2011, Suburban Chicago lost more than six million square feet of occupancy. As a result, its direct vacancy rate reached a record high of 23.6 percent. Thus far, 2012 has started to reverse this course. Demand has picked up slightly in Class A and B buildings causing direct vacancy to fall to 23.1 percent. Despite this, vacancy is still extremely high and numerous factors weigh against a sustainable recovery.
SUBURBAN CHICAGO
SECTION THREE
Key Indicators: • Negative net absorption totaled 185,000 square feet, but the overall market has experienced slight positive absorption year-to-date. The Northwest was the best performing submarket, experiencing 389,000 square feet of positive absorption. However, this was outweighed by significant occupancy losses in the East-West and North submarkets. • Occupancy decreased across each building class. Direct vacancy rates rose 20 basis points in Class A, remained unchanged in Class B, and rose 40 basis points in Class C. • AT&T continues to bog down the sublease market with its 1.2 million square foot corporate campus and a separate 239,000 square foot building listed as available. The potential for formerly single-tenant corporate campuses to enter the multi-tenant market weighs on Suburban Chicago. Kraft and Motorola are among the other firms who are seeking tenants or buyers for suburban campuses. • The Northwest submarket, which suffers from the highest vacancy rate in the market, benefitted from the two largest leases signed during the quarter. However, the net effect on the overall market is minimal, since these tenants are relocating from the East-West and North submarkets. This “musical chairs” trend, where companies lease a large block of space and leave behind another large block, has hindered the recovery. • Class A asking rental rates are down 3.0 percent year-over-year, which likely has contributed to year-to-date positive absorption. Rental rates may still need to fall further to generate the demand necessary for recovery. • Outdated product plagues the suburbs and fuels the glut of vacant space. Allstate is considering tearing down its former headquarters building in South Barrington. However, other obsolete buildings are still listing space and driving down market economics. • Speculative construction is at a standstill. Construction has been limited to build-to-suit projects, such as the recently completed headquarters for Astellas Pharma US in Glenview. The Hub Group and the Big Ten recently broke ground on build-to-suit headquarters. Occupancy is 6.9 percent below peak in Suburban Chicago compared to a 5.2 percent peak-to-current total employment loss. Corporate relocations, as well as underutilized space, remain the biggest risks to the market; companies have leased more space than they need and will reduce square footage upon lease expirations.
SUBURBAN VACANCY AND YEAR-TO-DATE ABSORPTION SUMMARY Direct Vacancy 3Q2012 East-West North Northwest O'Hare Suburban Chicago Total Net Absorption 3Q2012 East-West North Northwest O'Hare Suburban Chicago Total
A
Change from 2Q2012
B
Change from 2Q2012
C
Change from 2Q2012
Total
Change from 2Q2012
19.7% 20.9% 21.5% 19.1% 20.5%
0.9% 1.5% -1.7% 0.0% 0.2%
24.3% 19.4% 32.8% 30.9% 26.4%
0.5% -0.2% -0.9% 0.3% 0.0%
22.6% 23.9% 31.1% 37.1% 27.5%
1.1% 0.2% -0.2% -0.5% 0.4%
21.7% 20.7% 25.8% 25.7% 23.1%
0.7% 0.9% -1.3% 0.0% 0.1%
A
B
C
Total
(157,366) (259,900) 307,400 6,044 (103,823)
(104,331) 8,661 71,412 (12,392) (36,650)
(56,533) (9,972) 10,083 12,308 (44,114)
( 318,230) ( 261,211) 388,895 5,960 (184,586) Numbers in parentheses are negative
THIRD QUARTER 2012 | CHICAGO MARKET OVERVIEW
14
New build-to-suit announced, but no speculative construction on the horizon
• The only new development announced this quarter was a 50,000 square foot build-to-suit headquarters for the Big Ten conference located at 5440 Park Place in Rosemont. Construction began in August and is expected to be completed in September 2013. • Last quarter the Hub Group announced plans to construct a new 130,000 square foot headquarters at the site located at 2000 Clearwater Drive in Oak Brook. The company purchased and demolished the former 200,000 square foot Reed Elsevier headquarters building and broke ground on their build-to-suit in August. Construction is expected be completed by November 2013.
SUBURBAN CHICAGO
NEW DEVELOPMENT
• The only other office construction underway is limited to noncompetitive medical office developments. The build-to-suit North American headquarters for Astellas Pharma US in Glenview, for which MB Real Estate managed the construction, officially opened in June. • Over 25 million square feet is currently vacant in the Suburban market. This does not include former owner-occupied facilities, such as Allstate’s former corporate headquarters, a vacant 516,000 square foot building in South Barrington. United Airlines’ one million square foot campus in Elk Grove Village and Kraft’s 488,000 square foot building in Glenview are available for sale. S U P P LY
• With so much available space, speculative construction is not feasible. Even the largest tenants in the Suburban market have multiple options to choose from in each submarket and class. It is extremely unlikely that any lender would fund a speculative development until millions of square feet are absorbed. • OUTLOOK: Suburban Chicago has an overabundance of vacant space. Numerous proposed developments are ready to break ground once demand warrants, which will always cap rent growth at inflationary levels. Between historically high market vacancy and constrained financing, speculative development is unlikely for several years.
NEW DEVELOPMENT PIPELINE 2012 Deliveries Building Address 1 Astellas Pky, Glenview
Size (sf)
% Leased
Submarket
Comments
440,000
100.0%
North
Broke ground April 2010 with construction completed June 2012. Build-to-suit North American Headquarters for Astellas Pharma US. Construction managed by MB Real Estate.
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 Propperties
Under Construction Building Address 2000 Clearwater Dr, Oak Brook
5440 Park Pl, Rosemont
Size (sf) % Pre-leased 130,000
100.0%
East-West
50,000
100.0%
O'Hare
Total - 2 Propperties
Proposed Building Address
Size (sf) % Pre-leased
Due Date
Comments
Numerous multi-tenant properties, but none set to break ground
THIRD QUARTER 2012 | CHICAGO MARKET OVERVIEW
15
Sublease availability falls, three new blocks hit the market
• The amount of available sublease space fell 3.7 percent compared to last quarter. However, sublease availability continues to weigh heavily on the direct market for Class A space. Over 4.0 percent of total Class A inventory is available for sublease, compared to only 2.3 percent in Class B buildings. • Three large sublease blocks in the East-West corridor were placed on the market. Hillshire Brands is marketing a 157,000 square foot, short-term sublease at 3500 Lacey Road in Downers Grove as they relocate to the CBD. Acxiom Corporation is looking to sublease 71,000 square feet at 333 Finley Road in Downers Grove. Finally, InsureOne is seeking a subtenant to occupy 57,000 square feet at 150 Harvester Drive in Burr Ridge.
SUBURBAN CHICAGO
SUBLEASE SPACE
• OUTLOOK: The amount of available sublease space is slightly above its historical average of 3.4 million square feet. With a soft market and no large blocks rolling over until June 2013, it is expected that sublease availability will remain elevated.
HISTORIC YEAR-END SUBLEASE AVAILABILITY: CLASS A SPACE SPIKES AGAIN S U P P LY
LARGE BLOCKS (MORE THAN 50,000 SQUARE FEET) OF SUBLEASE SPACE CURRENTLY AVAILABLE Class A Building Address 2000 W AT&T Dr, Hoffman Estates 3 Overlook Pt, Lincolnshire 4201 Winfield Rd, Warrenville 3500 Lacey Rd, Downers Grove 1000 Milwaukee Ave, Glenview 9500 W Bryn Mawr Ave, Rosemont 150 Harvester Dr, Burr Ridge 3 Parkway Blvd N, Deerfield 701 E 22nd St, Lombard 5202 Old Orchard Rd, Skokie Total - 10 Spaces
Size (sf)
Occupancy
Expiration
Submarket
Sublandlord
1,207,245 290,143 249,996 156,855 130,403 56,554 56,514 53,970 52,079 50,766 2,304,525
Vacant Vacant Vacant March 2013 Vacant Vacant Vacant Vacant Vacant Negotiable
August 2016 February 2017 January 2016 May 2014 April 2017 August 2014 November 2016 December 2014 June 2013 June 2021
Northwest North East-West East-West North O'Hare East-West North East-West North
AT&T Hewitt Associates Navistar Hillshire Brands AON Warranty Group Matria Healthcare InsureOne Astellas Pharma US The Marketing Store National Lewis University
Size (sf)
Occupancy
Expiration
Submarket
Sublandlord
239,250 Negotiable 112,605 Negotiable 85,530 Negotiable 70,613 September 2013
August 2016 September 2017 January 2019 August 2020
Northwest East-West East-West East-West
AT&T Westell Technologies National Lewis University Acxiom Corporation
Class B Building Address 2001 Lakewood Blvd, Hoffman Estates 750 N Commons Dr, Aurora 850-950 Warrenville Rd, Lisle 3333 Finley Rd, Downers Grove Total - 4 Spaces
507,998
Italicized addresses indicate space is new on the market
THIRD QUARTER 2012 | CHICAGO MARKET OVERVIEW
16
80 contiguous blocks greater than 50,000 square feet remain directly available
• The total number of direct, available large blocks rose to 80, but total square footage within large blocks was reduced by 5.5 percent, or 454,000 square feet. This was because one of the largest available blocks was leased while seven new blocks in the 50-70,000 square foot range became available. • The largest block removed during the quarter was the entire 301,000 square foot building at 1600 McConnor Parkway in Schaumburg. Catamaran is consolidating two offices in the EastWest and North submarkets and will occupy the new location early next year.
CLASS B Building Address
City
747 E 22nd St 3890 Salem Lake Dr 544 Lakeview Pky 2350-2360 E Devon Ave 700 N Wood Dale Rd 2850 W Golf Rd 1000 E Woodfield Rd 703-709 W Algonquin Rd 4242 N Harlem Ave 9801 W Higgins Rd 500 Joliet Rd 2000 S Finley Rd ** 1350 E Touhy Ave 333 E Butterfield Rd 814 Commerce Dr 1245 Corporate Blvd 27545 Diehl Rd 999 E Touhy Ave 2211 Butterfield Rd 2400 E Devon Ave 20 Blocks of Space
Lombard Long Grove Vernon Hills Des Plaines Wood Dale Rolling Meadows Schaumburg Arlington Heights Norridge Rosemont Willowbrook Lombard Des Plaines Lombard Oak Brook Aurora Warrenville Des Plaines Downers Grove Des Plaines
Size (sf)
Submarket
209,557 150,000 144,999 142,596 125,328 110,941 99,453 96,213 93,155 91,614 78,400 78,300 71,367 70,897 66,882 64,960 62,440 59,710 52,891 51,000 1,920,703
East-West Northwest North O'Hare Northwest Northwest Northwest Northwest O'Hare East-West East-West East-West East-West East-West East-West O'Hare Northwest East-West O'Hare Northwest
Size (sf)
Submarket
195,393 186,432 75,996 51,845 509,666
Northwest Northwest North East-West
CLASS C Building Address
City
1299 Algonquin Rd 3501 Algonquin Rd 2-4-6 Genesee St 1950 S Batavia Ave 4 Blocks of Space
Schaumburg Rolling Meadows Waukegan Geneva
City
21440 Lake Cook Rd 700 Oakmont Ln 1 Corporate Dr 3075 Highland Pky * 2400 Cabot Dr 5550 Prairie Stone Pky * 1701 Golf Rd 3333 Beverly Rd 2895 Greenspoint Pky 1 Overlook Pt 1707 N Randall Rd 1 Pierce Pl 2355 Waukegan Rd 8420 W Bryn Mawr Ave 28100 Torch Pky 425 N Martingale Rd 1707 N Randall Rd 3800 N Wilke Rd 2550 W Golf Rd 4343 Commerce Ct * 75 Tri State International * 200 N Martingale Rd 2655 Warrenville Rd 2245 Sequoia Dr * 200 N Martingale Rd 5100 River Rd * 333 Knightsbridge Pky 1333 Butterfield Rd 1000 Royce Blvd 9500 W Bryn Mawr Ave 10255 W Higgins Rd 535 E Diehl Rd 2100 Sanders Rd 701 Warrenville Rd 4201 Lake Cook Rd 2 Corporate Dr 300 Park Blvd 1200 Lakeside Dr 540 Lake Cook Rd * 1001 Warrenville Rd 2 Pierce Pl 410 Warrenville Rd 18W140 Butterfield Rd 1 Parkview Plz * 1701 Golf Rd * 2100 Enterprise Ave 1701 Golf Rd 9525 W Bryn Mawr Ave 25 Tri State International * 1222 Hamilton Pky 7400 N Caldwell Ave 3 Parkway Blvd N 3000 Lakeside Dr 701 E 22nd St * 1520 Kensington Rd 3500 Lacey Rd 56 Blocks of Space
Deer Park Westmont Long Grove Downers Grove Lisle Hoffman Estates Rolling Meadows Hoffman Estates Hoffman Estates Lincolnshire Elgin Itasca Bannockburn Chicago Warrenville Schaumburg Elgin Arlington Heights Rolling Meadows Lisle Lincolnshire Schaumburg Downers Grove Aurora Schaumburg Schiller Park Lincolnshire Downers Grove Oakbrook Terrace Rosemont Rosemont Naperville Northbrook Lisle Northbrook Long Grove Itasca Bannockburn Deerfield Lisle Itasca Lisle Oakbrook Terrace Oakbrook Terrace Rolling Meadows Geneva Rolling Meadows Rosemont Lincolnshire Itasca Niles Deerfield Bannockburn Lombard Oak Brook Downers Grove
Size (sf)
Submarket
351,425 256,767 251,877 241,519 217,718 193,601 183,506 129,000 127,941 117,798 109,076 106,766 106,495 104,164 100,830 89,700 87,076 81,243 81,222 81,097 79,449 77,024 76,691 76,126 75,713 74,988 74,728 70,521 70,000 69,701 69,695 67,731 67,681 67,233 66,000 64,871 64,123 63,738 63,298 61,350 60,904 60,434 60,401 59,892 56,156 55,584 55,504 55,040 54,794 54,150 54,000 53,578 53,316 52,079 52,054 51,601 5,308,969
Northwest East-West North East-West East-West Northwest Northwest Northwest Northwest North Northwest Northwest North O'Hare East-West Northwest Northwest Northwest Northwest East-West North Northwest East-West East-West Northwest O'Hare North East-West East-West O'Hare O'Hare East-West North East-West North North Northwest North North East-West Northwest East-West East-West East-West Northwest East-West Northwest O'Hare North Northwest North North North East-West East-West East-West
S U P P LY
• The largest new block is a 92,000 square foot contiguous space at 9801 West Higgins Road in Rosemont. The recently vacated fifth floor created a block spanning the third through seventh floors.
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 during the upcoming quarter
THIRD QUARTER 2012 | CHICAGO MARKET OVERVIEW
17
Historically stronger submarkets lose occupancy
• While varying by submarket, the direct vacancy rate of the overall market rose slightly to 23.1 percent. Including sublease space, the total vacancy rate remained unchanged 26.2 percent. • The East-West and North submarkets, which have a lower vacancy rate than the overall market, experienced direct vacancy rate increases of 70 basis points and 90 basis points, respectively. Conversely, the Northwest submarket vacancy rate dropped 130 basis points to 25.8 percent.
SUBURBAN CHICAGO
VACANCY RATES
• Albeit slight, vacancy rates increased across each building class, resulting in a slight increase for the overall market. • OUTLOOK: Net demand was negative this quarter, and pervasive weakness continues in Suburban Chicago. Major corporate relocations and downsizing continue to threaten a recovery, as vacancy rates continue to be near historically high levels.
DEMAND
HISTORIC YEAR-END VACANCY RATES BY SUBMARKET: NORTHWEST AND O’HARE LAG
HISTORIC YEAR-END VACANCY RATES BY CLASS: B AND C PROPERTIES MORE THAN 1/4 VACANT
THIRD QUARTER 2012 | CHICAGO MARKET OVERVIEW
18
Reeling Northwest submarket gains two large tenants
• With the highest vacancy rate in the Suburbs, the Northwest submarket was in need of new large tenants to fill a number of large vacancies. Fortunately for local landlords, the submarket inked the two largest new lease transactions of the quarter as tenants were likely attracted by low rents.
SUBURBAN CHICAGO
LARGE DEALS
• Pharmacy benefits firm Catamaran signed the largest new lease during the quarter, taking 301,000 square feet at 1600 McConnor Parkway in Schaumburg. The firm formerly known as SXC Health Solutions is vacating 110,000 square feet at 2441 Warrenville Road in Lisle and 80,000 square feet at 1200 Lakeside Drive in Bannockburn. • Also signing a large lease in the Northwest submarket was Capital One. The bank holding company will move 450 employees early next year from Elmhurst and into 150,000 square feet at 3800 Golf Road in Rolling Meadows.
• Aon Hewitt signed the largest Suburban deal in the past four years as they extended their 818,000 square foot lease at 4 Overlook Point in Lincolnshire. As a result, the owner has placed the building up for sale.
DEMAND
• Mondelez International, Kraft’s snack spinoff, will relocate from its Northfield campus to 3 Parkway Boulevard in Deerfield. The 105,000 square foot lease backfills space formerly occupied by Astellas, who relocated to its new build-to-suit headquarters in June.
• OUTLOOK: Most new large deals involve companies who are already based in the suburbs, resulting in a “musical chairs” effect where large blocks are filled at the expense of creating new ones. For sustained occupancy increases, tenants must expand or new tenants must enter the Suburban market in order to offset companies like Sara Lee who are exiting the market. Unfortunately, the market has not displayed the new demand necessary for this to happen quickly.
LARGE LEASE TRANSACTIONS: AON HEWITT SIGNS LARGEST SUBURBAN TRANSACTION IN FOUR YEARS NEW Tenant
Type
Submarket
Building Address
Catamaran Capital One Mondelez International Invesco EN Engineering Ceannate PHH Mortgage Walgreens Abbott Laboratories Ferrara Candy Co. Retail Properties Group Total - 11 Deals
New New Relo Relo Relo Relo New New New New New
Northwest Northwest North East-West East-West Northwest North North North East-West East-West
1600 McConnor Pky, Schaumburg 3800 Golf Rd, Rolling Meadows 3 Parkway Blvd, Deerfield 3500 Lacey Rd, Downers Grove 28100 Torch Pky, Warrenville 1701 E Golf Rd, Rolling Meadows 2333 Waukegan Rd, Bannockburn 6 Parkway Blvd N, Deerfield 485 E Half Day Rd, Buffalo Grove 1 Tower Ln, Oakbrook Terrace 2021 Spring Rd, Oak Brook
Size (sf) 300,686 150,000 105,000 88,000 84,399 50,658 50,318 42,959 40,381 39,000 32,703 984,104
RENEWAL/EXPANSION/SUBLEASE Tenant
Type
Submarket
Building Address
Aon Hewitt Donlen Potash Corp Redbox Total - 4 Deals
Ren Ren Ren Exp/Sub
North North North East-West
4 Overlook Pt, Lincolnshire 2315 Sanders Rd, Northbrook 1101 Skokie Blvd, Northbrook 1 Tower Ln, Oakbrook Terrace
Abbreviations: Cont - Contraction
Exp - Expansion
Relo - Relocation
Size (sf) 818,000 74,000 74,000 55,000 1,021,000
Ren - Renewal
THIRD QUARTER 2012 | CHICAGO MARKET OVERVIEW
19
Demand turns negative once again
• Last quarter, after experiencing the greatest positive absorption in five years, occupancy declined in the third quarter. Net absorption was a negative 185,000 square feet as a result of large occupancy losses in the East-West and North submarkets. • OUTLOOK: Despite the relatively strong quarter, there are few significant demand drivers in Suburban Chicago. Companies have mulled relocation to other states to avoid increased corporate income taxes; others, like Sara Lee, are relocating to the CBD. Without significant job creation, the future of the market is weak.
SUBURBAN CHICAGO
ABSORPTION
SUBURBAN CHICAGO ABSORPTION BY CLASS: CLASS A AND B POSITIVE THUS FAR
DEMAND
EAST-WEST
2004
2005
2006
2007
2008
2009
2010
2011
Class A
1,080,332
102,299
366,688
542,281
(259,973)
(595,372)
(219,164)
299,247
22,563
Class B
(25,541)
389,014
484,869
(203,072)
(2,062)
(259,196)
67,827
(152,069)
(55,674)
Class C
YTD 2012
76,936
85,269
(125,850)
(108,813)
(87,441)
(179,177)
7,017
55,114
(2,850)
1,131,727
576,582
725,707
230,396
(349,476)
(1,033,744)
(144,319)
202,292
(35,961)
NORTH
2004
2005
2006
2007
2008
2009
2010
2011
YTD 2012 (218,286)
Total
Class A
(10,452)
196,403
(100,049)
615,115
(240,617)
(207,914)
(312,238)
(261,008)
Class B
62,026
164,357
316,207
355,510
(60,982)
(38,575)
(319,078)
33,814
50,172
Class C
(39,173)
12,697
(39,440)
26,935
(2,048)
(104,195)
(40,044)
(90,151)
(25,395)
Total
12,401
373,457
176,718
997,560
(303,647)
(350,684)
(671,360)
(317,345)
(193,509)
NORTHWEST
2004
2005
2006
2007
2008
2009
2010
2011
YTD 2012
Class A
902,901
225,865
(488,651)
10,333
(302,930)
(388,945)
(21,262)
(632,282)
317,527
Class B
233,613
(234,681)
12,266
(164,112)
(261,498)
(310,263)
(295,928)
(383,730)
141,356
Class C
(13,282)
(216,898)
(15,371)
(51,429)
(28,362)
(35,167)
(192,091)
(48,617)
15,790
1,123,232
(225,714)
(491,756)
(205,208)
(592,790)
(734,375)
(509,280)
(1,064,629)
474,674
2004
2005
2006
2007
2008
2009
2010
2011
YTD 2012
Class A
402,561
(55,786)
189,235
11,636
(256,325)
(134,526)
209,180
40,666
58,992
Class B
(306,424)
53,945
7,915
(81,167)
(51,601)
(80,925)
70,376
14,041
17,931
Class C
(15,002)
(204,597)
90,170
(50,022)
(35,696)
62,815
(10,855)
(14,567)
1,812
Total
81,135
(206,438)
287,320
(119,553)
(343,622)
(152,637)
268,701
40,140
78,736
TOTALS
2004
2005
2006
2007
2008
2009
2010
2011
YTD 2012
Class A
2,375,342
468,781
(32,777)
1,179,365
(1,059,845)
(1,326,757)
(343,484)
(553,378)
180,796
Class B
(36,326)
372,635
821,257
(92,841)
(376,143)
(688,960)
(476,802)
(487,944)
153,785
9,479
(323,529)
(90,491)
(183,329)
(153,547)
(255,724)
(235,972)
(98,221)
(10,642)
2,348,495
517,887
697,989
903,195
(1,589,535)
(2,271,441)
(1,056,259)
(1,139,542)
323,940
Total
O'HARE
Class C Total
Numbers in parentheses are negative
THIRD QUARTER 2012 | CHICAGO MARKET OVERVIEW
20
Asking rental rates down across all submarkets, building classes
• Over the last four quarters, gross asking rents have fallen across all building classes. Class A rents are down 3.0 percent, Class B rents are down 2.4 percent, and Class C rents are down 1.7 percent on a year-over-year basis. • Class C buildings in the O’Hare submarket were the best performing segment, posting 2.0 percent growth in asking rents over the past 12 months. However this segment is composed of just 2.5 million square feet and is 37.1 percent vacant, so the rent increase should be viewed as volatility in the market.
SUBURBAN CHICAGO
GROSS ASKING RENTS
• Asking rental rates in the Northwest submarket have fallen 4.4 percent on a year-over-year basis. This has led to year-to-date positive absorption totaling 475,000 square feet. • Class C gross asking rental rates are at their lowest historical levels in the East-West and Northwest submarkets. • Compared to peak levels, overall gross asking rents have fallen 16.6 percent and are at their lowest levels in MBRE’s tracked history. F E AT U R E S
• OUTLOOK: In general, segments with larger rent decreases have experienced positive absorption this year. As the overall market has a direct vacancy rate of 23.1 percent, rents will have to continue to decline to reach pre-recession occupancy.
AVERAGE GROSS ASKING RATES BY CLASS AND SUBMARKET Average Direct Gross Asking Rent East-West North Northwest O'Hare Suburban Chicago Total
A $22.23 $19.78 $21.73 $23.66 $21.61
Change over last year -1.7% -4.2% -4.6% -0.7%
-3.0%
B $18.05 $19.66 $16.88 $19.95 $18.29
Change over last year -3.9% 0.6% -2.9% -1.1%
-2.4%
C $15.46 $15.63 $13.05 $16.19 $15.17
Change over last year -1.3% -2.9% -4.9% 2.0%
-1.7%
Total
Change over last year
$19.91 $19.36 $19.50 $21.29 $19.85
-2.2% -2.8% -4.4% -0.5% -2.7%
ASKING RATES AT LOWEST LEVEL IN 12 YEARS
THIRD QUARTER 2012 | CHICAGO MARKET OVERVIEW
21
Investors turn to well leased, Class A properties
• The largest property sold was the 380,000 square foot building at 6250 North River Road in Rosemont. CBRE Global Investors paid $67 million or $176 per square foot for the 89 percent leased building. The sale price reflects deferred maintenance and the new owners’ plan to make further capital expenditures. • Cole Real Estate Investments closed on its purchase of 555-577 Aptakisic Road in Lincolnshire for $305 per square foot. The 163,000 square foot building is fully occupied by Sysmex, who has a 15-year triple net lease.
SUBURBAN CHICAGO
INVESTMENT SALES
• Retail Properties of America is seeking bidders for the 819,000 square foot 4 Overlook Point in Lincolnshire. Two large office parks were placed on the market. The Multi Employer Trust is listing the four building Greenspoint Office Park in Hoffman Estates while KBS Realty hopes to fetch $40 million for the 11 property Oak Creek Center in Lombard. • OUTLOOK: Suburban Chicago has not generated the premier investor interest that characterizes the CBD. However, well leased and well located Class A properties continue to be in demand.
On the Market: 3rd Quarter 2012 Building Address
Submarket
Size (sf)
Price
PSF *
4 Overlook Pt, Lincolnshire
North
818,686
$164,000,000
$200
A
Retail Properties of America New on Market (CBRE)
Greenspoint Office Park, Hoffman Estates (4 properties)
Northwest
500,000
$28,000,000
$56
A
Multi Employer Property Trust
New on Market (HFF)
Oak Creek Center, Lombard (11 properties)
East-West
427,161
$40,000,000
$94
B
KBS Realty
New on Market (Transwestern)
2707, 2803, 2805, & 2809 Butterfield Rd, Oak Brook
East-West
312,262
B
Inland Oak Brook International Office Ctr
New on Market (HFF)
2349 W Lake St, 2250 W Pinehurst Blvd, Addison Northwest
216,858
B
Multi Employer Property Trust
New on Market (Jones Lang LaSalle)
1717 Park St, 1755 Park St, Naperville
151,708
East-West
-
-
Class Seller
Status (Buyer or Listing Agent)
F E AT U R E S
INVESTMENT SALES: INVESTORS CAPITALIZE ON SOFT MARKET CONDITIONS
A/B Tetrad Holdings Corporation New on Market (NAI Hiffman)
Investment Sales: 3rd Quarter 2012 Building Address
Submarket
Size (sf)
Price
PSF *
Class Seller
Buyer
6250 N River Rd, Rosemont
O'Hare
380,360
$67,000,000 $176
A
GLL Real Estate Partners
CBRE Global Investors
5215 Old Orchard Rd, Skokie
North
209,625
$24,700,000 $118
B
TA Associates Realty
Millbrook Properties
2056 Westings Ave, Naperville
East-West
195,000
$27,250,000 $140
A
The Opus Group
U.S. Equities
1333 Butterfield Rd, Downers Grove
East-West
183,619
$11,500,000
$63
A
TA Associates Realty
Westport Capital Partners
630 & 650 Dundee Rd, Northbrook
North
181,330
-
-
A
North Suburban Development Corp.
The Davis Companies
4 Parkway Blvd N, Deerfield
North
171,681
$40,900,000 $238
A
The John Buck Company
Wells Core Office Income REIT
555-577 Aptakisic Rd, Lincolnshire
North
162,739
$49,700,000 $305
A
Bridge Development Partners
Cole Real Estate Investments
1933 N Meacham Rd, Schaumburg
Northwest
140,466
$11,713,768
$83
A
Younan Properties, Inc.
Westport Capital Partners
244 Knollwood Dr, Bloomingdale
Northwest
116,000
$3,100,000
$27
B
W.P. Carey & Co
NOW Foods
2275 Cabot Dr, Lisle
East-West
94,375
$17,700,000 $188
A
The Blackstone Group
Wells Core Office Income REIT
* Price per square foot - based off estimated selling price for new to market buildings
THIRD QUARTER 2012 | CHICAGO MARKET OVERVIEW
22
Vacancy expected to decline, but will remain well above 20 percent
Suburban Chicago has experienced severe occupancy losses surpassing the jobs lost since the economic downturn. Since reaching its peak in 2007, occupancy is down 6.9 percent. Total employment declined 7.4 percent peak-to-trough, but has rebounded to now stand at 5.2 percent below its peak.
For the factors mentioned above, total occupancy loss is already greater than the employment loss on a percentage basis. No speculative construction and, therefore, no new inventory will help aid the market, but the demand to sustain a recovery simply does not exist at this time. MB Real Estate expects a slight decrease in occupancy for the remainder of 2012. The large losses from 2009 are not expected again, but a rapid recovery is not expected. Positive absorption will occur in 2013 but will likely be due to 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
90,601,193 91,989,948 95,078,215 98,744,696 103,270,399 108,254,000 109,769,838 110,090,266 110,423,452 111,030,084 110,806,221 111,175,875 112,080,944 112,218,212 112,374,614 112,250,112 112,176,835 112,176,835
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 86,177,494 86,593,258
1997-2011 Absorption Avg:
327,603
YTD 2012 Absorption:
323,940
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% 22.8%
F E AT U R E S
Occupancy is still more reduced from its peak than total employment, which indicates the trend of companies relocating to the CBD. Suburban Chicago lacks the dynamic demand drivers that have recently been witnessed in the CBD. With a waning ability to attract top workers to the suburbs, the market is seeing long-time tenants seek relocation options. Also, large sublease blocks continue to weigh heavily on the direct market.
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: OVERALL VACANCY RATE WILL HOVER NEAR 23 PERCENT
THIRD QUARTER 2012 | CHICAGO MARKET OVERVIEW
23
SUBURBAN CHICAGO
SUBMARKET MAP
F E AT U R E S THIRD QUARTER 2012 | CHICAGO MARKET OVERVIEW
24
EAST-WEST
RBA (sf)
Class A Class B
Sublease Vacancy (sf)
Total Vacancy Rate (Vacancy + Sublease) %
19.7%
16,565,373
1,231,982
23.7%
24.3%
11,006,139
566,024
27.7%
1,111,491
22.6%
3,796,934
5,911
21.8%
8,708,312
21.7%
31,368,446
1,803,917
24.9%
Occupancy (sf)
Sublease Vacancy (sf)
Total Vacancy Rate (Vacancy + Sublease) %
20.9%
13,323,882
854,517
26.1%
19.4%
5,995,489
68,085
21.0%
603,250
23.9%
1,923,314
24,018
24.6%
5,560,905
20.7%
21,242,686
946,620
24.5%
Occupancy (sf)
Sublease Vacancy (sf)
Total Vacancy Rate (Vacancy + Sublease) %
21.5%
14,523,087
333,707
25.3%
32.8%
6,507,549
168,625
35.5%
728,775
31.1%
1,612,542
20,764
32.2%
7,891,435
25.8%
22,643,178
523,096
29.0%
Occupancy (sf)
Sublease Vacancy (sf)
Total Vacancy Rate (Vacancy + Sublease) %
3rd Quarter Absorption (sf)
20,627,861
22,563
(157,366)
4,062,488
14,540,471
(55,674)
(104,331)
3,534,333
Class C
4,908,425
(2,850)
(56,533)
Total
40,076,757
(35,961)
(318,230)
NORTH
RBA (sf)
YTD Absorption (sf)
3rd Quarter Absorption (sf)
Class A
16,834,771
(218,286)
(259,900)
3,510,889
Class B
7,442,255
50,172
8,661
1,446,766
Class C
2,526,564
(25,395)
(9,972)
Total
26,803,591
(193,509)
(261,211)
NORTHWEST
RBA (sf)
YTD Absorption (sf)
3rd Quarter Absorption (sf)
Class A
18,505,684
317,527
307,400
3,982,598
Class B
9,687,611
141,356
71,412
3,180,062
Class C
2,341,317
15,790
10,083
Total
30,534,613
474,674
388,895
O'HARE
RBA (sf)
YTD Absorption (sf)
3rd Quarter Absorption (sf)
Direct Direct Vacancy Vacancy (sf) %
Direct Direct Vacancy Vacancy (sf) %
Direct Direct Vacancy Vacancy (sf) %
Class A
7,856,623
58,992
6,044
1,500,246
19.1%
6,356,377
166,852
21.1%
Class B
4,334,861
17,931
(12,392)
1,341,117
30.9%
2,993,744
38,985
31.4%
Class C
2,535,582
1,812
12,308
940,967
37.1%
1,594,615
0
37.6%
Total
14,727,065
78,736
5,960
3,782,330
25.7%
10,944,735
205,837
27.0%
TOTALS
RBA (sf)
YTD Absorption (sf)
3rd Quarter Absorption (sf)
Occupancy (sf)
Sublease Vacancy (sf)
Total Vacancy Rate (Vacancy + Sublease) %
Class A
63,824,939
180,796
(103,823)
13,056,221
20.5%
50,768,719
2,587,058
24.5%
Class B
36,005,199
153,785
(36,650)
9,502,277
26.4%
26,502,921
841,719
28.9%
Class C
12,311,888
(10,642)
(44,114)
3,384,483
27.5%
8,927,405
50,693
27.6%
Total Suburban
112,142,026
323,940
(184,586)
25,942,981
23.1%
86,199,045
3,479,470
26.2%
Direct Direct Vacancy Vacancy (sf) %
F E AT U R E S
Occupancy (sf)
Direct Direct Vacancy Vacancy (sf) %
YTD Absorption (sf)
SUBURBAN CHICAGO
MARKET STATISTICS
Numbers in parentheses are negative
THIRD QUARTER 2012 | CHICAGO MARKET OVERVIEW
25
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 are located 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.
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.
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 nonoverlapping 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.
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.
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M B R E A L E S TAT E
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, resultsdriven 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.
MB REAL ESTATE HEADQUARTERS
DEPARTMENT LEADERSHIP
181 West Madison, Suite 4700 Chicago, Illinois 60602 phone: 312.726.1700 fax: 312.807.3853
PATRICIA ALUISI
EAST COAST REGIONAL HEADQUARTERS
ANDREW J. DAVIDSON
335 Madison Avenue, 14th Floor New York, New York 10017 phone: 212.350.2300 fax: 212.350.2301
Chief Administrative Officer
MARK A. BUTH Executive Vice President & Managing Director of Leasing Services
Executive Vice President & Managing Director of Corporate Services & Tenant Advisory
GARY A. DENENBERG Executive Vice President & Managing Director of Leasing Services
DAVID R. GRAFF Senior Vice President of Project Services
COMPANY LEADERSHIP PETER E. RICKER Chairman & CEO
JOHN T. MURPHY
MAUREEN G. GROVE Vice President & Managing Director of Accounting Services
DANIEL J. NIKITAS Executive Vice President of Corporate Services & Tenant Advisory Services
President
KEVIN M. PURCELL Executive Vice President & Chief Operating Officer
PETER J. WESTMEYER Senior Vice President & Managing Director of Investment Services
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