You are now browsing:

Chicago Office

What area is your expertise?

• Downtown Chicago office leasing

What trends do you see presently in office development in your area?
• Chicago is still a tenants’ market — but landlords are getting happier every day. As vacancy is gradually falling, concessions are gradually falling. Within that context, several specific trends are playing themselves out. First, in office leasing, higher views mean higher rents. Do you want to see the sailboats on Lake Michigan from your Chicago office window? You’ll have to find it first — and then you’ll have to pay for that view. While good views of the lake and city have always warranted premium rents, this has never been more true. Offices that are on the higher floors with appealing views are commanding significantly higher rents and demonstrating lower occupancy rates than their lower counterparts. In fact, while the overall downtown office vacancy rate is approximately 15 percent, space in premium offices with views is coming in at less than 6 percent vacant. Second, new development planning is being driven by rising construction costs. The cost of raw materials is so high right now that it does not make sense to build a standard cookie-cutter building — tenants will only pay premium rents that justify the cost of construction in the highest-quality, Class A+ office towers, with all the bells and whistles of a state-of-the-art facility and world-class architecture.

Who are the active office developers in your area?
• Active office developers continue to be the “usual suspects” in this marketplace. The John Buck Company, Hines, Higgins Development Partners and Fifield Companies are considered the most active in the downtown market.

Please name one or two significant office developments in your area.
• The next two new 1 million-square-foot-plus office towers are not scheduled to be delivered until 2009 or 2010. These two projects include the 1.3 million-square-foot Hines project at 300 North LaSalle, anchored by law firm Kirkland & Ellis, as well as the 1.1 million-square-foot Mesirow Stein building at 351 North Clark, anchored by law firm Jenner & Block. What impact will these projects have on the market? Both of these projects will bring Class A+ office towers to the River North area for the first time. This location north of the Chicago River provides access to retail and lifestyle amenities that are located outside the traditional central business district. Additionally, the timing of these two new projects is fortuitous for the overall health of the office market. The leasing market will have 3 more years to finish absorbing the 5 million square feet of office space brought online in this last big round of office development.

Where is the majority of development taking place? Why is this area doing well?
• Right now, the two largest new projects that have been announced are located in River North. However, the majority of development since the turn of the millennium has been in the West Loop area, thanks to its proximity to expressways and commuter rains, as well as the availability of quality sites. This market is not full of older office product like the Central Loop submarket and thus offers more new development opportunities versus redevelopment potential.

What area do you expect to be the next big development market? Why?
• The West Loop will continue to be the most active market for new development, since the trends that have driven development in this area in the recent past will continue to attract new projects.

What areas are doing well in terms of office leasing? Which areas are struggling with office leasing?
• The West Loop and River North are doing quite well, with many firms relocating from outgrown offices to new buildings in these two submarkets. Conversely, the Central Loop continues to suffer flight of its traditional base, the financial and legal sectors, to the West Loop. The East Loop, which includes the Millennium Park area, will benefit over the long term from the conversion of selected historic buildings from office to residential use as well as its proximity to Millennium Park.

Please give a measure of office vacancy rates.
• Vacancy rates in the downtown Chicago office leasing market are around 14.9 percent for overall Class A and B properties. This is an improvement over year-end 2005, when the same properties were approximately 16.8 percent vacant. If you look at the upper floors of buildings with city and lake views, the vacancy rate plummets to 6 percent, and thus that type of space is in some ways a market of its own. Sublease space in downtown Chicago has stabilized to historic norms at around 3 million square feet, down from nearly 6 million square feet in 2001.

What impact do current interest rates have on the office market? What predictions do you have for interest rates and their effect on the office market in 2006?
• Rising interest rates mean the cost of acquiring a building rises for the high-leverage investor. As this trend continues over time, fewer highly leveraged owners enter the market. As a result, pension funds and other institutional sources of capital should become more active as owners of an increasing percentage of downtown properties. This trend is beginning to take effect but will continue to gain momentum if rates creep up during the next 18 months. As the cost of owning property rises in tandem with increased demand for office space, rents will continue to rise as well. While there is still a significant amount of capital chasing downtown office buildings, most buyers are focused on properties that are 90 percent leased or more. This requirement has arisen because of the expense to install new tenants in a softer market.

What is the status of job growth/(un)employment rates and what bearing will it have on the office market?
• The negligible job growth that this area has seen in recent years has been coupled with companies’ becoming more efficient with their use of space. The result is that while a few net jobs have been added to the regional economy, companies are not leasing the commensurate amount of additional office space.

Is there any type of office tenant absorbing a majority of space? What industries do you expect to expand in 2006 to absorb a great deal of office space? What areas will be affected?
• The last few years of office leasing transactions have been dominated by large law firm leases. However, that craze is coming to an end. The tenants that are currently driving the most demand for office space are financial services companies. For example, two hedge funds recently leased approximately 13,000 square feet at 71 South Wacker (Hyatt Center). Copia Capital leased 6,000 square feet, while Chicago Fundamental took 7,000 square feet. This is exemplary of the current growth pattern of new financial services companies: lots of modest-sized leases that together represent a significant trend. Because these firms tend to be image-conscious, they seek Class A space in newer buildings. As a result of this growing sector, service firms that support financial companies are also expanding. For example, Computer Discount Warehouse recently expanded its downtown space significantly, and Morningstar will expand by almost 100,000 square feet when it moves into its new headquarters at 22 West Washington in 2008.

Would you like to make any additional observations about the office market in your area?
• With the downtown office market beginning recovery, many tenants are using this period of time to “trade up.” Many companies that once looked into Class B properties are currently able to afford Class A rents on a Class B budget. This trend is temporary, as rents are on the rise — but it has been the case for the last several years.

This report has been brougth to you by: rebusinessonline.com.