SNAPSHOT, APRIL 2004

Chicago Office Market

Alex Arata, Midwest Senior Research Manager, Cushman & Wakefield

The current level of office construction in Chicago’s central business district is cause for concern, according to Alex Arata, Midwest senior research manager in Cushman & Wakefield’s Chicago office. New projects continue to attract sizable demand from tenants who might otherwise reduce the existing supply. “Because of the abundance of existing Class A product, and its subsequent affordability compared to previous years, downtown Chicago is experiencing a flight-to-quality trend, consequently weakening the Class B and Class C markets,” Arata says.

In the Central Loop, Prime Group Realty Trust recently delivered the Bank One Center, located at 131 S. Dearborn, which added more than 1.4 million square feet of speculative office space to the market. Also, Hines recently broke ground on One South Dearborn, an 825,000-square-foot building that is scheduled for delivery by late 2005.

“The West Loop remained the most active submarket — with 2.5 million square feet of speculative office supply under construction — due to its ample supply of viable development sites and its proximity to public transportation,” Arata says. The projects under construction include the 1 million-square-foot 111 South Wacker Drive by The John Buck Company and the 1.5 million-square-foot Hyatt Center by Higgins Development Partners.

“The strong pre-leasing activity by each project continues to fuel concerns about absorption, especially with respect to the existing supply,” Arata says. For example, Sidley Austin Brown & Woods pre-leased 510,000 square feet of space in One South Dearborn, and Lord Bissell & Brook pre-leased 194,000 square feet of space in 111 South Wacker.

“Most of the long-term leases signed by anchor tenants in these new developments were relocation or consolidation moves,” Arata says. “This means that while the active pre-leasing was fortunate for developers, the large blocks of space left behind from the moves places continued pressure on existing vacancy rates.”

Direct Class A rental rates for downtown Chicago are $34.57 per square foot gross, an approximately 5 percent drop from this time last year. Overall Class A rents, which include sublease space, are holding stable at $31.88 per square foot.

Downtown Class A office product experienced marginal shifts in vacancy since this time last year. The Class B and Class C markets, on the other hand, combined to add more than 2.5 million square feet of available supply.

This year, unemployment, job growth and strong corporate earnings will be the keys to recovery for the Chicago market. Recovery will be marked by increased occupancy resulting in positive absorption and rising rents.

“The biggest challenge for the central business district will be to harness activity beyond the cost-conscious implications of renewals and consolidations,” Arata notes. “Only when changes in occupancy reach positive levels again will the Chicago real estate market truly be in recovery.

“In all likelihood, this year will be characterized as a bottoming year for the Chicago real estate market. A gradual deceleration in rising vacancy rates, combined with flattening rents, will allow this market to regain its traction. Unfortunately, any significant gains netted by these stabilizing market fundamentals will likely have to wait until next year.”

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