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HEARTLAND SNAPSHOT, APRIL 2006
Chicago Office Market
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Laurence Elbaum, Principal and
co-founder,
Bradford Allen Realty Services/TCN Worldwide
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Presently, Chicago is experiencing a marked increase in new office development in general and in the West Loop submarket in particular. Proximity to the major highways and the train stations makes the West Loop a popular location for new developments. “Most of these developments are being anchored by tenants [that are] drawn to the new buildings because they offer the rare opportunity to be in a new building at similar economics as their current obligations,” says Laurence Elbaum, principal and co-founder of Chicago-based Bradford Allen Realty Services/TCN Worldwide. Elbaum likens the current leasing of space to “a game of musical chairs.” “The market is constantly changing, however change brings new opportunities and a new sense of competitiveness for space within these new developments,” he adds.
Such recent developments include Higgins Development Partners’ Hyatt Center, located at 71 South Wacker and anchored by Hyatt, Mayer, Brown, Rowe & Maw, IBM and Goldman Sachs; John Buck Company’s development at 111 South Wacker, which is leased to Deloitte & Touche; Lord, Bissell & Brook and RR Donnelly (the building has since been sold at the record sale price of $401 per square foot); Fifield Company’s new development at 550 W. Adams, at which USG Corporation is leasing 65 percent of the building for its headquarters; and One South Dearborn, Hines’ new development anchored by Sidley Austin. “The most significant impact these developments all have is to the former homes of the major tenants in each of these projects. Most of these buildings will take years to fully replace the vacancies created by the major tenants,” Elbaum says. Chicago has not experienced any significant increase in demand for Class A space, yet the inventory has, and will continue to grow with each new development. As a result, rental rates are down and landlords are forced to evaluate the highest and best uses for their properties. A significant number of landlords have decided to convert their properties to either residential or commercial condominiums.
Two major leases completed so far this year include CDW Corporation’s lease of 252,000 square feet at 120 South Riverside and Blue Cross Blue Shield of Illinois occupying 202,000 square feet at 111 East Wacker. Five leases of greater than 200,000 square feet were completed in fourth quarter 2005. Kirkland & Ellis took 600,000 square feet at 300 N. LaSalle; Citadel Investment Group leased 315,000 square feet and Seyfarth Shaw leased 295,000 square feet at 131 South Dearborn; Commonwealth Edison took 297,000 square feet at 2 South Dearborn; and Morningstar Inc. leased 210,000 square feet at 108 N. State Street.
Class A rental rates range from the mid-$20s per square foot to the low $40s. The current average gross asking rate is $30.39 per square foot. Vacancy rates average 14.9 percent in the central business district, with the highest, at 17 percent, in the East Loop and the lowest, at 8.4 percent, in the South Loop.
Elbaum believes the class of product, rather than a specific submarket, should be watched. “In the Class A product, it is important to keep an eye on the large block vacancies that have been created by the new developments,” he explains. “How and when those blocks of space are leased will go a long way in determining the overall health of the Chicago office market.” Class C product should also be watched out for, as this product type will most likely see its overall supply diminish due to commercial or residential conversions.
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