HEARTLAND SNAPSHOT, APRIL 2007

Downtown Chicago Office Market

The downtown Chicago office sector has seen a flight towards quality trophy properties that has been dominated by tenants within the financial and legal industries. Much of this need has been created by industry consolidation and the need for large blocks of contiguous high-end, image-conscious space that cannot be found in older buildings. This trend is evidenced by the fact that a tenant within these two industries has anchored every major building greater than 500,000 square feet that has come online since 2000.

Although most of the development continues in the West Loop, two new developments, the 1.1 million-square-foot 353 North Clark tower and the 1.3 million-square-foot 300 North LaSalle project, represent the first new major office developments for the River North submarket since the AMA Building was built in 1990.

These two major developments, along with the recent success of smaller office developments such as 20 West Kinzie, Alter’s future office condominium project at 111 West Illinois and the recent renovation by Friedman Properties of 325 North LaSalle, have demonstrated that the River North submarket is not made up only of restaurants, hotels and residential condos. The fact that 353 North Clark and 300 North LaSalle have $28 to $32 per square foot net asking rental rates is a statement that high-profile tenants are going to be willing to go across the river for high-end space. 

During 2005 and 2006, the West Loop added approximately 2.8 million square feet of new office product, and in 2009, it will deliver an additional 1.6 million square feet with the completion of 625 West Monroe and 155 North Wacker. The West Loop continues to lead the submarket in development, due to its proximity to commuter rail stations and the availability of land parcels west of the river for development.

With limited high-profile sites along Wacker and the major developments in the River North submarket, large tenants that are looking to make a statement are expanding their boundaries and relocating to areas that would not have been considered 10 years ago.

Major leases in the downtown Chicago market that closed first-quarter 2007 include Citigroup’s 235,000-square-foot deal at 227 West Monroe; Cash America’s 105,000-square-foot lease at 200 West Jackson; Segal McCambridge Singer & Mahoney’s 64,000-square-foot lease at 233 South Wacker; a 51,939-square-foot deal at 550 West Jackson for Corporate Executive Board, Thoughtworks’ 50,620-square-foot lease at 200 East Randolph; EA Sport’s 50,212-square-foot deal at 2125 West Ohio; and Adams Street Partners’ 47,504-square-foot renewal and expansion at 1 North Wacker.

Rental rates vary depending on the age and location of the space; new and future developments have rates ranging from $24 to $32 per square foot net, depending on location within the building.  Rates for second generation, Class A properties that are 10 years or older range from $16 to $24 per square foot net, depending on location and concessions granted.

Fourth-quarter 2006 vacancy rates for the Chicago office sector varied by submarket, with the Central Loop at 15.9 percent, the East Loop at 19.4 percent, North Michigan Avenue at 14.55 percent, River North with 12.61 percent, South Loop at 12.26 percent and the West Loop at 11.46 percent.

In 2006, downtown office market absorption totaled more than 2.1 million square feet, a level the city had not seen since 2000. In fact, absorption in 2006 was almost triple the 10-year average from 1996 to 2006, which during that timeframe averaged a little more than 758,000 square feet of annual absorption. Although this lends support to an improving market for landlords, it is hard to believe that such robust absorption could continue for the next 3 years, with more than 3 million square feet of new product to be delivered by year-end 2009. Vacancy rates, which are currently at 14.36 percent for the entire CBD, should remain flat or increase slightly as new developments come online.

— Andrew Davidson is an executive vice president at Chicago-based MB Real Estate.


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