HEARTLAND SNAPSHOT, APRIL 2008

Chicago Office Market

Gary Denenberg, Senior Vice President, director of leasing services, MB Real Estate

In 2000, after an 8-year hiatus, new development resumed in Chicago’s central business district (CBD). Since that time, approximately 11 million square feet of office product has been delivered to the market, with an additional 4.1 million square feet expected to come online by year-end 2009. This construction in the pipeline is composed of five significant CBD developments: a 1.3 million-square-foot project at 300 North LaSalle; 1.1 million square feet at 353 North Clark; 1.1 million square feet at 155 North Wacker; a 400,000-square-foot project at 22 West Washington/108 North State; and 227,604 square feet at 111 West Illinois.

These projects comprise the entirety of the market’s new supply from 2007 to 2009, and approximately 61 percent (or approximately 2.5 million square feet) of it is pre-leased. Some would worry that this glut of new product coming to market may increase vacancy rates but, when compared to the market’s historical annual absorption average of approximately 1 million square feet, the impact of the excess supply should be minimal.

With a temporary lull in completions, vacancy in the CBD has decreased, from an overall rate of 12.67 percent at the end of third-quarter 2007 to 11.67 percent in fourth-quarter 2007. Direct vacancy rates for the different building classes showed a slightly smaller decrease. Class A space went from 11.25 percent in third-quarter 2007 to 10.55 percent in the fourth quarter; Class B space dropped the most, from 12.26 percent to 11.11 percent in the same period; and Class C space decreased from 14.27 percent to 13.76 percent.

The biggest trend in office development right now is the importance of bringing LEED-certified space to the market. Although it is slightly more expensive to build initially, both developers and corporate America have recognized that society is demanding conservation and good stewardship. Additionally, there are potentially large energy savings to be achieved over the course of the lease with more efficient buildings.

Other trends include an overall flight to higher quality space and the willingness of tenants in the legal and financial services industries to pay top dollar for new developments, which right now range from $20 to $34.50 per square foot net for Class A space. Law firms Quarles & Brady, and McAndrews, Held & Malloy have leased 75,000 and 73,177 square feet, respectively, within the CBD. Northern Trust signed a lease for 421,000 square feet at 181 West Madison, and Madison Dearborn Partners has leased approximately 58,000 square feet nearby at 70 West Madison.

Of the recent CBD construction boom, the large majority of this new development has occurred in the West Loop submarket, due to its close proximity to commuter rail stations and highway access, which make it a tenant favorite. But with most of the West Loop’s prime sites now developed, expect more development to occur in areas once considered too distant from the center of the CBD.

One of these submarkets to keep an eye on is River North. Two significant developments will be delivered here in 2009 and both have a high level of pre-leasing, which means there is a tenant willingness to occupy trophy office space in this submarket. 300 North LaSalle is already 76 percent pre-leased to tenants including Kirkland & Ellis, Boston Consulting, GTCR Golder Rauner, Stockbridge Capital and Elite Business Center. The other project, 353 North Clark, is 68 percent pre-leased to Mesirow Financial and Jenner & Block. Additionally, 111 West Illinois is currently 32 percent pre-leased to Erikson Institute, and will be added to the submarket during 2008.

— Gary Denenberg is a senior vice president and director of leasing services with Chicago-based MB Real Estate.

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