HEARTLAND SNAPSHOT, APRIL 2009

Chicago Office Market

The downtown Chicago office market is betting on its diversified network of tenants and property owners to help offset the pressure of the current economic recession and deliver some stability in a turbulent time.

“Chicago has a diversified economy, but it also has a significant concentration of financial services companies in the downtown market,” says Cheryl Stein, president of Chicago-based Cheryl Stein & Company. “The market is faring well, because we have very sophisticated players. Chicago is resilient, and I don’t think the impact in the financial sector will be as dramatic is it may be in a market like New York City. However, the statistics do not yet show the full drama of what is going to unfold in Chicago this year.”

There is a cautious optimism regarding the Chicago office sector that is tempered by the reality of the current economy. A trend that may have a significant impact on the office market is the rise of sublease activity as financial services tenants, along with other challenged office users, seek to backfill vacant space as they contract their Chicago operations.

“The biggest thing we are seeing involves quite a few of the major financial institutions looking at subleasing some space,” Stein explains. “A lot of the banks are going to take a closer look at how much space they have leased, what they are paying for it, and whether they may be able to reduce their operating expenses by subleasing.”

According to Stein, sublease space comprises approximately 10 to 12 percent of the total available space in the market — it represents 2 percent of all office inventory in Chicago — and it could increase up to as much as 20 percent of the vacant space in the near term if the expected economic recovery is too far off.

“This year, I see vacancy going up, and I see subleases increasing most dramatically,” Stein says. “Space doesn’t come available that quickly typically, but sublease space can become available very quickly in the secondary market. The subleases will offer great value for tenants to get into good, finished space. I don’t think that really affects occupancy levels; we could have a stagnant year.”

Another indicator that tenants are shrinking their size requirements is the availability of large blocks of space. Stein’s research indicates that there are 32 buildings in downtown Chicago that can accommodate a tenant seeking 100,000 square feet or more.

“The numbers are going up; that is not a good indicator,” she explains. “But it is interesting that, with the exception of one, all of these buildings were constructed in the 1970s through the 1990s. So far, the newest buildings show no real vacancy. But for the first time, we are starting to see some subleases in those new buildings.”

The office towers that broke ground before the economic troubles began are moving forward with impressive pre-lease commitments, which is further evidence that tenants in Chicago place a premium on new, modern space. However, the tenants are coming from within the market, moving from older Chicago buildings into the fresh space.

The biggest challenge in this scenario involves what will be done with this older Class A space that is now vacant,” Stein says. There might be some opportunities for Class B tenants to upgrade into this space if they can afford it. It remains to be seen what opportunities companies are going to be creating out of these challenges.”

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