HEARTLAND SNAPSHOT, SEPTEMBER 2004

Suburban Chicago Office Market

In contrast to downtown Chicago, which currently has more than 3.7 million square feet under construction, there is little development in the multi-story office building market in the Chicago suburbs, according to Joseph Stevens and Diana Riekse, senior vice presidents, agency leasing, in Transwestern Commercial Services’ Chicago office. There are a few office condominium developments, as well as smaller one- and two-story properties, that have been trickling into the market, but none offering significant blocks of space. There are currently 23 buildings under construction — totaling 195,500 rentable square feet — in the Chicago suburbs, and this new inventory is approximately 30 percent pre-leased.

New product has come to the Chicago market because single-tenant buildings have been losing occupants such as Lucent, Kemper Insurance, Zurich Insurance, 3Com and Comdisco. These buildings are now being marketed as multi-tenant properties. “We estimate that that this type of property has added more than 2 million square feet to the Chicago Suburban inventory during the past 24 months,” Riekse says.

Suburban Chicago has not seen significant office development since 2002. From 1998 to 2001, Chicagoland received 20.3 million square feet of development in the suburbs; 8.1 million square feet in the East-West Corridor; 1 million square feet in the O’Hare market; 4.1 million square feet in the Schaumburg market; and 5.3 million square feet in the Northbrook/TriState market. After 2001, however, only 3.9 million square feet have been delivered to the market, and, according to Delta Associates, vacancy rates and the amount of available sublease space in the major suburban markets have been decreasing.

“Financial services firms, including banks, insurance companies and mortgage companies, have significantly contributed to the absorption of vacant office space throughout the suburbs,” Stevens says. In the O’Hare market alone, major lease transactions with Cole-Taylor Bank and Banco Popular — along with the purchase of the vacant 6111 River Road building by MB Financial, which consolidated its banking operations at that property — have helped that particular market turn the corner toward recovery. Other significant transactions by financial services firms include leases by Ameriquest Mortgage, Mid-America Bank, State Farm Insurance, Washington Mutual and Kingsway Financial — all of which have absorbed space during the past year in their respective markets.

Other business segments that have had large space requirements and have absorped office space include schools, healthcare related firms and the U.S. government.

The net rental rates for Class A buildings located in the suburban office market range from $12 to $16 per square foot. “Tax and operating expense pass-throughs for these buildings that quote on the net basis can be an additional $8 to $14 per square foot, depending on the submarket,” Stevens says.

The O’Hare submarket has shown significant improvement during the past 12 months. This market, which contains approximately 15 million square feet of office space, is currently 19 percent leased. The market benefits from its proximity to O’Hare Airport and its centralized location to downtown and the surrounding suburbs. Since this market is relatively small in total office inventory compared to other submarkets, movements in the net absorption rate can quickly shift the momentum of the overall market. During the past year, large blocks of vacant space, primarily Class A space, have been absorbed. Significant lease transactions at Balmoral Business Campus, President’s Plaza, 5100 River Road and Pointe O’Hare have removed large blocks of space from the market inventory. Additionally, large transactions, such as the sublease by Banco Popular and MB Financial’s purchase of 6111 River Road, have further reduced space availability. “As a result, we view this market as being in “recovery,” Stevens says.

Other factors that have helped move the area to a recovery status market are the continued reduction in sublease availability as well as the lack of development sites, which will restrict the potential for significant new inventory. “Also, the tenancy in the market is comprised of a good mix of tenant businesses, without heavy concentration of any one type of business segment,” Stevens says. “As a result, over the next 12-month period, we expect to see a tightening in lease concessions and a gradual increase in rental rates for the O’Hare market.”

The number of requests for large space have been increasing; however, many of these tenants have existing lease obligations or large penalties to pay in order to exercise termination options at their present buildings. “As the market continues to improve it will become more difficult for these tenants to attain the type of lease concession packages needed to offset these tenant liabilities in order to justify relocation,” Stevens says.

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