HEARTLAND SNAPSHOT, SEPTEMBER 2005

Chicago Office Market

Laurence Morgan Executive Vice President, Branch Manager Studley

Financial services firms and corporate consolidations make up a hefty portion of these large space users. Most are looking to capitalize on the currently soft market by upgrading from older Class A and Class B spaces, which they have outgrown. Relocations also will drive demand as out-of-state firms are drawn to suburban Chicago’s high-quality labor pool. However, somewhat offsetting this advantage are the aggressive municipal incentives and lower labor costs offered by competing, tertiary markets in Ohio, Indiana, Wisconsin and other Midwest states.

The principal concern about this pending wave of speculative development is that it is just that — speculative. Developers are having difficulty securing anchor tenants that will sign pre-lease commitments that would allow them to break ground. The caveat here is that if every proposed project was built, 7.5 million square feet of space would hit the market at the same time, resulting in a 25 percent increase in total office space in the suburbs, an increase that cannot be supported by the anticipated job growth. As a result, less than half of the proposed buildings are expected to actually come to fruition.

Though most of the noteworthy development is still in the proposal phase, a few significant developments have been recently delivered to the market. In the East-West Corridor submarket, Calamos Investments moved into its new global headquarters, a 140,000-square-foot build-to-suit at 2020 Calamos Court in Naperville. The new facility is nearly double the size of its previous headquarters at East Warrenville Road also in Naperville.

Mars Equities’ first two buildings in Estancia Corporate Center in Burr Ridge were completed recently, adding 160,000 square feet to the East-West Corridor supply, with a third 110,000-square-foot building proposed. Since the center is strategically located on the DuPage side of the DuPage/Cook County border, it is expected to attract office tenants from Cook County, as well as industrial tenants from the O’Hare area that are looking to capitalize on the lower DuPage County taxes.

Ninety percent of all new development is still in the proposal phase however, with the East-West Corridor harboring a disproportionate share. In Lisle, two major developments are planned that would add more than 850,000 square feet to the space supply — The Corporetum Companies’ 550,000-square-foot Corporetum Office Towers I and II and Duke Realty’s 303,246-square-foot Phase III building at Central Park of Lisle at 3325 Warrenville Road. The latter was proposed due to the success of Phase II, which was completed in 2000.

In Aurora, White Oak Office Park will consist of four mid- to low-rise towers totaling 330,000 square feet. In Downers Grove, Opus North Corporation is planning to develop Highland Landmark V, a 250,000-square-foot building. However, construction might be hampered if the current tenant, Washington Mutual, gives back space at Tower III. Corridors Four by The Alter Group is a 225,000-square-foot proposed building also in Downers Grove for which construction is almost ensured since its other three corridors are fully occupied.

In the North submarket, Catellus Development Corporation’s 400,000-square-foot Prairie Glen Corporate Campus in Glenview is a 92-acre masterplanned business park that was created during the redevelopment of the former Glenview Naval Air Station. The campus is adjacent to a new Metra Station, as well as a Tom Fazio 18-hole championship golf course.

In the Northwest Corridor, IBM and Motorola have returned space at the Woodfield Corporate Center in Schaumburg and 50 Northwest Point in Elk Grove Village, respectively, increasing the availability rate in this submarket by 2.5 percentage points. As a counterbalance, Sara Lee’s 360,000-square-foot suburban relocation to Downers Grove softened any negative impact that IBM and Motorola would have had on the overall suburban rate.

The suburban Chicago office market is reflecting the business growth and expansion that has been gaining traction during the last several years. According to Studley’s market report for the second quarter of 2005, the overall availability rate — 20.9 percent — has dropped considerably from the 23.8 percent peak reached more than 2 years ago. The Class A rate posted at 21 percent, continuing its descent from the 28.2 percent peak set in early 2002. The average asking rental rate in suburban Chicago for Class A space is $21.68. Class A rent still has quite a journey before returning to the $26 peak last seen in the late 1990s.

There is little to report in terms of new developers coming into the suburban Chicago market. Most of the active development is being driven by companies with a long tenure and expansive “in-the-trenches” market knowledge. On the ownership side, Fulcrum is a relatively new office building owner in the suburbs with new acquisitions in Deerfield, Northbrook and Downers Grove.

The area to watch in the near future is the East-West Corridor. It is the most active development market not only because it is the largest suburban submarket with the most available land, but also because it is accessible to an immense labor pool. Nearly half of the 200 under-construction or proposed buildings are in this submarket. In addition to its vigorous development activity, the East-West Corridor is showing an unprecedented amount of leasing activity, accounting for nearly half of all leasing according to Studley’s second quarter market report, at just more than one million square feet. The North submarket is also an area to watch, especially since it has been consistently posting the lowest availability rate of all the suburban submarkets.

Though the suburban real estate market is moving toward equilibrium, significant space absorption has not occurred during the last 5 years. Of the nearly 112 million square feet of office space in the suburbs, 23 million square feet is currently available. Historically, market equilibrium is usually reached at about a 10 percent availability rate. To reach this level, the suburban market would need to absorb another 12 million square feet — without any new construction. This would require the creation of a significant number of new office jobs. Therefore, the consensus view is that it is likely to take as long as 4 to 5 years to reach a balance between supply and demand in Chicago’s suburbs. In addition, a strong pace of speculative development could further hamper a full recovery through a flood of new space. Until consistent economic expansion leads to true absorption, rents will continue to favor the tenant and concessions will remain generous, making a long-term strategic plan essential to the tenant that wants to capture savings.

— Laurence Morgan is executive vice president, branch manager, at Studley’s Chicago office.

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