CHICAGO—Many suburban office submarkets are plagued by extremely high vacancy rates, and theoretically that should make it easy for tenants to find suitable spaces. But since many of those empty offices sit within obsolete buildings and campuses, a new wave of office build-to-suits has begun flooding the suburbs.
“We happen to be running a bunch of suburban build-to-suit projects that are in the ground right now or still in the planning stages,” Scott Ohlander, senior vice president of JLL, tells GlobeSt.com. “Something is happening out there. I’ve been doing this for 10 years and this is the most build-to-suit activity I’ve seen.”
“The trend really started in 2009 with the Cisco development at O’Hare,” Ohlander adds, referring to the Rosemont Corporate Center, a 121,000-square-foot building located at 9501 Technology Blvd. that Cisco anchors. But the trend has become much more noticeable in the past two years. JLL is now involved in suburban build-to-suit projects, both planned and under construction, that total more than 1.3-million-square-feet.
JLL pegged the suburban vacancy rate at 24.3% at the end of the fourth quarter, where it has stubbornly remained for several years. But Ohlander points out that even though the suburbs as a whole have a high vacancy rate, several desirable submarkets such as O’Hare and Oak Brook saw significant tightening in that time period. Furthermore, financing still remains relatively attractive and construction and land costs lower than average. All of these factors have aligned and opened up build-to-suit opportunities.
“I think all organizations considering a build-to-suit will start with some kind of unique driver,” Ohlander says, such as outgrowing an old space. And “if they need to be in a class A office space with a hotel next door there are not many existing options, so they will consider building.”
Ohlander is representing the American Academy of Orthopaedic Surgeons in the development of its new 165,000-square-foot build-to-suit headquarters at River and Higgins Rd. in the O’Hare submarket. The project will include a Hampton Inn & Suites and the academy will only have to move a few blocks from their present headquarters at 6300 N. River Rd. when the building opens in the first quarter of next year.
And the American Society of Anesthesiologists, represented by CBRE, recently outgrew its Park Ridge headquarters and opted for a 70,000-square-foot build-to-suit, now under construction at 1110 American Ln. near Golf Rd. and Meacham Rd. in Schaumburg, and set for delivery in the fourth quarter.
Likewise, the Big Ten Conference outgrew its 25,000-square-foot headquarters in Park Ridge and chose a 50,000-square-foot build-to-suit in Rosemont. The new building, at 5420 Park St. in MB Financial Park, opened last year.
“For them, having access to hotels and access to the airport is key,” Robert Sevim of Studley, who represented the athletic conference, told GlobeSt.com. And “for their size requirement, there was nothing that presented an opportunity to just go in and open up shop.”
But the decision of Zurich Insurance to acquire a 40-acre chunk of Motorola Solutions’ campus in Schaumburg last year and launch a 720,000-square-foot build-to-suit headquarters remains the biggest change to the suburban office market. The development will be completed by the fourth quarter of 2016. JLL recently helped secure more than $333 million in financing for the project, now billed as the largest build-to-suit single-tenant, net-leased project in North America in 2014.
“The fact that one of the largest insurance companies in the world is choosing to remain here is proof of the solid trajectory of the submarket,” said Bruce Westwood-Booth, managing director of JLL’s capital markets division. “Chicago’s suburbs are definitely on the upswing.”
But that stubborn vacancy rate will probably stay high for years. “The large vacancies in these markets, such as Schaumburg,” Ohlander says, “will remain because many of our clients are leaving behind empty headquarters space. The new owners will eventually say, ‘to fill the vacancies we’re going to have to reposition these assets.’”