Overall, though, there are more question marks over the office sector's horizon, according to experts at the recent Real Estate Investment Association's/Society for Industrial and Office Realtors' Summit 2001. Among them is about five million sf of "shadow space" caused by mergers and acquisitions expected to hit the market within the next 30 months, says Lori G. Brown, SIOR, who manages Binswanger Advisory Group's Midwest operations here. "That could throw our market out of equilibrium in time," she says.

A "very robust" Downtown office market saw 40 transactions in excess of 100,000 sf in 2000, says Philip W. Palmer, senior vice president of Grubb & Ellis' office services group, with class A rates capped at $40 per sf, which pales in comparison to other major markets. However, Palmer foresees bigger increases ahead in class B rates. Not only will some former class A tenants be unable to find comparable space, but class B office buildings Downtown have been converted to other uses, including condominiums. "People are living in the Loop now, so that's changing the market for office users," Palmer says.

"Downtown Chicago continues to gain as a place where people want to live and work," echoes Equity Office Properties Trust president and chief executive officer Timothy H. Callahan, predicting in a recent conference call that vacancy rates could rise back up to 9.5%.

That hurts the suburbs, where some experts warn that developers may find themselves competing with the sublease market. Lucent Technologies is cutting 1,000 jobs in the East-West Tollway Corridor, where Callahan's REIT is fighting vacancy problems in its Lisle Executive Center. Not even the strongest submarkets, such as the O'Hare Airport area, may be immune.

"My concern about O'Hare is they can't build any residential in the area because it's too close to the airport," Brown said. "If they can't build on the labor pool, the market will decline."

Instant Insights /

City, Suburban Office Markets May Be As Good As They'll Get

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