CHICAGO- Both the Chicago office and industrial markets continued making a steady recovery over the first quarter of 2013, according to newly released research reports from Newmark Grubb Knight Frank. However, the firm expects relatively anemic job growth in the Chicago area, making a full recovery unlikely.

“Demand for commercial space hinges on job growth, and through February, Chicago has recovered only 51% of jobs lost during the recession, lagging the U.S. recovery of 67%,” said Michael Sheinkop, executive vice president and regional managing director. “The state's daunting financial challenges and Chicago's competitiveness when it comes to attracting and retaining business are among a number of important local issues that will continue to affect the region's labor market.”

Vacancy rates in the metro are continued to drop. The overall office market saw 746,000-square-feet of positive net absorption and vacancy dropped 20 basis points to 18.6%, down from 19.7% one year ago. And a milestone was reached by the end of the quarter. All 5.3-million-square-feet of office space vacated during the recession were reabsorbed.

But the recovery so far has not affected the vast differences between city and suburbs. In the CBD, the office vacancy rate hit 15.0% and in the suburban market, although the vacancy rate fell 50 basis points, it was at 22.6%. And while Class A average rents rose 0.5% in the CBD, they only rose 0.1% in the suburbs.

“It's a tale of two cities,” Michael McKiernan, managing director of Avison Young in suburban Chicago, told GlobeSt.com earlier this month. The CBDs have revived, “whereas the suburban market is suffering.” In Chicago, large corporations such as Sears and Google have decided to leave their sprawling suburban campuses and migrate downtown, a process McKiernan expects to accelerate. “Many of these companies are being forced to run back to the city for the quality labor they need,” especially young workers “who aren't going to make the trek out to the 'burbs any more.”

“The CBD recorded three of the area's four largest first-quarter leases, and saw speculative building downtown,” Newmark Grubb reports. “In the suburbs, performance was spottier.” Some submarkets, such as O'Hare and the North, have seen growing tenant demand in industries such as pharmaceuticals and insurance, while others such as I-88 West and the Northwest have suffered from corporate consolidations and tenant relocations.

The tightening downtown market may spark more office construction, says Research Manager Tim Van Noord. “In the CBD, only six options – four of which are above the 20th floor – remain for tenants requiring over 200,000 contiguous square-feet of Class A space on a long-term basis. Numerous tenants with requirements of this magnitude are currently searching for space in the CBD, and the lack of available quality options, alongside Mayor Rahm Emanuel's efforts to strengthen the city increase prospects for growth.”

Chicago's industrial market has more than kept pace with the office recovery. In the first quarter of 2013, 3.3-million-square-feet were absorbed and vacancy fell 20 basis points to 9.5%. This was the 12^th consecutive quarter of positive net absorption. Rents have increased at a modest rate, but developers have 4.0-million-square-feet of construction, the majority build-to-suit or owner-built, underway to counter the tightening market.

“Warehouse properties drove the first quarter overall improvement, accounting for over two thirds of net absorption and 93% of new construction,” Van Noord says. “Construction volume may even reach the trailing 10-year average of 6.0 million square feet by year-end. Submarkets such as I-88/55, Far North and O'Hare, which include towns offering attractive Class 6B tax exemptions, ample amounts of developable land and desirable locations, will see the most activity.”

Instant Insights /

Chicago Markets Continue Steady Recovery

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