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Transwestern

2016: Year of the Landlord

CHICAGO—CBD office market fundamentals have reached prerecession levels and it is clear that downtown Chicago is no longer in recovery mode, according to Transwestern.

By Brian J. Rogal | brianjrogal | | Updated on April 20, 2016

 

chi-new-building (2) 151 N. Franklin, the latest class A development to break ground in the CBD.
CHICAGO—Is 2016 the year of the landlord? Transwestern came to that conclusion after looking over the first quarter data for Chicagoland’s office market. Overall vacancy declined to just 15.4%, the lowest rate in eight years. Furthermore, rental rates ticked up to $28.45 per square foot and the firm predicts rates will continue to rise. “CBD office market fundamentals have reached prerecession levels as it is clear that downtown Chicago is no longer in recovery mode,” the firm notes. “As vacancy tightens downtown (currently at 12.1%), the suburban office market is poised to follow.”   Development is trending in the right direction, although many builders, investors and lenders remain cautious, Transwestern reports. John Buck broke ground on 151 N. Franklin, another new class A development for the CBD. The total amount of new office space under construction now stands at about 3.45 million square feet, including Hines’ River Point, Sterling Bay’s Fulton West, and John O’Donnell’s 150 N. Riverside, several of which will begin hitting the market as early as December 2016.   Currently, developers have proposed a total of 20 new office buildings for River North, River West and West Loop. If built, this group would add more than 11 million square feet of office space to CBD, but Transwestern officials say it is unlikely that even 25% will get underway in the next five years.   Net absorption for the metro area in the first quarter was 404,587 square feet, somewhat lower than what Chicagoland has seen in previous quarters, but the trend remains positive, especially for class A assets. The Central Loop had the highest net absorption within the CBD with 235,931 square feet. But in a somewhat surprising development, the suburban market posted the majority of the positive absorption for Chicagoland at 358,134 square feet.   The Chicago metro vacancy rate decreased another 10 bps to 15.4% quarter over quarter. And even though several suburban firms have recently established outposts in the CBD, suburban leasing activity also contributed to the decrease. The suburban rate dropped 30 bps to 19.1%, the lowest in six years but still significantly higher than the pre-recession rate of 16.1%. “It is expected that vacancy will continue to tighten in 2016 prior to new inventory reaching the market,” Transwestern predicts.   The firm also predicts that rental rates will continue to climb. Gross asking rates in Chicagoland topped $28.00 per square foot at the beginning of 2016, and ended the quarter at $28.45. The CBD rate climbed from $33.72 at the close of 2015 to $34.19 at the end of March. In a good sign, all classes contributed to the increase, with class A buildings leading the way. And suburban rental rates reached an average of $21.98 for all classes, with class A coming in at $25.26. “It is expected that rental rates in suburban and CBD submarkets will continue to increase in 2016, but particularly in class A buildings.”

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