CHICAGO—The metro area's office market saw its vacancy rate blip up in the first quarter, according to a new report by Newmark Grubb Knight Frank, but that was largely due to opening of the CBD's new office towers. And overall, these new trophy spaces have attracted a healthy number of tenants, a run of good news that does not seem likely to end any time soon.

“Our market tracking reports show tenants that need a total of about 13 million square feet are looking for space,” Bob Chodos, vice chairman of NGKF, tells GlobeSt.com. “That's almost as deep a market as I've seen in my career.” And it may help push other developers to add more trophy space to the CBD inventory.

The tower at 150 North Riverside added 1.3 million square feet of new inventory to the CBD this quarter, pushing the metro vacancy up 30 bps to 17.3%, a level not seen since mid-2014, NGKF found. Still, that rate is 340 bps below the recession peak of 20.3%, and tenants absorbed another 1.7 million square feet, 1.2 million of which was in the CBD.

“There are a lot of other big potential deals still moving around the market,” Chodos adds, including a number of global banks and corporations that need more than 450,000 square feet. But not all of that demand is focused on trophy spaces. Chodos expects some to consolidate back office space from the suburbs into a value play location, most likely “into a building that is being vacated by a tenant that is going into a new trophy building,” such as River Point at 444 W. Lake St., which Hines opened in the fourth quarter, or 150 North Riverside.

He also has high hopes that the remaining spaces in these properties won't be available for long. “Those spaces will be essentially leased in a year,” or at least up to 90% to 95%. And the owners of both have in some cases secured lease rates of more than $40 net, an excellent incentive for the other developers that have buildings on the drawing board and ready to go. Meanwhile, John Buck's 151 N. Franklin, which the developer plans to open by June 2018, basically has the top of the building available, and “somebody will step up and take that space.”

After flat growth in the fourth quarter of 2016, the overall weighted asking rent across all property types in Chicago increased by $0.29 per square foot to $27.46 per square foot at the start of 2017, NGKF found. The first-quarter average also marks a 6.1% increase from the $25.88 per square foot recorded in late 2011.

Chodos expects that the Howard Hughes Corp. will be the next developer to break ground on a trophy building. Last week, the Chicago Plan Commission approved the firm's proposal for a 51-story tower at 110 N. Wacker. There are several potential anchor tenants bouncing around, possibly including Bank of America, and if one chooses 110 N. Wacker in the near future, Hughes could break ground and complete the structure by 2020.

And after Hughes gets underway, Chodos says the next most likely project is Tishman Speyer's proposed 1.1 million square foot tower at 130 N. Franklin. “It will be a market-leading asset, as high-quality as River Point, 150 North Riverside and 110 N. Wacker. These buildings just keep getting better and better,” and each will set a new standard the way 1 N. Wacker, 71 S. Wacker and others did in previous construction cycles.

If all of this seems like a lot of class A+ space to absorb in just a few years, Chodos says the tenants are there and willing to pay top dollar. “Major corporations are continuing to choose downtown Chicago as a headquarters due to its lakefront, the world-class transportation assets like O'Hare Airport, and the many luxury apartments springing up in new neighborhoods like Fulton Market. It looks like that trend will continue.”

Instant Insights /

Leasing Activity Stays Strong as Trophy Properties Open

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