CHICAGO—The region's suburban office market recorded a slight drop in the overall vacancy rate during the first quarter, a welcome break from 2016, when vacancy increased in three out of four quarters, according to NAI Hiffman, which just released its latest market update. In the fourth quarter, vacancy had increased by 153 bps, largely due to the relocation or down-sizing of suburban mainstays like Zurich Insurance and AT&T.

No company probably better exemplifies both the challenge and promise of the suburban office market than Zurich Insurance. It left its former Schaumburg headquarters last fall, leaving a big hole in the northwest suburban market, but by developing a $333 million complex nearby, it also showed how desirable the region remains for many class A users.

And that demand continues to draw in new investors. Sales volume in the suburban office market totaled $230 million first quarter, NAI Hiffman found. American Landmark Properties, for example, acquired the 6-building Illinois Science & Technology Park in Skokie for $77 million. The new owner has plans to develop up to 1.3 million square feet of new office and lab space on the campus. And GlenStar Properties LLC acquired the 1.04 million square foot Schaumburg Corporate Center for $70.7 million, or $68 per square foot.

Tenants currently occupy 72% of that space. But that is a much higher rate than the nearby Continental Towers complex had when GlenStar bought it in 2013. That 911,341-square-foot campus was once less than 50% occupied, but after a two-phase, multi-million dollar renovation effort, the vacancy rate dropped below 10%. Company officials see a chance to do likewise with their newest acquisition.

And even if the suburban market as a whole still looks a bit anemic, trophy properties continue to perform well, according to NAI Hiffman. Gross asking rates for trophy properties increased by 2.4% from the $29.04 per square foot recorded in the first quarter of 2016.

Three out of five suburban submarkets saw a year-over-year increase in asking rents. The O'Hare submarket recorded the largest bump, from $32.52 to $34.08 per square foot, a 4.8% increase. It also recorded the largest drop of overall vacancy, declining by 178 bps to 14.94%, and saw the most absorption. Significant moves included Combined Insurance occupying 69,068 square feet at Triangle Plaza and Sapa Extrusions, Inc. moving into 15,500 square feet in Rosemont.

Nearly all of the suburban submarkets, with the exception of the north suburbs, recorded positive absorption in the first quarter. The north suburban exception was primarily due to Walgreens vacating more than 300,000 square feet in Lincolnshire.

Instant Insights /

After Tough 2016, Suburban Office Improves

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