Downtown Office Market to Remain Soft

Overall vacancy Downtown hit 16.6% in the third quarter, according to Delta Associates, up 1.3 percentage points from the same time in 2004. Asking rents have dropped 1.5%, the researchers add. However, the research arm of Transwestern Commercial Services predicts vacancy will decline, fueled by space demands of professional and business services tenants.

For now, the 28-million-sf East Loop is Downtown's softest submarket with an 18.4% vacancy rate when sublease space is included, according to Delta Associates. At the other end of the spectrum, the 12-million-sf River North submarket boasts a 12.9% vacancy rate. However, Hines Interests' 1.35-million-sf building at 300 N. LaSalle St., set to begin construction next year, will represent more than 10% of the submarket's total.

Capitalization rates for sales of Downtown buildings have dropped from above 8% to below 7%, Delta Associates reports. "We expect cap rates to stabilize this year," the company's report predicts. "Cap rates may begin rising in the period ahead if interest rates move up." The third quarter saw two Downtown properties trade for less than $200 per sf, according to Delta Associates, noting the $154 per sf paid by Broadway Partners for 300 S. Wacker Dr., a $79-million acquisition; and $139 per sf paid by Hamilton Partners for the Santa Fe Building, a $53-million deal.