Tenants Remain Cautious, Leases Fall 50%

CHICAGO-Downtown office tenants continue to remain cautious in their decision making, significantly slowing deals in the second quarter, according to a report by tenant rep firm Studley. For example, completed transactions only reached 1.1 million square feet in the quarter, more than 50% lower than the CBD’s long-term historical average.

However, though the vacancy rate remains at about 17.2%, tenants and landlords are getting better at meeting deal requirements in this post-recession year, according to the report. More landlords have been willing to discuss early renewals and restructures, and tenants shedding some space have extended their lease term as compensation for landlords’ recapture of unneeded space.

Law firms led the leasing in Q2, with Neal, Gerber & Eisenberg’s extension and return of space at Two N. LaSalle the largest deal at 179,451 square feet. Both Horwood Marcus & Berk and Ulmer & Berne LLP signed for almost 49,000 square feet at 500 W. Madison. A law firm led the city’s highest price sale, as California-based KBS Realty Advisors agreed to buy 300 N. LaSalle, home of Kirkland & Ellis, for about $655 million or $503 per square foot.

There are more companies out kicking tires, including a number of firms with requirements exceeding 100,000 square feet and with lease expirations of between 2012 through 2015. The companies include Motorola (400,000 square feet), Citadel (300,000 square feet), advertising firm Foote Cone & Belding (200,000 square feet), PriceWaterhouse Coopers (200,000 square feet) and Sonnenschein Nath & Rosenthal (150,000 square feet).

Though these deals will be great for the participating brokers, it’s not likely these groups will change anything about the 22 million square feet available for lease in the CBD, according to the report. Even if net absorption increased to an annual rate of one million square feet per year, it would take several years of supply to absorb before availability would fall to the 10% range.