Vacancy Uptick Does Not Dim CBD Prospects

CHICAGO—The CBD office market saw its vacancy rate inch up over the first quarter of 2015, and rents slid back a bit, according to a new report by Savills Studley. But Robert Sevim, the company's Chicago-based executive vice president, tells GlobeSt.com that these quarterly statistics “may not give you the bigger picture,” and represent a blip for a market that overall remains quite healthy.

The vacancy rate may have hit 15.9%, an increase of 40 bps since the end of the fourth quarter, but it also represents a decline of 110 bps for the year. And although asking rent declined 0.9% from last quarter to $34.57, that is still a 3.2% increase over last year.

Furthermore, Sevim adds that the downtown market continues to see a proliferation of new businesses, especially tech-based firms, many of which are scaling and are or soon will be in the market for new or additional space. And this demand will probably have an impact across the CBD. “There is an increasing open-mindedness to evaluating buildings options across a wider geography,” and even though landlords in River North and the West Loop are particularly confident, conditions in the rest of the market, including the East Loop, Central Loop, LaSalle St. and Michigan Ave., are also quite healthy. “There really is not one submarket that is falling off relative to the others.”

For example, tech and creative firms have tended to occupy space in the River North and West Loop submarkets, but Blue Star Properties has decided to reconfigure the former home of Chicago Public Schools at 125 S. Clark St. in the Central Loop into creative office space. Savills Studley says that Blue Star hopes to have the 507,920 square-foot building ready for occupancy later this year. And Prudential Real Estate Investors and GlenStar Properties have similar plans for the former BHO Harris Bank Building at 311 W. Monroe St. Tenants currently occupy only about 20% of the 364,000 square-foot building, and this, along with other conversions like 125 S. Clark St., has helped boost the CBD's availability rate even though overall leasing is quite brisk.

Investment sales also continued at a torrid pace in the first quarter, and Savills Studley says 2015 should match the activity levels in 2013 and 2014, when investors bought $12 billion of office assets in the region, with two-thirds of that volume occurring downtown. Blackstone Group LP closed its $1.3 billion purchase of the iconic Willis Tower in March, the most ever paid for a US office building outside of Manhattan, and Prudential paid $367 million for the office, retail and parking portions of 55 E. Monroe.

All of this sales activity has many other owners thinking about the big prices they could get for their own buildings. “What you tend to see is a focus on upward pressure on face rents,” says Sevim, as the owners looking for a buyer seek to boost the value of their buildings.

And the imminent completions of major office projects like River Point at 444 W. Lake and 150 N. Riverside should also encourage some owners to raise rental rates to bring them more in line with these new trophy properties.

But he also expects other landlords to compensate for these increases by offering more generous concession packages, thereby putting downward pressure on the effective rental rates. Still, Sevim is careful to say that he does not necessarily “see a trend of higher rents thematically tied to more generous concessions. We tend to like the one-size fits all explanation,” but the various factors pushing rents up and down, such as whether an owner even desires a sale, have made the environment fairly complex and buildings will have to be analyzed on a case-by-case basis.