CHICAGO-Office vacancy rates have been declining in both the city and surrounding suburbs, and lease rates are increasing, according to second quarter office market reports. The vacancy rates are expected to continue to decrease until buildings currently under construction start to come online in 2009. Only one new building is expected to be delivered both this year and next year and, then, four million sf to five million sf is expected to be delivered beginning in 2009, says Jones Lang LaSalle managing director Steve Smith.

Vacancy is also declining due to the strong economy, with companies expanding both in their current locations as well as companies expanding in new buildings, Smith says. There is especially a “tightening” of the market for “better view” space in the West Loop, Smith says.

The market is segmented in the West Loop with less vacancy for class A space than class B and not a lot of movement in the class C market, says Geoffrey Euston, senior vice president with US Equities. “Currently, in the class C markets, there is a lot of adaptive reuse going on” such as space being converted into student housing, Euston says.

Rents are increasing in both the Chicago and suburban markets, in part because of the increasing cost to construct new buildings. “If it costs more to build a building, they will not build it unless they can get a rent that justifies their expectations of profits,” Euston says. Many class A and class B office buildings have also switched hands during the past few years, which have lead to higher lease rates. “A significant amount of the downtown class A and class B buildings have been bought and sold,” Smith says. “As that has happened, the expectations and the underwriting of landlords have risen.”

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