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CHICAGO-The Chicago Central Business District experienced negative absorption in the first quarter of 2008 but, otherwise, has emerged relatively unscathed from a downturn in the economy. The upcoming months, however, are expected to show a slightly bleaker picture if the economy does not quickly improve. Effective rental rates are expected to decrease; due mostly to an increase in concessions, and vacancy is expected to increase, particularly when new space comes online in 2009.

The district had negative absorption of 469,117 sf in the first quarter and the vacancy rate increased to more than 12%. However, more than 300,000 sf of the negative absorption was due to JPMorgan/Chase’s relinquishing of space at 120 S. LaSalle, says Mark Buth, SVP and managing director of leasing services for MB Real Estate. “They had the right to terminate in 2009. Ownership negotiated with the bank,” which will allow for Private Bank to lease 105,000 sf, he says.

Many companies are taking a “wait and see” approach on whether to lease or renew. Companies that would have renewed a lease last year are now waiting until the last possible moment “so they can let the economy settle down,” says Christopher Wood, managing director at UGL Equis.

The decrease in leasing activity is expected to continue at least through the first half of the year, Buth says. In the first quarter of the year, there were 668,298 sf of new leases, for transactions of more than 20,000 sf, with William Blair & Co.’s 340,000 sf at 200 N. Riverside Plaza, also known as River Point, accounting for half that amount.

Currently, there is 5.5 million sf under construction in the CBD, with 55% pre-leased, Wood says. In 2009, nearly 3.7 million sf of space is expected to come online, including 300 N. LaSalle, 353 N. Clark and 155 N. Wacker. While the majority of the new space is pre-leased, building owners will have to lease up the space these tenants are vacating.

There is not expected to be a dramatic impact on rental rates this year. “As long as the landlords are collecting rent, they do not feel the pressure as much,” Buth says.

As the new construction comes online, there is expected to be a “flattening of rental rates” and the CBD is expected to continue to shift to a tenants’ market, Wood says.

There is already about 67 large blocks of space of more than 50,000 sf with only about 28 tenants currently looking for at least 50,000 sf, according to the MB Real Estate first quarter market report. Sales activity has been low with only two buildings closing during the first quarter: 1 N. Wacker and 20 N. Clark. The lackluster sales activity is expected to continue, as it is still difficult to find financing and there is a disconnect with how high of an amount people are willing to pay for buildings and how low of an amount people are willing to sell buildings for. “I think that sellers will be less apt to bring buildings to market,” Buth says.

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