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CHICAGO AREA-The Chicago suburban office market is feeling the effects of the economy, with vacancy increasing to 17.3% for the first quarter of the year from 15.8% in the last quarter of 2007, according to local commercial real estate experts. The suburban market has fared worse than Chicago’s Central Business District, with the Northwest submarket being especially hard hit. “The suburban market tends to be the first to react and the last to recover,” says Christopher Wood, managing director with UGL Equis.

The suburbs have already seen an exodus, of sorts, to downtown Chicago, such as United Airlines and The Warranty Group, says Andrew Davidson, EVP and managing director of corporate services for MB Real Estate. The mortgage crisis and economy have caused the Chicagoland markets to worsen and, with more mortgage and lending companies based in the suburbs than downtown, the suburban submarkets have fared the crisis much worse. The suburban submarkets saw nearly 1.2 million sf of negative absorption for the first quarter of the year, compared to 450,058 sf of positive absorption in the fourth quarter of 2007, according to MB Real Estate’s market report. The Northwest submarket, where quite a few of the mortgage and lending companies were based, was the hardest hit with the highest increase in vacancy for the first quarter of the year, Davidson says. “I think a lot is going to depend on the economy and where it is going,” he says.

Sublease opportunities are expected to increase in the next 18 to 24 months. Walgreens is subleasing the 321,320-sf Two Overlook Point in Lincolnshire, IL from human resources consulting firm Hewitt Associates Inc., Davidson says. Hewitt is also subleasing 290,000 sf in another building. “Another reason the suburbs are suffering more than downtown is that they have a larger call center component that is subject to outsourcing overseas, which is the case with Hewitt,” Davidson says. About two blocks of sublease space with a total of more than 450,000 sf will roll over before July, according to MB’s report.

Annual average Class A asking lease rates have increased 9% each year since 2005, according to a market report from UGL Equis. However, rates are expected to decrease this year.

Usually, Class A office buildings fare better than the overall market, but this is not the case in the Chicago suburbs. Class A buildings have had the highest negative absorption in the first quarter of the year, due in part to companies downsizing and consolidating, in addition to business closures, according to the MB report. Healthcare and pharmaceutical companies are continuing to do well, as is the North submarket, where many of them are based, Davidson says. “The northern market is fairly strong,” he says.

There are currently 10 projects with a total of 1.7 million sf under construction in the suburbs with only 13.8% of the space pre-leased, according to the Equis market report. In the East-West Corridor, the $300 million CityGate Centre I is being developed by Chicago-based Calamos Real Estate. As with the Chicago CBD market, the suburban submarkets are shifting to a tenant’s market, which is expected to only increase as new space comes online. Landlords will likely initially boost concessions before reducing rental rates, Wood says.

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