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CHICAGO-There has been a lot of talk and feeling of “doom and gloom” in the Chicago office market, but the second quarter doesn’t show negative. Vacancy rates, in general, decreased in the Central Business District and rental rates generally increased slightly. Whether the office market will continue to hold off the economic malaise affecting other real estate sectors remains to be seen, however.

Overall vacancy decreased 70 basis points, and there was nearly one million sf of net absorption, according to a second quarter market report from Transwestern. Some of the decrease in vacancy is due to some office space being taken off the grid and being converted into hotels, says Tamara Kos, EVP with Transwestern. Floors at both the former IBM Building, 330 N. Wabash Ave., and 208 S. LaSalle will be converted into hotels. Vacancy has decreased from 10.5% in the first quarter to 10.2% at the end of the second quarter. Once vacancy rates hit the single digits, “that really is a fairly tight market,” Kos says. “Having a little bit more vacancy really would not be hurtful. It will give tenants more choices.”

Several buildings under construction are expected to be delivered in 2009 which will give tenants more choices and could increase vacancy rates as well. The majority of the buildings under construction are pre-leased but building owners will have problems leasing up the space in the existing buildings that are being vacated, says Christopher Wood with UGL Equis.

Kos, however, is more optimistic and believes that, as long as the economy does not get any worse, that the market will be able to absorb the extra space. As to whether the storm has yet to hit the CBD office market or will blow over, there are differing opinions. “Commercial real estate tends to lag, generally, the movement in the economy,” Kos says. But, “Companies are, for the most part, still growing and being profitable,” she adds.

There is a current trend of companies moving downtown from the suburbs as young people want to work downtown, also drawn to mass transit as gas prices continue to climb, she says. Kos expects the office market to remain relatively unaffected unless the economy continues to worsen or there is another catastrophic event. “The Chicago CBD has got so many advantages going for it,” she says.

Wood, however, does not believe the office sector will luck out. “There is no doubt in our minds that new development, combined with the economic malaise that is out there…is going to create a slowdown in this market,” he says.

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