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CHICAGO-Downward pressure will continue to force rental rates down as sublease space in the Chicago market continues to increase through the next year, according to a recent Jones Lang LaSalle report. Steve Stratton, managing director with JLL, says the commercial real estate market trails behind the general economy by anywhere from three to nine months. As a result, he says he does not foresee any change to tilt the current tenants’ market back in favor of building owners before early to mid-2010.

By year-end 2008, sublease space in Chicago had reached 5.5-million square feet, representing a 16.5% increase since the credit crisis began in Q2 2007. Despite this, Jones Lang LaSalle says many other markets are facing greater challenges related to heightened sublease space than Chicago. JLL’s research puts Phoenix’s increase in sublease space around 132%, while Silicon Valley has seen growth above 57%, New York around 50% and Atlanta at 40%.

“There’s always been a balance of supply and demand historically in Chicago and we have not overbuilt,” Stratton tells GlobeSt.com. “In the last five to six years, new product has always come with substantial preleasing, and the fundamentals have been pretty strong. As a result of that supply and demand consistency, rents have stayed a moderate level and have never gone to the levels where they were in New York or San Francisco.”

JLL’s report projects sublease space will continue to grow further nationwide, but Stratton says Chicago may not be hit as hard as some other markets. “Our industry and job base in Chicago is pretty stable,” Stratton says. “There’s a pretty level base of legal, finance, banking, industry, technology and not-for-profits. This is a pretty robust market with fairly moderate levels of highs and lows, and as a result has never seen the challenges New York has seen.”

Other commercial real estate firms’ research concurs that sublease space will continue to heighten in the Chicago market, with the suburbs being particularly hard hit. “Experts predict that over the next year, landlords will become notably competitive as high-end sublease space hits the Chicago suburban office market,” said Cushman & Wakefield’s year-end office market report. “In order to attract current and prospective tenants, landlords will continue offering generous incentive packages and begin lowering asking rental rates to obtain desirable leasing activity.”

Better times might be nearing however, according to JLL’s research, which reflects an expectation that the stimulus package has the potential to aid certain markets and sectors. Stratton says infrastructure and other ready-to-build projects might be helped by the package in the public sector, but the impact on the banking system is still undetermined. “We still have to see capital flow through to finance new projects and until that gets resolved we’re still going to be very challenged,” Stratton says. “Sublease space ties to the whole liquidity in the system in terms of providing tenant improvement dollars or the ability to improve the building.”

Stratton recommends that companies considering putting sublease space onto the market act quickly. “To the corporate user, it’s really important to heed the implications of your business and talk to your advisor about how the market can impact it,” Stratton says. “You need to manage those expectations because it’s going to get tough to get recovery on sublease space toward the end of the year. The need to get sublease and excess space deals completed is important.”

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