CHICAGO CBD: OFFICE MARKET CLEARLY ON THE MEND
The Chicago downtown office market is on a roll. Vacancies have fallen for more than 12 months straight as corporations pull the trigger on new or rehabbed office space in marquee locations to accommodate consolidation and growth. One of the big stories is that the market is far more geographically diverse today. We are seeing the suburban sprawl in reverse as corporations leave far-flung business parks to seek out trendier 24-hour neighborhoods such as River North (Chicago’s tightest submarket), the West Loop and the Millennium Park/East Loop-area. Where you work is also increasingly where you live.
Chicago’s 136.7 million-square-foot office CBD market reported a 14.9 percent vacancy rate at the end of the first quarter, a welcome decline from the 15.4 percent reported during the fourth quarter of 2011. According to CBRE Group, downtown vacancy has fallen in every quarter since the end of 2010, when the rate was 17 percent. It peaked at 17.3 percent midway through 2010. Overall vacancy numbers include sublease space. Direct vacancy was 13.6 percent in the first quarter of 2012, down from 14 percent in the prior period.
Compare that to the suburbs, where the first-quarter vacancy rates rose to 24.6 percent after consecutive declines in the last six quarters. Net absorption downtown was 287,945 square feet in the first quarter, the seventh quarter in a row that demand for space has grown. Although some projects are in the planning stages, there are currently no new CBD projects under construction. The dearth of new supply will help lower vacancy rates as further economic expansion gathers speed.
Some notable first-quarter leases included Smith Bucklin Corp.’s lease of 111,000 square feet at 330 N. Wabash Ave., and Savo Group’s lease of 41,000 square feet at 155 N. Wacker Dr. In the East Loop, Health Care Service Corp., the parent of Blue Cross/Blue Shield of Illinois, added 358,434 square feet in its existing headquarters at 300 E. Randolph St.
The landmark IBM building (to be renamed AMA Plaza), which lost both its eponymous tenant and then law firm Jenner & Block, has undergone a major facelift. Designed by Ludwig Mies van der Rohe, the building is considered an architectural and engineering masterpiece. Through some smart leasing strategies and a $250 million renovation, the property managed to achieve 86 percent occupancy with the American Medical Association as its new anchor tenant.
A 320-room luxury Langham Hotel will open on the building’s top 13 floors next year. The 52-story tower also added law firm Latham & Watkins LLP with 137,188 square feet and an existing tenant, law firm Burke Warren MacKay & Serritella P.C., increased its space by 41 percent, to 54,882 square feet, as part of a lease renewal.
There are several reasons behind the downtown surge, including the continuing migration of companies from the suburbs. The latest arrival is Guggenheim Partners, which is moving 200 jobs to the CBD from west suburban Lisle.
Last year, Sara Lee announced that it is bringing 600 jobs from Downers Grove to 400 S. Jefferson St. in the South Loop. For suburban firms, the one downside of leasing downtown is that Cook County property taxes have soared at twice the rate of inflation during the last 10 years.
There were several noteworthy investment sales in the first quarter. Bank of America sold Block 37, the 305,000-square-foot retail and commercial block, to CIM Group, a Los Angeles-based investor, for $84 million.
Bounded by State, Randolph, Dearborn and Washington Streets, the high-profile but troubled project has a 70 percent vacancy rate at a time when the retail sector grew 7.9 percent over the last year to $4.7 trillion nationally.
One robust source of demand for downtown retail development will be big-box retailers and the net-leased chain drugstores, which have been launching smaller, higher-end urban versions of their traditional spaces. As an example, Walgreens just opened a flagship store at 151 N. State Street. The store is aimed at tourists, downtown office workers and the new downtown condo dwellers who have few grocery stores and are willing to pay for internationally sourced wines, cosmetics and other luxury goods.
Best Buy is closing 50 big-box stores nationally and transitioning them into 100 Best Buy Mobile stores by 2016. Additionally, Target and Walmart are entering urban markets across the nation with trendier stores in upscale locations.
The first quarter also saw the sale of the 80-year-old Art Deco Chicago Board of Trade buildings for $160 million to GlenStar Properties LLC and USAA Real Estate Co. The seller was CME Group.
The long view
The prospects for downtown Chicago going forward remain strong. Strengthening consumer and professional/business services sectors will drive Chicago’s expansion. The local economy is expected to add 35,000 to 40,000 jobs in 2012 and 60,000 in 2013.
Nationally, the tepid job numbers (nonfarm payroll employment grew by 69,000 in May) reflect strong economic headwinds, including highly volatile oil prices, the European debt crisis and waning demand from China, the second largest economy in the world.
Still, there is cause for optimism. The auto sector is on fire because of the aging fleet (the average car is more than 10 years old) and the fact that the Japanese automakers can’t fill demand because of the disruptions in their supply chains. Chrysler sold more cars and light trucks in March than in any month since March 2008. Also, the U.S. is now a net exporter of energy for the first time in 62 years, driven largely by coal and liquefied petroleum exports.
On a macro level, American corporations continue to sit on $2 trillion in cash. Cisco, for example, has $47 billion in cash and Apple has $65 billion.
The companies listed on the Standard & Poor’s 500 have now surpassed their 2007 levels in terms of sales, profits and employment partly because of aggressive cost cutting.
Corporations won’t sit on this cash forever. Once indicators pick up, buoyed by leading-edge industries like robotics and nanotech, plus old-line industries such as auto and energy, confidence and hiring should return.
— Matthew Ward is senior vice president of Skokie, Illinois-based The Alter Group.