There is no question that the technology sector is one of the principal drivers of our commercial real estate sector today. Downtowns nationally have seen an influx of new economy firms because of the presence of young knowledge workers in CBDs — and Chicago is one of its stars.
More than $265 million flowed into Chicago-area digital tech companies during the third quarter of 2013. In addition to startups, this growth caused an exodus of firms out of suburban business parks into areas populated by millennials like the West Loop and River North.
Developers are planning to build 8 million square feet of office space in downtown Chicago during the next 24 months.
Arrivals and Departures
Following Motorola Mobility’s move out of Schaumburg, Gogo Inc. signed a 230,000-square-foot lease to move its headquarters to 111 N. Canal St., shifting more than 500 workers from two buildings in Itasca.
Meanwhile, OfficeMax Inc. is leaving behind 344,000 square feet in Naperville to consolidate in Boca Raton, Fla. Much of the media coverage has focused on these relocations as the only story worth telling about the Chicago office sector. But the reality is the suburbs aren’t throwing in the towel.
Defying conventional wisdom, suburban Chicago ended 2013 with its largest lease in nearly 18 months — a 230,000-square-foot transaction that brings Zebra Technologies Corp. to 3 Overlook Point in Lincolnshire.
Flexera Software leased 75,000 square feet, relocating its headquarters to Hamilton Lakes, the same development that is losing Gogo. Flexera’s lease was the second largest of the fourth quarter in the Chicago suburbs.
In other notable fourth-quarter deals, Japanese tech firm Omron Corp. took 70,199 square feet at Greenspoint Office Park in Hoffman Estates, and Advanced Technology Services Inc. leased 41,332 square feet at 425 N. Martingale Road in Schaumburg.
Suburban Strengths
Notice that all of these lease signings involved tech firms taking down large blocks of space in business parks. The suburbs still shine when it comes to the availability of large floor plates in premium buildings that have surface or structured parking included.
What’s more, unlike the new construction downtown, which may involve a lead time of 18 to 24 months, there is a plethora of Class A space available in the suburbs on an immediate basis at cost-effective rates.
The tech firms that choose the suburbs aren’t generally startups, but established companies that have their funding and staffing securely in place. Additionally, landlords have been willing to work with tenants, offering free rent and large tenant improvement packages.
Suburban asking rents for all classes of office space are down 2.2 percent since the end of 2012, although they gained modest traction during the second half of 2013. In large part, this is due to willingness to cut lease rates in order to secure long-term tenants at premium assets.
Landlords sometimes hold firm on their rental rates, choosing to offer more generous concessions such as tenant improvements. Ultimately, this is to preserve the long-term value of the asset if it’s being primed for sale.
Another positive sign for the suburban office market is the limited development pipeline. There were three deliveries in the suburbs totaling 269,000 square feet in the fourth quarter of 2013. All three buildings were 100 percent pre-leased upon delivery.
Furthermore, a modest 556,000 square feet of new space was delivered in the suburban Chicago office market during all of 2013, 92 percent of which was pre-leased.
Buyers Look for Bargains
The best benchmark of suburban strength is the investment community, which is looking at the suburbs for higher yields because it has been deterred by 2007-level pricing in CBDs.
The Canadians are particularly coming on strong. Take, for example, Vancouver, B.C.-based Adventus Realty Trust. The REIT has purchased five buildings in suburban Chicago since March 2012 for about US$140 million. Then there’s Toronto-based Agellan Commercial REIT, which bought Naperville Woods Office Center for US$83.4 million.
Despite the positive indicators, there is no question that the suburbs have a lot of work ahead of them. In 2013, the suburban office market treaded water, with net absorption at a meager 235,332 square feet in an overall market of 98.4 million square feet. That’s reflected in the year-end vacancy of 24.3 percent, relatively unchanged from a year ago, according to Jones Lang LaSalle.
The East/West Corridor led in terms of annual leasing with 418,000 square feet. Lake County maintained the highest vacancy of the six submarkets, rising to 29.3 percent in the fourth quarter of 2013 from 28.3 percent in the previous quarter. The lowest is in north Cook County, down to 16.3 percent from 16.5 percent one quarter earlier.
Still, there is plenty of reason for optimism. Expect average annual growth of approximately 62,000 jobs from 2013 through 2015 in the Chicago metro area, according to Transwestern.
This level of growth would outperform the pre-recession period of 2005-2007. Additionally, there is a modest 398,000 square feet of office space under construction in suburban Chicago at year-end 2013, compared with 1 million square feet at the end of 2012.
The new buildings are 97 percent pre-leased compared with 35 percent at year-end 2012. This is a very positive trend line since it signals that there is minimal new space being added to the overall available inventory at a time when the suburbs are starting to find their sea legs.
— By Matthew Ward, Senior Vice President, The Alter Group. This article appeared in the February 2014 issue of Heartland Real Estate Business magazine.