Chicago’s downtown and suburban office markets continue their dynamic path through an unpredictable and unprecedented economic environment. Although no one can predict the future, it is difficult to argue with the opportunities of a tenant in the current market. New supply in Chicagoland has increased by 3.9 million square feet in the past 2 years. Historically, new space is absorbed quickly; however, 2009 met this new supply with a different embrace than before. Space demand has not been as robust, and positive absorption enjoyed in the years past has decreased.
This excess space, coupled with added sublease space, is contributing to Chicago’s pain. Given the tumultuous economy, the sublease market (both CBD and suburban) soared to 6.5 million square feet in second quarter 2009. The sublease market has become such a force in volume and quality that it competes with direct space, resulting in a downward push of overall effective rates.
While tenants stand to reap the benefits of the subleases available, current market dynamics reveal the risks associated with leasing and subleasing space. A tenant’s credit has never been scrutinized more closely. Furthermore, the credit of the landlord/sub-landlord and tenant/sub-tenant is a major concern. A Subordination Non-Disturbance & Attornment Agreement is increasingly important for tenants to protect their rights in the event of an ownership change, loan default or change in the function of a building.
Both the CBD and suburbs continue to have steady leasing activity, albeit below historical norms. In the CBD, the City of Chicago extended its 263,000-square-foot lease at 30 N. LaSalle; Chicago Trading Company signed a new lease for 87,400 square feet at 440 S. LaSalle; and Smurfit-Stone Container signed a 51,000-square-foot sublease at 222 N. LaSalle. In the suburbs, DeVry secured 150,000 square feet at Highland Landmark V in first quarter and an additional 66,000 square feet at 814 Commerce in second quarter.
Suburban demand from larger tenants could position the area for positive absorption in fourth quarter. Those active tenants include Career Education Corporation (350,000 square feet), Tru Value (120,000 square feet) and US Cellular (45,000 square feet). The overall consensus in the suburban markets is that numerous opportunities have sparked an increase in tenant activity. In the CBD, several large requirements are pursuing options including UBS (400,000 square feet), William Blair (325,000 square feet) and Baker & McKenzie (250,000 square feet).
In both the CBD and the suburbs, tenants have been hesitant to secure that long-term lease or sublease in the first half of the year due to the lack of clarity in the economy. Knowing Chicago and how it is less impacted by market fluctuations, Jones Lang LaSalle expects activity to turn into real absorption in the latter half of the year as tenants regain confidence and take advantage of historically low market rents.
— Sean Reynolds and Luanne Reedy are executive vice president and senior associate, respectively, at Jones Lang LaSalle’s Chicago office.