In the wake of rising office vacancies and sublease space, tenant opportunities are at their most pronounced for companies seeking office space throughout the Chicago Metro market, which includes both the CBD and the suburbs, in 2009.
In Chicago and across the U.S., credit-worthy tenants continue to be in a position to strike deals at a fraction of previous rents. Landlords are beginning to offer increased concessions such as tenant improvement funds, rent abatement, and greater lease flexibility. Nationally, such offerings have escalated nearly 20 percent over the last 24 months, while rents have been driven down some 10 percent in the last 3 months alone.
Chicago’s sublease space climbed to 7 million square feet, including 2.67 million square feet in the CBD plus the suburbs in the first quarter of 2009, according to Jones Lang LaSalle research. Sublease space will jump further in the coming months as corporate America's more recent job cuts trickle down to commercial real estate.
The overall vacancy rate, including subleases, in Chicago’s CBD is 18,140,000 square feet, or 13.6 percent, and is 22,900,000 square feet or 23.9 percent for suburban Chicago in the first quarter of 2009. The absorption rate is at -0.8 percent and -0.7 percent, respectively.
In order to attract and retain tenants, Chicago’s suburban landlords have gotten especially creative with extremely low rent offerings on short-term deals. However, they have steep competition from quality plug-and-play sublease space peppered throughout the metropolitan area. Chicago’s diverse business base has helped the city fare better than the coasts, which are more tied to the financial sector.
OUTLOOK
Investors’ focus will shift in the remainder of 2009 as fundamentals become an increasingly important factor in leasing dynamics and property values — and will ultimately shape the opportunities and challenges ahead.
Leasing concessions will continue, though anecdotal evidence suggests the trend may level off. This is due to distressed landlords’ ability to fund these concessions and the unwillingness to offer substantial upfront capital to tenants with an uncertain existence in 12 to 36 months.
Throughout the Chicago Metro market, job losses will continue to rise throughout the better part of 2009 and likely into the first part of 2010. As such, we can expect available space options to continue to increase throughout 2009 and into 2010. As options increase due to existing inventory as well as the expected 3.8 million square feet of deliveries due this year, overall vacancy levels for the Metro area may approach peaks established during the last downturn, possibly settling near 20 percent. As a result of these factors, there will continue to be downward pressure on rents throughout 2009.
When the economy stabilizes, the effect on commercial real estate will trail that uptick by about 6 to 9 months. This is the reaction time for companies to create new jobs, hire the right talent, evaluate their real estate needs, and begin to address their space requirements. More than ever, tenants are taking the time to re-evaluate their current real estate strategy and relying on the guidance of experienced advisors to further improve their position during these historic times.
— Jesse Van Dyke and Scott Ohlander of Jones Lang LaSalle