Chicago Downtown Office Market Changing; Slowly Progressing

Chicago Downtown Office Market Changing; Slowly Progressing

Commercial News » North America Commercial News Edition | By Hortense Leon | November 28, 2012 8:30 AM ET

Things are changing in Chicago's Central Business District (CBD) office market. While there hasn't been a big reduction in the overall vacancy rate recently, there are signs of progress, including large spaces being converted into office space from other uses. 
"In the last year, we've seen a couple of very large transactions," in the CBD, says Lisa Konieczka, executive vice president and office tenant representative at CBRE in Chicago. There was the 240,000 square foot lease for Sara Lee which is moving from the suburbs into the West Loop, on the fringes of the CBD, she says. "The property, formerly a warehouse, is being converted into office space."
Another big lease was signed recently with Motorola Mobility, a high-tech tenant that will be taking 572,079 square feet at Merchandise Mart Plaza on the Chicago River. "A good portion of the space had been showrooms, so it wasn't accounted for in our office inventory, "as was also the case with the Sara Lee space, says Konieczka. "Conversions like these are addressing a need for a more creative work environment that is (in keeping with) current work-place strategies, such as densification and mobility," she says. These spaces are compatible with the way people work today, says Konieczka.
The need for high-tech office space is growing in Chicago. "There are a lot of high-tech clients signing leases in the River North submarket," which is just north of downtown, says Konieczka. This is an area that had a lot of old warehouses that a number of high-tech tenants have converted into lofts, she says. There are also some new buildings built in this submarket in the last few years, such as 300 North LaSalle Street and 353 North Clark Street, says Konieczka.
In River North, the direct vacancy rate, which doesn't include sublease space, dropped from 7.1% in fourth quarter 2011 to 4.5% in third quarter 2012, says Konieczka. Although converted spaces, such as the one for Sara Lee or conversions in River North, don't move the vacancy needle much, because they add new inventory, they are significant, she says.
"We've seen steady improvement in the Chicago office market over the last year," says Konieczka. In the third quarter of 2012, CBD direct vacancies ticked up a little, from 13.6% in the second quarter to 13.8%, says Konieczka, "but that was because of some big leases expiring," in addition to it being before the  election when a lot of people didn't want to make any decisions.
The total vacancy rate remained constant from second quarter 2012 at 14.8%, as the slight increase in direct vacancy was balanced out by the decrease in the sublease vacancy rate to 1.0% from 1.2% in the second quarter, according to CBRE's third quarter MarketView report on the Chicago CBD office market.
As for the future, says Konieczka, "we expect to continue seeing a slow recovery." One of the drivers of the office leasing market, in addition to demand from high-tech companies, she says, is the lack of additional supply of space on the market.
While there are some new office buildings being discussed for the CBD, they need pre-leasing to get financing, says Konieczka. It takes 36 months to build a Class A high-rise office building in downtown Chicago, "so it could be as long as 48 months before there will be any new high-rise office supply," she says, adding a year to the 36 months for pre-leasing.

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