The data on the 245-million-square-foot metro area Chicago general purpose, multi-tenant office space market is flat, with overall stagnation despite extensive activity as business shifts between buildings and submarkets. Most local market watchers report a dramatic structural shift in favor of Central Business District (CBD) towers at the expense of suburban office campuses, although Reis data present a more nuanced picture. One point of agreement—the economy is not strong enough to create a rising tide that lifts all boats.
Reis reports a second quarter 2012 vacancy rate of 18.7% for the Chicago market, unchanged from the prior quarter, about the same as the two quarters before that, and down just 50 basis points from the cyclical high of 19.2% in the first quarter of 2011. The vacancy rate has been elevated in Chicago—and in the Midwest as a whole—relative to the U.S. average since 2001. There is little evidence of a flight to quality. The Class A rate is also high at 17.3%, and was up 30 basis points during the quarter. The Class B/C rate is 20.0%, down 40 basis points during the second quarter.
Jones Lang LaSalle reports a metrowide vacancy rate of 19.5% for 235 million square feet. Cushman & Wakefield reports a Central Business District (CBD) vacancy rate of 14.2%, down 70 basis points from a year earlier, and a suburban rate of 22.5%, down 250. Studley, Inc. reports a slight increase in the CBD availability rate, to 17.6%, while in the suburbs the rate fell 50 basis points to 25.5%. Reis predicts the limited improvement in overall vacancy will continue, as the rate edges down to 18.5% at year-end 2012 and 18.2% at year-end 2013. Consistent with a forecast of accelerating job growth, a faster decrease is expected to begin in 2014. Even so, Reis predicts the rate will be at 15.7% at year-end 2016, well above the U.S. average and far from a balanced market.
SUPPLY AND DEMAND
Overall net absorption was modestly positive at 127,000 square feet in the second quarter, bringing the half-year total to plus 280,000. While the quarter’s Class B/C net absorption was positive 509,000 square feet, the Class A total was minus 382,000. The completion of a 400,000-square-foot new multi-tenant building during the first quarter was followed by the completion of a 120,000-square-foot building in July. No additional space is forecast to complete this year. Net absorption for all of 2012 is forecast at just under 800,000 square feet, slightly more than in 2011.
The decade from 2000 to 2009 was a disaster for Chicago area landlords. The amount of occupied multi-tenant space fell by nearly 4 million square feet during the decade, while 35 million square feet of new space was added. The effect on vacancy would have been even worse were it not for about 15 million square feet of inventory losses—due to demolitions, shifts to owner occupancy, or conversions to housing. The inventory increased slightly less than 20 million square feet from year-end 1999 to year-end 2009. The vacant inventory more than doubled to more than 44 million square feet at year-end 2009, and sits at 45.7 million square feet as of the second quarter of 2012.
This enormous overhang seems to have chastened developers, or at least their lenders, as new supply has been limited since the start of 2010. Reis reports just 385,000 square feet under construction with another 207,000 planned in projects with expected completion dates. Although planning is extensive, the firm expects just 4.7 million square feet of new space will complete construction from 2013 to 2016, or an average of about 1.2 million square feet per year. Annual net absorption, meanwhile, is forecast to rise from about 1.3 million square feet in 2013 to more than 4.6 million square feet in 2016, eventually accelerating the decline in vacancy.
A modest recovery in rents in 2011 and early 2012 petered out in the second quarter, as both the average asking rent and the average effective rent slipped a penny to $27.37 psf and $21.19 psf, respectively. The year-over-year gains were reduced to 0.9% asking and 1.3% effective; still better than the increases of 0.6% and 0.8% for all of 2011. The average asking rent for Class A properties is $33.14 psf, down 0.1% during the quarter but up 0.6% year-over-year. For Class B/C space the asking average is $21.85 psf, up 0.1% over three months and 1.4% over twelve.
Jones Lang LaSalle reports an average asking rent of $27.13 psf metrowide, with $31.44 psf in the CBD and $21.56 psf in the suburbs. The overall weighted average rental rate, according to Cushman & Wakefield, is $31.79 psf in the CBD and $21.56 psf in the suburbs. Studley, Inc. reports an asking rent of $32.65 psf in the suburbs, up 0.5% during the second quarter, and $20.05 psf in the suburbs, down 0.7%. “There is little support for rental rate growth” in the suburbs, according to this source.
Reis predicts another year of modest rent increases, at 1.4% for the asking average and 1.9% for the effective average. Having missed out on the strong rent growth around 2000 and 2007, in fact, Chicago’s office rents have been weak for some time. The current effective average is lower than it had been in 1999, as the average effective rent has been stuck in the vicinity of $20.00 psf since 1998. Despite continued high vacancy, however, Reis predicts that rent wills break out to the upside during the 2013 to 2016 period. Asking and effective rent gains are forecast to ramp up from 2.1% and 3.2% in the former year to 3.7% and 5.2% in the latter year, pulling the effective average to more than $25.00 psf. Chicago’s asking rent gains, however, will continue trailing the U.S. average.