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Office

The office market in the East West Corridor along I-88 truly consists of two separate submarkets – I-88 East, comprised of Oak Brook and the surrounding area, and I-88 West, which consists of everything west of I-355. The eastern part has traditionally been stronger due to the presence of many corporate headquarters facilities, such as McDonald’s, Ace Hardware and Blistex. The western part was just beginning to recover from the tech bust in the early 2000s when the most recent recession came along, resulting in many corporations downsizing or relocating. Alcatel-Lucent already vacated its 1.2 million-square-foot campus in Lisle, and BP will leave a large amount of space behind when part of its operation moves to downtown Chicago later in 2010.

At the end of first quarter, the overall vacancy stands at 23.6 percent, 120 basis points higher than in the first quarter 2009. Class B properties are suffering the most, having reached a new high with 27.3 percent vacancy.

However, there are some bright spots as well. Highland Landmark V, the last speculative building on the market, is now almost fully leased to DeVry University and Dover Corporation. Redbox renewed and expanded its headquarters at Oakbrook Terrace Tower to a total of 137,000 square feet. Another company from the education sector, Rasmussen College leased 62,000 square feet at Regency Towers in Oak Brook, doubling its current space in Burr Ridge.

Tenants are still hesitant to make any decisions at this time. Many of them will try to renew early in their current location, though some will start looking elsewhere in the market as the year progresses. Depending on the capital structure and occupancy level of their buildings, some landlords may not be in a situation to compete for those tenants.

Industrial

The industrial real estate market in the East-West Corridor is more known for its local users and smaller build-to-suits rather than big distribution centers. In fact, only 40 users occupy more than 200,000 square feet. However, 2009 saw two large tenants choose this submarket – Suncast (600,000 square feet) and Freudenberg Houshold Products (525,000 square feet), indicating that there is some interest in the East-West Corridor.

Infrastructure improvements along I-88 are starting to positively impact businesses and commuters. The Aurora area has become more attractive in terms of accessibility since the completion of the I-88 and Eola Road interchange at the end of last year. Companies in the surrounding business parks are now on the highway within minutes instead of having to drive along the back roads to the closest interchange several miles away.

Preliminary vacancy numbers for the first quarter of 2010 show an increase of 200 basis points to 13.8 percent compared to the first quarter 2009. Warehouse/distribution space vacancy has hit an all-time high with 17.8 percent. This is a significant increase from the lowest vacancy rate at 6 percent in the fourth quarter2006. The increase in the vacancy rate is largely due to a recent boom of construction – in the last 5 years, 5.7 million square feet have been added to this submarket, mostly on a speculative basis. Of this space, 30 percent is now vacant as opposed to 12 percent of buildings completed before 2005.

At this time, no industrial properties are under construction in the area. However, there are still tenants downsizing or closing their businesses. Many logistics companies are trying to sublease space that they are currently not using – about 10 percent of all available space is sublease space.

The market is likely to reach its bottom in the later part of the year, but will favor tenants for at least another year. Owners are looking for evaluations to get a feel for property values and to decide if they should hang on to or part with their asset.

Retail
Developers and retailers were counting on the residential expansion in the western part of the East-West Corridor, but the economic downturn nixed many of the large subdivisions. Now, a large number of new strip malls have few or even no tenants, and many of them will go back to the lender. Several big-box retailers closed down or changed plans.

At the end of the first quarter of 2010, 10 percent of this 68-million-square-foot submarket stood vacant, with the eastern end of the market faring slightly better. The area around Oak Brook will probably rebound faster due to higher population density and higher income demographics.

Construction has come to a virtual standstill. Only 440,000 square feet of space was completed in 2009 -a contrast to the astounding 6.2 million square feet of retail space built from 2006 to 2008 in the East-West Corridor.

More than 8 million square feet of retail space is currently on the market for lease, with 80 percent of it 10,000 square feet and smaller.

With the unemployment rate still at 10 percent – up from 6.2 percent in 2008 and at its highest level in 17 years – consumers will remain cautious. Discount retailers, resale shops, moderately priced restaurants could fare better than the rest in the coming months as consumers stay focused on essentials.

This piece was provided by Grubb & Ellis Co.

Tags | Chicago, Grubb & Ellis, Office, Report

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