Chicago office market continues to plod along

September 29, 2010  |  Mark Thomton  |  Print Article  |  Email this Article

Demand for office space is still weak, but the downtown market has benefited from a few significant transactions in the past year, said a panel of experts at a ULI forum focusing on the Chicago office market.

L-R: Casey Wold, James Postweiler, Jack McKinney, Joseph I. Neverauskas.

“Downtown is benefiting from the little demand that there is right now,” said Jack F. McKinney, president, J.F. McKinney & Associates.

McKinney cited the leases of United Airlines and BP as major tenants moving from the suburbs to the CBD. Corporate users are concerned about attracting young talent, and one of the best ways to do that is to move downtown, where most young professionals want to live.

While this trend has been prevalent for some time, McKinney remembers a time when it was different. Yet he wondered if the changing of the guard in Chicago–with the decision by Mayor Daley to not seek reelection–will have an effect on major firms moving to the city.

“In the 1980s it was a flight to the suburbs,” said McKinney. “That changed the past 20 years as firms have been moving downtown. I’m curious as to what will happen when Mayor Daley is no longer here.”

McKinney said that he is seeing “green shoots” in suburban leasing, but he compared the overall environment to the NFC North football division, with financing still difficult to achieve negotiations are often “three yards and a cloud of dust.”

The investment environment is considerably more active in 2010 than it was in 2009, but compared to the boom years in 2006 and 2007, it is still relatively paltry. Yet there have been some record deals in the market, with 300 N. LaSalle selling for the highest per-square-foot price in the city’s history.

It lends to a trend that is currently taking place in the office investment market. Buyers want quality, well-leased assets, with little risk of tenant turnover.

“The sales we are seeing are of newer towers with long leases and good credit tenants,” said James Postweiler, managing director for Jones Lang LaSalle.

Tishman Speyer’s Casey Wold said that leases drive investment activity in this market. This trend could change the way that many landlords approach leases. If they are looking to sell a property, short-term leases will not be as appetizing.

“The new way to sell real estate is with leases,” said Wold. “A five-to-ten year lease is a waste of a landlord’s time.”

Wold said that commercial real estate is a long-term investment now, as opposed to the rapid buying and selling of the previous few years. With interest rates low, quality property will outperform treasuries over the long haul.

Yet it is difficult to find quality firms willing to take a 20-year-lease and Wold acknowledged that landlords probably shouldn’t pass on the opportunity to rent space, even if it is with a short-term lease.

However, Postweiler sees investors more willing to take on some leasing risk in this environment.

“Some buyers may take some (leasing risk) if they believe the worst is over,” said Postweiler. “This would not have happened last year, but we see some of this activity this year. It really depends on the building.”

Wold is a believer that the worst is over and that eventually rents and absorption will begin to increase.

“As long as we continue to plod along, rents will creep up,” said Wold. “Markets have a way of morphing together. I think we will see that in the next 18 months.”

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One Response to “Chicago office market continues to plod along”

  1. The market is improving but that is not saying much. Office space for rent in the south suburbs is competitive.


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