Office Midwest

Chicago hitting records again: Office absorption, vacancy lowest in years

Office-River-Point-Signature-Rendering-Front-Page
Rending photo of River Point, a 52-story office tower under construction at 444 W. Lake in Chicago

Chicago has seen an increasing migration of people relocating downtown—whether it be for housing purposes or for business, it’s impossible to stay away from the center of where all the action happens.

Renters just can’t seem to keep away from the city.

Chicago has seen an increasing migration of people relocating downtown—whether it be for housing purposes or for business, it’s impossible to stay away from the center of where all the action happens.

That is why it’s no surprise that today’s office market activity downtown is strong. According to Drew Nieman, executive vice president of CBRE Chicago’s Agency Leasing Group, it has been building momentum over the last 24 to 36 months.

A 2015 third quarter Chicago office market report by Newmark Grubb Knight Frank showed a strong positive turn for the city’s net absorption, totaling more than 1.4 million square feet—the greatest quarterly absorption tally in four years.

The same report showed that the overall vacancy rate improved 50 basis points during the third quarter to 16.5 percent, matching the low record low set in 2007.

Michael Lirtzman, executive vice president of agency leasing at Transwestern, said it’s been shaping up to be a record year in the Chicago CBD in terms of gross dollars invested in office buildings, and sale volumes in dollars. He said right now, all signs are positive.

“I think we’re at the upper reaches of the cycle that’s turned favorable for landlords,” he added. “Capital market cycle demand drivers for tenants are very good and tenants are absorbing additional space.”

Landlords are then capitalizing on that and improving buildings to accommodate growth and see what they can do for the future. Lirtzman said tenants all want high-quality office space and an environment to hire employees where everything they may need, like amenities, is under one roof.

Some of this year’s recent downtown activity includes the current construction of two new office towers at 444 W. Lake Street and 150 N. Riverside, both of which will be more than 50 stories tall once complete in 2017. A third office tower is also said to begin construction in the fourth quarter at 151 North Franklin Street in Chicago’s West Loop.

Other notable large-name companies making the move downtown include: Mead Johnson Nutrition Company, which will lease space at River Point tower; ConAgra Foods, Inc.’s 168,410 square feet at the Merchandise Mart; The Kraft Heinz Company’s 169,696 square feet at 200 E. Randolph Street; and Motorola Solutions, Inc.’s 150,345 square feet at 500 W. Monroe Street —all of which are said to be a positive on pure net absorption.

Neiman also shared that in the last year, some of the well-known digital media and tech companies CBRE represented in their office relocations, include: Groupon, Uber, Pandora, Paylocity, Yelp, Jellyvision, and Context Media.

Thomas D’Arcy, senior managing director of Hines’ Midwest regional office, believes Chicago in general is one of the most dynamic markets right now, firing on all cylinders.

“To me, this is a very positive contribution to the overall health and vibrancy of the Chicago market,” he said. “It has become a holistic equation. Every sector of the real estate economy is performing very well right now and that’s good for office.”

D’Arcy believes that the cost of land rising and the cost of construction continuing to increase are acting as a governor of how many new projects will be built. He thinks there’s a rational governor on supply side for new office and that may result in seeing fewer and smaller buildings.

To Lirtzman, the overall sentiment is that the market is healthy.

“The last time was in 2007. This market feels more disciplined and feels more fundamentally sound. The cycle has some legs left, seeing more demand from tenants that exceeds the market in 2017,” he said, adding that the fundamental market paints a positive picture that everyone hopes will be sustainable this time around.

OFFICE TRENDS

According to Nieman, the increase in the technology market has been a visible trend lately. Technology-based companies are booming—they have expanded and grown rapidly, they are also receiving more funding. These tend to be a mix of companies that combine both creativity and technology.

Another observation is the transformation of office space. Lirtzman believes the way tenants use space has changed in the last year, whether they are tech, an open call center, or a traditional office.

“No matter how it’s designed, people are thinking more of a collaboration,” he said. “As a result, sizes are shrinking. The design is much more conscious of how people work together and collaborate.”

This includes changing around the furniture so participants are able to see better, and these days, people are getting grouped together by their divisions instead of seniority. This makes it easier for the teams to collaborate when everyone is nearby. In addition, amenities are also being used for collaborative space. Kitchens and reception areas are now more commonly utilized as a place for a meeting.

Nieman sees that a change in space within established offices—financial, consulting or law firms—are all doing a densification. They are fitting more people into less space and attempting to take less space if they renew or move.

D’Arcy has been seeing this, too. He said in densification, tenants are relocating and renewing in less space, yet the market still has positive absorption. This means that there is a lot more absorption taking place than it is showing in the numbers.

He explained it like this. If many tenants are relocating or renewing in 10 percent to 15 percent less space on average, and yet the market can still record a positive absorption, then that says that if there wasn’t that densification taking place the net absorption would be higher.

“There’s a tipping point when you can’t compress anymore and when that cycle has run its course, what does that mean for net absorption?” D’Arcy asked.

IS DOWNTOWN OFFICE OVERSHADOWING SUBURBAN OFFICE?

Lately it seems that downtown office is overshadowing suburban office activity. Despite all the news of companies continuing to leave the suburbs, the market is actually seeing that there’s been an increase in demand, particularly for Class A buildings. In fact, a third quarter 2015 suburban market report by JLL shows that the strong absorption has led to a record low vacancy of 19.2 percent compared to 22.6 percent in 2014.

Leasing activity in the third quarter helped to break up several large blocks of available space in the suburbs, according to the report.

Today, the smaller towns house a lot of back office operations including accounting and support staff. Jeff Shay, senior vice president of Jones Lang LaSalle’s (JLL) suburban leasing team, confirmed that there continues to be positive absorption and while it’s nothing dramatic, they are positive steps.

Shay said owners are pushing rents in various submarkets, especially in Class A office spaces, as they become scarce.

The North market saw plenty of activity, though it remained fairly consistent. The JLL suburban office team noted that there have been several signed leases in the North compared to other submarkets that saw mid-sized deals.

“Certain submarkets have lower vacancy, so everyone’s recovering at the same level, some were hit harder like the Northwest submarket but they’re recovering at the same pace,” Shay added.

Two of the larger deals this year were Ingredion and Exelon Corporation recommitting to Westchester, Illinois for 10 years.

These days, many owners are reinvesting back in their assets, whether they are upgrading or retrofit to amenity packages that are being brought in. Investments are being put back in across the board to create attractive and vibrant office spaces.

So where does this leave us? Shay reassures that going forward, the future of suburban office looks healthy.

“We’re still optimistic,” he said. “If things continue the way they are going in the hiring and corporate results, we don’t have a big shoe to drop, we see continued positive movement. New sites are being marketed, absorbing vacancy continues across the board, investing…all continue in a positive direction.”