Office Midwest

Lots of movement in Chicago’s CBD: Office tenants actively seeking area for their new space

McDonaldsHQ
McDonald's will be relocating its corporate headquarters to 1045 W. Randolph by spring 2016. Groundbreaking on the building is set to begin September 2016.

Office especially saw an impressive second quarter in the Central Business District (CBD), where vacancy decreased from 11.97 percent to 11.65 percent—the lowest it’s been since 2008, according to MB Real Estate’s Q2 Chicago CBD research report.

Downtown Chicago has recently seen plenty of activity in all market sectors, reminding us that it’s going to be another robust year.

While the area has seen its big share of multifamily, retail and hospitality projects and deals, the office sector has sustained a remarkably active period with new leases, renewals, redevelopments and groundbreakings.

Office especially saw an impressive second quarter in the Central Business District (CBD), where vacancy decreased from 11.97 percent to 11.65 percent—the lowest it’s been since 2008, according to MB Real Estate’s Q2 Chicago CBD research report.

A different Q2 2016 report by Colliers International says this is the fifth consecutive quarter that the CBD has experienced significant positive net absorption, which generated the decrease in the overall vacancy rate.

Class C assets are currently seeing a vacancy rate at a historic low of 11.16 percent. MBRE said renovations of those types of buildings are taking place to become Class B properties or Class C properties being converted for non-office use.

Positive absorption in the second quarter was seen across all submarkets, totaling 570,485 square feet and raising the 2016 year-to-date total to 916,854 square feet. MBRE said this is largely due to two new office towers that recently broke ground.

One of which, includes, John Buck Company’s 807,130-square-foot development at 151 N. Franklin that will be branded as the CNA Building once it’s completed in 2018. In addition, a 443,645-square-foot office building at 625 W. Adams is currently under construction by White Oak Realty Partners and CA Ventures.

This brings the total number of new office towers under construction in the West Loop to four, with another one under construction in River West. Over the past year, large block availability has increased by six blocks and Colliers data shows that this is largely due to the construction of 151 N. Franklin St. and 625 W. Adams St. The largest block of available space, however, is the 443,625 square feet at 625 W. Adams St., which is being built on speculative development.

MBRE data showed that there were six large new deals and 15 large renewals, expansions and subleases, signed in the second quarter. Notably, 1000 W. Fulton, known as 1k Fulton, sold for $572 per-square-foot—one of the highest per square footage prices the Chicago office market has ever seen.

As more and more tenants continue to show interest in the area, landlords are responding with higher rents. The average direct asking rental rate in the CBD currently stands at $37.25 per-square-foot—an increase compared to the $37 per-square-foot posted in the first quarter, Colliers research showed. The average asking rate in total increased by 4.17 percent from this time last year.

A relocation that shook the city

The largest deal of the quarter also happens to be the largest new deal since 2012. McDonald’s announced plans to relocate its Oak Brook-based headquarters to Sterling Bay’s new 608,000-square-foot office build-to-suit development at 1045 W. Randolph in River West. The burger-chain will occupy 486,400 square feet at the building, which will break ground in September 2016 at the site of Oprah Winfrey’s former Harpo Studios.

McDonald’s announced in June 2016 that it plans to move its corporate headquarters along with its Hamburger University, a state-of-the-art learning center for the company’s future leaders and employees, to the new space by spring 2018.

This move was a big one for the Fulton market submarket as it was able to lure the headquarters away from the traditional office buildings in Chicago’s core submarkets. Colliers said that by landing McDonald’s, Fulton Market solidified its status as Chicago’s hottest emerging submarket and proved that companies are willing to move into the trendy neighborhood despite its peripheral location.

Following McDonalds’ new lease at 1045 W. Randolph, Constellation Brands and Beam Suntory also signed big leases in the second quarter. Constellation Brands is in final negotiations for a 133,000-square-foot lease at 131 S. Dearborn, relocating from their space down the street at 1 S. Dearborn.

In addition, Beam Suntory topped the charts for largest sublease in the second quarter. The company subleased 112,803 square feet at Motorola Solutions’ former space at the Merchandise Mart.

Subleases in the second quarter increased by 124,058 square feet, bringing the total of sublease space available to 3.82 million square feet. MBRE research shows that four large blocks of sublease space hit the market. Those include GE Healthcare’s space at 500 W. Monroe; GE Capital Rail Service’s space at 161 N. Clark; Google’s space at 1000 W. Fulton; and Avant Credit’s space at 225 W. Randolph.

The firm identified at least 40 tenants actively seeking 50,000 square feet or more in the CBD.

Other notable deals contributing to the positive absorption in the CBD, include ConAgra’s 168,410 square feet at the Merchandise Mart; WeWork’s 112,088 square feet at 125 S. Clark, which will be known as The National; and Alvarez & Marshal RE Advisory Service’s 41,957 square feet at 540 W. Madison.

Looking ahead

If the second quarter of 2016 is any indication of how strong the market is, it’s very likely that we will continue to see it grow at a steady pace for the remainder of the year. MBRE said vacancy levels will remain low but are unlikely to decrease significantly.

The market expects to get a total of 4.4 million square feet of Class-A space in new construction within the coming years. Of that, 2.6 million will be delivered in 2017. If leasing activity continues at the current level, MBRE predicts that the market should remain stable through the remainder of 2016 and 2017.

It’s also expected that the market will get an additional 1.9 million square feet of inventory scheduled for 2018 completion. MBRE said that with the continuing suburban migration and the expansion of existing companies, the market should be able to absorb it. In addition, an important market indicator will be the developers’ ability to attract tenants to the 443,645-square-foot speculative office building at 625 W. Adams.