Office N Illinois

Chicago metro office sector very active to start 2018

Chicago metro office sector very active to start 2018,ph1

By just about any measure, the Chicago office market is looking strong to start the year.

According to Newmark Knight Frank’s (NKF) research on the Chicago metro office market, the first quarter of 2018 witnessed a flourish of activity. Large renewals in the CBD included Braintree, which will occupy 40,000 square feet at the Merchandise Mart on top of the 80,000 it already leases. Bank of America expanded its lease at 540 W. Madison Street by 45,000 square feet, for 405,000 total. Citadel also renewed and expanded at its namesake building at 131 S. Dearborn Street.

Out in the suburbs, Mizkan Americas, a food and condiment producer, renewed its 54,000-square-foot office lease in Mount Prospect while Downers Grove landed a new tenant in T-Mobile as the cellular carrier will take on space in Executive Towers West. Additionally, California-based pharmaceutical company Depomed leased 21,000 square feet in Lake Forest.

Moving forward, all of this leasing activity should be taken as a positive sign for the market. Across the MSA, vacancy was down 50 basis points to 16.9 percent and rents increased in the first quarter by $1.50 per square foot, up from $29.09 per square foot the previous quarter. The 619,000 square feet of absorption in the first quarter was double what the region saw in Q1 2017.

Class B inventory, however, is struggling to fill space, especially in the suburbs. NKF reports that suburban, Class B properties are suffering a 24.5 percent vacancy rate, the highest in the region for that building type. Highly amenitized, Class A buildings are drawing tenants away, leaving shadow space unleased. One example is Piedmont Office Realty Trust’s planned $10 million renovation of 2 Pierce Place in Itasca. Once completed, the property’s new lobby, food service, conference facility and lounge area will make competition tough for similarly sized Class B properties.

Chicago finished seventh nationally in venture capital funding (up from tenth place in 2015) with a record $1.6 billion raised. Historically, VC funding is a strong predictor of future office needs. “A case in point is Shiftgig, which received its fourth round of funding, totaling $56 million, in January 2017,” the NKF report stated. “A year later, the startup opened its new headquarters at 1 North State Street and announced plans to hire 100 people through 2018.”

Following a slowdown last year, investment sales were stronger in Q1 2018. The metro completed $1.2 billion in office transactions by the end of February, according to Real Capital Analytics data. The last time Chicago broke the billion-dollar threshold in the first quarter was in 2015; last year the metro didn’t reach that mark until May. Several prominent deals fed into this sales volume, including Sterling Bay’s $510 million purchase of 600 W. Chicago Avenue and the $360 million transaction that sent 1 S. Dearborn Street from Olen Commercial to Starwood Capital Group.

Looking ahead, Chicago’s office sector has positive momentum that should carry it through 2018, although some planned moves downtown will include downsized space. CNA’s relocation from its namesake tower at 333 S. Wabash Street to the new 151 N. Franklin Street will cut their office space in half, down to 300,000 square feet. Similarly, law firm Hinshaw & Culbertson will shed 24,000 square feet when it also moves into the building.

“Although the state’s fiscal woes and budget deficit remain a sticking point for companies looking to move to Chicago, the metro continues to attract top talent, and that draws employers,” the report stated. “Continued employment growth, improved consumer confidence and one of the world’s best-performing economies will continue to support growth in Chicago.”