9:30AM
According to the most recent Newmark Grubb Knight Frank reports on the Chicago office and industrial markets, both the CBD and suburbs fared well in 2012, and a combination of low inflation, low interest rates, steady economic growth and little new construction will likely continue to benefit landlords over the coming year.
The overall office leasing market saw its third consecutive quarter of positive net absorption as tenants occupied 573,000 square feet of additional space, more than 433,000 square feet of it in the CBD. The increase in demand caused vacancy to fall 20 basis points to 19.1%, the lowest level since 2009.
“The urbanization trend continues, as firms desiring a central location and proximity to the city’s educated labor pool and live/work/play environment drove absorption in the CBD,” said Michael Sheinkop, executive vice president, regional managing director, who heads the Chicago area office. “Even with several marquee tenant relocations to the CBD, new and organic tenant growth helped the suburban market post noteworthy occupancy gains.”
Enthusiasm is tempered, however, by several other fourth quarter measures. The sublease market pushed to its highest level since 2005, finishing the year at 8.3 million square feet. This, combined with relatively high vacancy, especially in the suburbs, continues to restrain asking rent appreciation. Class A suburban average asking rental rates fell for the fifth consecutive quarter, ending 2012 at $23.37/sf gross.
Research Manager Tim Van Noord explained that continued economic recovery and limited new construction will drive overall office market improvements in the coming year. Office vacancy is forecasted to drop by at least 100 basis points to 18.0% by the end of 2013 with rental rates in some of the tightest markets, such as the West Loop, River North and segments of O’Hare experiencing 8-10% annual rent growth.
The story of recovery and buoyancy is similar for the industrial sector within select segments. Chicago posted a 12.8-million-square-foot net occupancy gain for industrial properties in 2012 - the largest tally since 2006. The rate of net absorption increased every quarter during the year with over 3.5 million square feet absorbed in the fourth quarter alone. This helped lower the annual vacancy rate 100 basis points to 9.8%.
“The jump in annual net absorption primarily stemmed from the warehouse sector, which accounted for 63% of the occupancy gains in 2012,” Mr. Van Noord said. “And while the big box transactions made headlines, they’ve also had a positive effect on the next tranche of properties, those in the 50,000 to 80,000-square-foot range, which tend to be populated by local and regional firms.”
Despite the increase in demand, average asking rents continued to fluctuate. Among the various product types, rents for warehouse space saw the largest annual increase, rising 2.3% to $4.00/sf, triple net. Overall manufacturing rents were flat on the year at $4.19/sf, triple net.
Supply-side fundamentals should aid overall rent appreciation for industrial product in 2013. The nearly 4 million square feet currently under construction - 77% of which is pre-leased - remains well below the 17-million-square-foot level seen in 2007. With no large boxes of space currently available, Mr. Van Noord expects supply to remain constrained in the first half of 2013 and 3-5% overall rent growth during the second half of the year.
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