Chicago’s office, industrial and retail markets registered respectable performances in the third quarter of 2013 despite the disruptive political noise flowing from the nation’s capital, according to Newmark Grubb Knight Frank (NGKF).
“The Chicago commercial real estate market continues to show remarkable improvement,” said Michael Sheinkop, executive managing director. “In the office sector, demand from tenants in the technology, education and business services industries contributed to the sixth consecutive quarter of positive net absorption. The industrial sector saw a net gain in occupancy across all its segments, and retail has benefited from improvement in the housing market, an important driver of retail sales.”
Metro Chicago office vacancy decreased to 18.2% - its lowest level since 2008. Despite a spike in sublease availability, all asset classes experienced occupancy growth in the third quarter, with particularly robust demand for Class A space.
Despite positive net absorption in 12 of the past 14 quarters, Class A weighted average asking rental rates decreased 5.5% to $27.93/sf over this timeframe. The average rental rate drop can be attributed to the leasing activity of higher-end spaces, such as DLA Piper signing an LOI for 175,000 square feet currently under construction at 444 West Lake Street in the CBD’s River North submarket, which is slated for completion in 2017.
Follett Corporation completed Metro Chicago’s largest lease, taking 136,212 square feet at Westbrook Corporate Center in Westchester, Ill. Zurich Insurance signed the largest lease in the CBD, committing to 108,000 square feet at 300 South Riverside Plaza in the West Loop; the company also signed a letter of intent to relocate within Schaumburg where it plans to construct a North American headquarters for 2,500 workers on the Motorola Solutions campus. The lagging Northwest submarket, which ended the quarter with a vacancy rate of 24.7%, will need to get aggressive to make up for the space Zurich will vacate in 2016, as competition from other suburban submarkets and Chicago’s CBD remains fierce.
Tenant demand for modern properties continues to drive improvement in the industrial leasing market. The 42-million-square-foot inventory of industrial space constructed since 2008 has seen nothing but positive net absorption since the first building broke ground. This combined with relatively low vacancy of 9.1% has been a bellwether for new construction: More than 7.8 million square feet, 34% of which is speculative and 96% of which is warehouse/ distribution, is currently underway throughout the region.
Landlords in all industrial segments - general industrial, incubator, R&D/flex and warehouse/distribution - gained negotiating leverage as overall average asking rents increased $0.03 during the period to $4.46/sf triple net, $0.16 higher than one year ago and a new cyclical high.
Still, certain industrial submarkets continue to struggle due to competition from closer-in submarkets like O’Hare and the I-55 Corridor, which offer more desirable central locations, as well as from the neighboring states of Indiana and Wisconsin which offer a lower tax basis. McHenry posted its fifth consecutive quarter of negative net absorption as vacancy rose to 15.5% - the second highest of the 18 regional submarkets behind the I-80 Corridor.
Tenants in the online retailing, packaging and logistics sectors are likely to support future growth in the industrial sector. Steady leasing demand, along with more than 2.0 million square feet in build-to-suit deliveries likely will help vacancy settle just below 9% by year-end, according to the NGKF report.
Downtown and suburban retail markets together experienced a vacancy rate decline to 8.4% in the third quarter. Prestigious “micro-markets” like Oak Street and North Michigan Avenue carried the overall improvement, and Chicago’s CBD continues to thrive with relatively low vacancy and steadily rising rents.
“The lack of available space on Oak Street has resulted in spillover to streets not typically viewed as super-lux,” said Greg Kirsch, executive managing director. “On North Michigan, where asking rents exceed $450/sf, retailers are committing vertically; Burberry, Zegna and Ferragamo have all gone multi-story.”
Bucking the positive momentum was the small-shop suburban market, which posted negative net absorption of 250,810 square feet as vacancy increased to 7.5% - still comfortably below the overall market average.
For additional information about the Chicago market, contact Mira Matic at miramaticpr.com.
About Newmark Grubb Knight Frank
Newmark Grubb Knight Frank (NGKF) is one of the world’s leading commercial real estate advisory firms. Together with its affiliates and London-based partner Knight Frank, NGKF employs more than 12,000 professionals, operating from more than 320 offices in established and emerging property markets on five continents.
With roots dating back to 1929, NGKF’s strong foundation makes it one of the most trusted names in commercial real estate. Its integrated services platform includes leasing advisory, global corporate services, investment sales and capital markets, consulting, program and project management, property and facilities management, and valuation services. A major force in the real estate marketplace, NGKF serves the local and global property requirements of tenants, landlords, investors and developers worldwide. For further information, visit www.ngkf.com.
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