Downtown office vacancy falls, but ’09 concerns landlords
(Crain’s) — On paper, the downtown office market looks as strong as it’s been since the U.S. emerged from its last recession in late 2001.
The vacancy rate in the third quarter dipped to 10.7%, lowest since 2002, while a key gauge of demand was positive for a second straight quarter, notching its highest mark in a year, according to real estate services firm CB Richard Ellis Inc.
But many landlords and office brokers are looking at 2009 with trepidation, with the economy seemingly headed for recession and a host of major financial corporations scrambling to survive amid the shakeout from the subprime mortgage meltdown.
“I don’t think anybody thinks the fourth quarter is going to be a positive,” says Cal Wessman, an executive vice-president with CB Richard Ellis who represents office tenants. “When somebody expands, a certain part of that is a leap of faith in future business expectations. . . .People are starting to get a lot more cautious.”
Still, it was a remarkably active quarter for the downtown office market, with two deals inked in excess of 200,000 square feet.
• Law firm Baker & McKenzie LLP signed a 300,000-square-foot lease to move its headquarters and co-anchor a new tower planned at 444 W. Lake St.
• Oil giant BP PLC leased 225,000 square feet at the Chicago Mercantile Exchange Center, with plans to move about 1,000 employees from the west suburbs in 2010 into the two-tower complex at 10-30 S. Wacker Drive.
Net absorption in the quarter, which is the change in the amount of leased and occupied space compared with the prior period, was 552,881 square feet. That’s up sharply from 149,659 square feet in the second quarter and the highest mark since the third quarter last year.
But Mr. Wessman says the flurry of leasing activity and handful of big deals signed in recent months come from expansion plans that were first hatched nine months to a year ago.
“Those deals are not being teed up today,” he says.
At the same time, new supply is hitting the market.
The new office building at Block 37, 22 W. Washington St., was added to CB Richard Ellis’ inventory figures in the third quarter. The building, the first to open downtown since the second quarter of 2006, expands the market to 121.5 million square feet. That’s to be followed by four more new towers to open through 2011, which will add about 4.6 million square feet to the market.
Some argue that Chicago’s downtown market is at least partially insulated from much of the turmoil that’s hobbling the economy, from Wall Street firms crumbling to the burst of the housing bubble.
Chicago’s office market isn’t as dependent on the financial sector as New York’s, and the subprime mortgage pain has been far worse in the West, Southeast and Southwest, says Thomas D’Arcy, a senior vice-president with the Chicago office of developer Hines Interests L.P. He also says that unlike the 2001 recession, companies in certain sectors today, such as commodities trading, consulting and alternative energy, are still expanding.
“It seemed like in 2001-2002 everybody stopped growing,” Mr. D’Arcy says. “I don’t think we really fully know how we’re going to be impacted.”
Plus, Mr. D’Arcy adds, with lending markets all but frozen, Hines’ new building that Baker just agreed to co-anchor at 444 W. Lake is likely to be the last big office building to get off the drawing board for some time.
“Is there going to be another building launched in the next two years? I don’t think so,” says Mr. D’Arcy, adding that the halt in new construction will probably keep the supply-demand balance from getting out of whack.
Two other notable deals in the quarter included:
• Law firm Schiff Hardin LLP decided to stay in the Sears Tower, 233 S. Wacker Drive, by waiving an early termination of its lease for 205,000 square feet. Schiff tested the market but ultimately decided to stay at Sears Tower, expanding its space to more than 217,000 square feet and extending its lease three years to 2024.
• Executive search firm Spencer Stuart signed a lease for 103,000 square feet to move to 353 N. Clark St., becoming the third tenant in a new tower that’s to be anchored by the building’s co-developer, Mesirow Financial.
