Chicagoland Office Leasing Market on the Rise

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(Crain’s) — The suburban office leasing market is limping back to health.
The overall vacancy rate for suburban office properties declined in the first quarter for the third straight time, trundling down to 24.8%, from 25% in the fourth quarter, according to data provided by Jones Lang LaSalle Inc.

Direct vacancy, which excludes sublease space, was 21.3%, down from 21.5%.
Tenant demand is steadily increasing, and dealmaking should pick up dramatically during the second quarter, predicts Gregg Raus, an executive vice-president with Jones Lang who represents suburban office tenants.

That would be a marked change from a year ago, when the suburbs posted a 25.4% vacancy rate, the highest in more than a decade.

After a quiet start, “the accelerator is starting to be pressed a little harder,” with many tenants looking to capture favorable deal terms while the market still favors them, Mr. Raus says.

A lot of large users — those who want 50,000 square feet or more — are in the market, which contributes to a sense of urgency, says Tom Saletta, a principal with Chicago-based White Oak Realty Partners.

“Certainly from a tenant’s standpoint, they’re stepping out a little early to hopefully take advantage of some of the competitive market conditions,” Mr. Saletta says. “Maybe a year from now, when these larger users have committed somewhere, there may not be so many options.”

White Oak recently inked deals with Armour-Ekrich Meats LLC and Farmers Insurance Exchange at the two building, 691,000-square-foot Central Park of Lisle complex, which the firm bought last year.
Net absorption — the change in leased space compared with the previous period — was 83,899 square feet, compared to -240,514 in the first quarter of 2010, signaling a turnaround in demand.
Asking rents across all markets during the first quarter averaged $21.52, up from $21.49 in the fourth quarter.

Financial strength will help office users get good deals right now, Mr. Raus says.
“If you’re a good-credit tenant, you can almost write your own deal terms,” he says. “That’s worth gold for landlords now.”

Not everyone will share in the improvement, though. Softer markets such as the northwest suburbs have fewer properties that can compete for the best tenants, and are still a couple years away from normalized vacancy levels, Mr. Raus says.

“There’s really only a handful of buildings with the financial wherewithal to really go after transactions,” he says of the submarket.

Meanwhile, tenants that have traditionally leased class B spaces will move to better buildings, Mr. Raus predicts, as they seek to capitalize on the window of opportunity for favorable lease terms.
“Landlords with cash are willing to put it up to fill up their buildings,” he says, and are competing aggressively with concession offers to prospective tenants.

Significant leases in the first quarter included:
• Box maker Packaging Corp. of America leased the entire 59,000-square-foot building at 1955 W. Field Court in north suburban Lake Forest.
• Vernon Hills-based computer reseller CDW Corp. renewed its lease for 122,000 square feet at Woodland Falls Corporate Center in Mettawa, downsizing from about 152,000 square feet.
• North Chicago-based Abbott Laboratories Inc. extended its 86,000-square-foot lease at 100 S. Saunders Road in Lake Forest.
• Armour-Eckrich Meats LLC leased 71,479 square feet at Central Park of Lisle, 4225 Naperville Road.
• Cincinnati-based Fifth Third Bank signed a lease extension for its regional headquarters at Continental Towers I in Rolling Meadows, downsizing by about half to 52,801 square feet.
• Consulting firm RSA Medical LLC leased 50,652 square feet at CityGate Centre, 2135 CityGate Lane in west suburban Naperville.