Office vacancy fell during the third quarter in downtown Chicago, reaching its lowest point since mid-2009, after six consecutive quarters of virtually flat leasing.
Overall vacancy rate fell to 14.7 percent during the quarter, down from 14.9 percent in each of the previous three quarters and 14.8 percent in the third quarter of 2012, according to commercial real estate firm CBRE Inc. Law firms and other professional services firms have been reducing their space in recent years, while tenants such as technology firms fill the void with continued growth.
The vacancy rate is at the lowest level since the second quarter of 2009, when it was 14 percent, Los Angelesbased CBRE says. The downtown market faces a big challenge beginning in 2015, when two big tenants leave their locations for a new tower under construction along the west bank of the Chicago River. Even so, the drop is a positive sign for downtown landlords, who have seen vacancies at a virtual standstill over the past year and a half. In the wake of the recession, the vacancy rate peaked at 17.3 percent in mid-2010. “I think you’re going to see vacancy continue to decline into 2014 at a slow but steady rate,” said tenant broker Brad Serot, a senior vice president at CBRE. “Sublease inventory has been picked over, and the market’s still very active.” Demand, as measured by net absorption — the change in the amount of leased and occupied space from the previous period — was at 266,481 square feet, the largest amount since the first quarter of 2012.
“There are still those singles and doubles, companies that have been growing by 10,000 or 20,000 square feet,” Mr. Serot said. “And a lot of the downsizing has already happened over the past 24 months.” The largest tenant move during the quarter was actually a contraction, reflecting companies’ increasing focus on getting by with less space. The American Medical Association took 289,000 square feet at 330 N. Wabash Ave., reducing its space by 12 percent from the 329,200 square feet the doctors’ group leased at 515 N. State St. The 45-story River Point, the only office tower under construction, took two major steps forward. The development venture led by Houston-based Hines Interests L.P. finalized a lease with McDermott Will & Emery LLP for about 225,000 square feet and signed another law firm, DLA Piper LLP, to a letter of intent for about 175,000 square feet.
Another tenant is in negotiations for a single-floor lease at River Point, 444 W. Lake St. along the Chicago River, said Greg Van Schaack, a senior vice president in the Chicago office of Hines. He declined to identify the tenant. “There really aren’t any big, 600,000-square-foot tenants out there looking for space in 2017,” he said. “We’re getting the next-best thing, the 200,000-square-foot tenants.
It’s yet to be seen how many other proposed towers will come out of the ground. But those two law firms will leave big holes to fill, adding to the options of large tenants who might consider a new skyscraper. “That will really impact the market at the end of 2015 and 2016, when the game of dominoes will occur,” said Mr. Serot, who envisions continued gradual absorption until then. In the largest expansion during the third quarter, Chicago-based health technology firm GoHealth LLC subleased 93,799 square feet at the Merchandise Mart from Schaumburg-based Career Education Corp. Chicago-based GoHealth is keeping about 76,000 square feet it has in other downtown Chicago buildings. River North remained the top-performing submarket, with 10.7 percent overall vacancy. North Michigan Avenue has the highest vacancy, 18.7 percent.
Other noteworthy deals included: Zurich American Insurance Co. took 108,000 square feet at 300 S. Riverside Plaza, growing from about 100,000 square feet at 10 S. Riverside,; and fund manager Harris Associates L.P. subleased 55,400 square feet from law firm Locke Lord LLP at 111 S. Wacker Drive. Harris is moving from 2 N. LaSalle St., where it has about 66,000 square feet.