Suburban office market had “unexpectedly strong” Q2 despite challenges: report

Vacancy rates dropped even though large-scale leasing activity stalled, a new MBRE report shows

Presidents Plaza (Credit: Glenstar)
Presidents Plaza (Credit: Glenstar)

Despite corporate relocations to the city and a lack of new development, the suburban office market market had an “unexpectedly strong” second quarter, according to a new report.

The suburbs saw a 1.25 percentage point decrease in the overall vacancy rate, a second-quarter report by commercial brokerage MB Real Estate shows. The overall suburban vacancy rate stands at 20 percent, with vacancy rates decreasing in every suburban submarket in the second quarter.

Average rent prices, meanwhile, creeped up by 1 percentage point, with the average suburban asking rent at $20.51 per square foot.

Vacancy rates ticked down slightly even though leasing activity in the suburban market has slowed, according to the study. There were only 13 deals larger than 15,000 square feet, and there were no new signed leases of more than 100,000 square feet.

That the vacancy rate still improved is due to the fact no new office developments have been delivered in 2018 — and the only developments in the pipeline are considered single-tenant, owner-occupied buildings. Only two office developments over 50,000 square feet are currently under construction in the suburbs: a 100,000 square-foot medical office building in North Chicago and 150,000 building near in the O’Hare submarket that GlenStar Properties is building for Central States Pension Fund.

Despite the drop in vacancy rate and a dearth of new construction, there is plenty of large blocks of office space available in the suburbs. Some 95 available spaces are larger than 50,000 square feet, with 16 of them at least 200,000 square feet, the report shows.

Exacerbating the problem of large block vacancy is the migration of corporate headquarters from suburban campuses to offices Downtown. After McDonald’s moved this spring from the western suburbs to burgeoning Fulton Market, Walgreens now is shaking up the suburban office market.

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The drug store chain announced it will transfer 1,300 employees from its Deerfield headquarters to the former Old Main Post Office downtown. Walgreens is now seeking to sublease 425,000 square feet of space in its Deerfield offices, according to the report.

The healthiest suburban submarket is O’Hare. It’s vacancy rate is 14 percent, the lowest in at least 15 years and which puts it in line with Downtown’s vacancy rate, the report shows.

O’Hare saw the priciest suburban office building sale of the six recorded in the second quarter, after Angelo Gordon & Co. bought the Presidents Plaza complex for $147 million.

Of the nine suburban office buildings that listed in the second quarter, the largest is the O’Hare International Center, which Blackstone listed in May for $75 million.

While the second quarter market activity was considered good news, the suburban office market will need to see more leasing and development activity to sustain its success, the MBRE report said.

“Though Chicago’s suburban office market has had positive absorption and declining vacancy rates in 2018, the amount of leasing activity has been underwhelming,” the report said. “Without significant leasing activity the market cannot be expected to improve substantially in the coming years.”