The Real Deal Chicago

Office leasing cools, rents slide Downtown and in the suburbs during Q3: report

By Alex Nitkin | October 16, 2018 02:30PM

515 North State Street and interior offices at 120 South Lasalle Street

Office leasing fell sharply during the third quarter both Downtown and in the suburbs, raising the availability rates and softening rents in both markets.

Office tenants Downtown leased 2.3 million square feet of space between July and September, matching the area’s “long-term average” but sharply down from the 3.2 million square feet leased during the second quarter, according to a Savills-Studley report.

The slower leasing activity notched up the availability rate in Downtown office buildings from 15.5 percent 16.9 percent and dropped average asking rents from $40.10 to $39.60 per square foot.

601W Companies’ 2.7-million-square-foot Old Main Post Office redevelopment played a large part in the sharp quarter-to-quarter rise in availability, a metric that includes space set come on the market during the next year, according to Robert Sevim, Savills Studley’s co-chairman for the Chicago region.

“You can look at this data set and say that leasing is declining, but when you look at the activity going on in the larger market, that’s not really indicative of market conditions,” Sevim said. “A lot of leases get signed at the end of the year, so I expect those numbers to become quite active next quarter.”

The suburban office market told a similar story during the third quarter, according to the report. Leasing fell by more than 20 percent from the previous quarter to 1.1 million square feet in the suburbs, pushing the overall availability rate up to 28.3 percent. Asking rents for suburban offices dipped by 0.8 percent, averaging $23.39 per square foot between July and September.

But taking a longer view, Downtown office landlords appear in far better historic shape than their suburban counterparts, according to the report.

Downtown office tenants leased more than 12 million square feet during the four quarters ending Sept. 30, exceeding the area’s “long-term market average” by 25.3 percent, researchers wrote. But suburban tenants leased just 5 million square feet during the same one-year period, “falling well short of the market’s long-term average,” they added.

But Downtown and suburban office buildings this year both registered dramatic spikes in transaction volume compared to last year.

Between January and July 2018, office property sales in the city core totaled $4 billion, thanks in part to Sterling Bay’s acquisitions of Prudential Plaza and Groupon’s River West headquarters.

Suburban office sales combined for $2.9 billion in transactions between March and August 2018, a 51 percent spike over the previous six months, according to the report.

Researchers also tallied the 10 largest new Downtown office leases signed between July and September, which combined for more than 1 million square feet. Facebook’s 263,000-square-foot lease at 151 North Franklin Street took the top spot, followed by CIBC’s 143,137-square-foot lease at 120 South Lasalle Street and WeWork’s 122,350-square-foot lease at 515 North State Street.

Earlier this month, a Colliers International Report showed upticks in both rents and vacancy rates for office buildings in Chicago’s suburbs. At the same time, Newmark Knight Frank published a report indicating record high office rents inside the city.