February 2013

Demand continues to drive tenants to East-West Corridor

Demand and interest in the historically active East-West Corridor will continue to drive tenants to expand and sign new leases in 2013, according to a year-end market review and 2013 forecast by NAI Hiffman.

With the exception of a slight decline during the third quarter, absorption has been positive for eight of the last nine quarters, according to the NAI Hiffman report. During that period, more than 1.2 million square feet has been absorbed through new leases and expansion of existing tenants. This represents about 95 percent of the 1.3 million square feet of vacant space added to the market in 2009 and 2010 due to the effects of the recession.

“Relatively speaking, I think the East-West corridor has been very active,” said Diana Riekse, executive vice president at Jones Lang LaSalle. “It was active last year and it’s been active so far this year. We see a lot of concentration on the A buildings and we see the B buildings struggling. The B buildings are struggling because a lot of them just don’t have the minimums that tenants are requiring today.”

Absorption during the fourth quarter totaled 149,234 square feet, pushed positive by new leases and the completion of the new 120,000-square-foot building for DuPage Medical Group located in Lisle’s Corporetum Office Campus, according to NAI Hiffman. The area’s vacancy rate decreased slightly to 21.1 percent, a rate 55 basis points below a year ago and nearly 2.7 percent below the peak rate reached in 2010.

“Although there a lot of large tenants in the market right now, there is a lot of new space that is going to be delivered statistically,” Riekse said. “So, on paper, I don’t see our absorption in the western East-West Corridor to be very strong during 2013.”

The class A availability rate in the East-West Corridor spiked from 22.9 percent to 26.5 percent in 2012 – the highest mark since year-end 2003 as companies continued to shed space over the last several quarters, according to an office market and space data report by Studley. The submarket accounted for 26 percent of the class A space leased in suburban Chicago during 2012, with a volume of 1.1 million square feet. The report noted that this was a sharp 40.5 percent decline from the 1.8 million square feet leased in 2011. The average class A asking rent fell by 1.2 percent year-on-year from $22.25 to $21.99.

“The A buildings have had some really good values,” Riekse said. “Landlords have been giving rather good value deals to tenants so tenants can have a nice A space for a good rate and a good concession package.”

Transaction activity

A joint venture between two leading investment companies, Investcorp International Inc. and Golub & Company, purchased an 11-building portfolio in Lombard, according to NAI Hiffman. Totaling 427,290 square feet, the portfolio sold for $39.5 million and suggests that investors are starting to see value in suburban class B product. The portfolio consisted of single-story and multi-story buildings in Lombard’s Oak Creek Center office park.

Oak Brook-based medical group Advocate Health Care signed the largest new lease of the fourth quarter, leasing 134,984 square feet in the building known as Highland Landmark I in Downers Grove. The company has more than 150 neighborhood locations, including the Advocate Good Samaritan Hospital right down the street from its new space.

Other notable leases executed in the fourth quarter included Waste Management’s 40,030-square-foot expansion at 700 E. Butterfield Road in Lombard and EN Engineering’s 21,000-square-foot expansion at 28100 Torch Parkway, where the company now occupies approximately 105,000 square feet, according to the Studley report.

Studley’s report pointed out that C-suite executives hit the brakes on large lease commitments, renewing in many instances for five- or seven-year terms versus typical 10-year terms. While the market still has ample supply for small and mid-sized tenants, the quantity of large blocks dipped slightly. At year-end, there were just six blocks of available contiguous space of more than 100,000 square feet and several tenants in the market. If these blocks are absorbed in 2013, it is likely that future large tenants will have fewer options to consider.

Looking forward

Although more than 21 percent of the space in the East-West Corridor sits vacant, the area has witnessed one of the strongest recoveries among the suburban office markets, according to NAI Hiffman. The current vacancy rate is the lowest seen in five years and nearly all of the vacant space introduced to the market due to the recession has been absorbed.

“On the eastern end of the class A market in the Oak Brook area, I think we will get overall vacancy under 20 percent during 2013,” Riekse said. “I think that market will be the healthiest suburban market with rates potentially increasing and concessions being pulled back slightly.”

NAI Hiffman predicts that due to its desirable location at the heart of the Chicago metropolitan area and mix of product, the East-West Corridor will remain one of the most active suburban office markets.

Source: Brian Wasag – RE Journals

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