Can The Suburbs Withstand the Pull of the CBD?

Another crop of major firms chose to move to the CBD in the third quarter, driving the vacancy rate down 20 bps to 12 percent, the lowest it has been since 2008. Positive absorption was recorded at 268,627 square feet.

DirectVacancyRate&GrossWeightedRate-(Downtown-PG2)

Kraft, ConAgra, Motorola Solutions and several other firms all took significant space, making moves downtown from the suburbs. In the case of ConAgra, the firm moved its Chicago-area operations from Naperville to the Merchandise Mart, and, soon after announced it would be relocating its corporate headquarters from Omaha to its new CBD location.

“While downtown rents are higher than the suburbs, the risk of potentially not attracting the right talent in the suburbs continues to outweigh the increased occupancy costs downtown,” said Jon Milonas, First Vice President with CBRE.  “In addition, companies are using space more efficiently, which means that more people are working in a smaller square footage.  Suburban parking garages and lots weren’t built for this type of density.  When our clients study the costs to build a parking garage versus higher rents downtown, the downtown options are proving to be quite compelling.”

Significant expansions took place as well, with Groupon and Yelp both renewing and expanding their space at 600 W. Chicago and the Merchandise Mart.

All of this activity has emboldened landlords to push rental rates as tenants currently have few options on the market. Average rates rose $.48 PSF to $36.19.

However, with a flush of new construction set to hit the market in 2017, the tables may be turning in the tenants favor as the market will see 6.6 million square feet of new and shadow space hit the market.

“The next 12-18 months will likely continue to be a landlord’s market with rental rate increases continuing and high competition for space, but the upcoming supply in 2017 will likely drive a shift in the favor of tenants starting in the third quarter of 2017 once the majority of the shadow space hits the market,” said Milonas.

Download the Q3 downtown office report here.

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2 Responses to Can The Suburbs Withstand the Pull of the CBD?

  1. Anonymous says:

    While it is true that there have been over 3 million square feet of prominent firms that have decided to move downtown recently, class A product in suburbs are still healthy. Here are some facts that people need to understand to put this all in perspective.

    – The suburban market totals 107 million square feet, the CBD market is 128 million square feet.
    – The entire suburban market has absorbed 394,000 square feet year to date. The entire CBD market has absorbed 275,000 square feet year to date.
    – The Class A suburban market has absorbed 560,000 square feet year to date. The Class A CBD market has absorbed 90,000 square feet YTD.
    -The Class A suburban market is 13% vancant, compared to Class A downtown at 12%.
    – Since 2012, the entire suburban market has absorbed 3.8 million square feet. Over the same period of time the CBD market has absorbed 1.9 million square feet.
    – According to the Illinois Department of Employment Security, since 2011, 72,000 office using jobs have been created in the suburbs. During the same period of time, the CBD market has created 25,000 office using jobs.
    – There is zero square feet being built on a speculative basis in the suburbs. In the CBD, there is 2.6 million square feet of speculative product under construction.

    The downtown market is healthy across all classes and is benefiting from firms looking to attract young talent. Also, the new supply is a fraction of that built in past development cycles and has experienced strong preleasing activity. However, people need to understand that functional buildings in the suburbs are exhibiting strong demand and have no new supply to compete with.

    The key to understanding the suburban market is focusing on the difference between Class A product and everything else. The B and C market is currently 22% vacant which is largely driven by functional obsolesence and deferred maintenance. Class A buildings are not competing with this product and rents are growing.

    Like

  2. CBRE Chicago says:

    Thank you for the excellent insights. Vantage Point posted on the subject of Class A suburban properties a few days ago. We would love your thoughts/comments on this piece as well.
    https://cbrechicago.com/2015/10/28/suburban-resurgence-apparent-in-class-a-properties/

    Like

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