Chicago Suburbs on Record Investment Pace

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Last year marked the third consecutive year of suburban investment transaction volume in excess of $1 billion—a post recession record. 2015 ended the year with 34 properties trading for $1.4 billion (including portfolio transactions), the highest total since 2007.

The majority of total investment volume was concentrated in well-located, core properties—such as the sale of One O’Hare Center for $83 million in October—which accounted for 55 percent of gross sales volume on the year.

The spread in cap rates for stabilized, core opportunities in the CBD and suburban markets remains at a historically wide level, and investors are slowly beginning to recognize this disconnect and moving to capitalize on it.

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Suburban office investment is on a torrid pace. One O’Hare Center sold for $83M in October of last year, achieving more than $200 PSF.

“Investors seeking opportunities in the suburban market are primarily focused on the highest-quality properties in the best locations,” said Paul Lundstedt, executive vice president at CBRE. “These groups recognize the superior risk-adjusted returns that can be achieved in high-quality suburban assets relative to investment opportunities in the CBD market.”

Robust positive net absorption and job growth

Net absorption has been a very positive story in the suburbs dating back to 2012. The close of 2015 brought the seventeenth consecutive quarter of positive absorption in suburbs. Overall, the year was very positive, recording 873,686 square feet of absorption in total, and, 479,474 square feet in the fourth quarter alone, a 202 percent year-over-year increase.

Jobs have been another strong selling point in the Chicago suburbs, accounting for 66 percent of the region’s office-using job growth since 2011. Since the beginning of 2011, the suburban market has added 70,928 office-using jobs, while the CBD market has added 36,498 office-using jobs.

“Investors are typically surprised by these statistics as they run contrary to many of the headlines regarding companies relocating to the CBD market,” said Dan Deuter, senior vice president at CBRE. “We expect 2016 to be another strong year of net absorption in the suburban market.”

Because of all of the leasing activity and positive trends in the suburbs right now, more properties, particularly larger, trophy assets, are expected to hit the market in 2016, as owners see the climate as favorable to monetize their investments.

Currently, there are 16 properties being marketed for $866 million.

“There is no new speculative supply under construction in suburban Chicago and demand has been robust for four consecutive years, yet yields for suburban office are at historically wide levels,” said Deuter.  “We see this as a pricing dislocation in the market and investors are intrigued by this opportunity.”

As evidence of this trend, several investment transactions (i.e. One O’Hare Centre, Corporate 500, etc.) closed during 2015 at over $200 per square foot, a threshold that has not been cleared since the Great Recession.

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