Market Trends in Chicago

With the national unemployment edging towards 8%, commercial real estate executives are hoping that this points towards better times ahead.  According to CoStar, the Chicago office vacancy rate fell to 14.8% in the fourth quarter 2011, down from 15% in the third  quarter.  Respondents to a Real Estate Roundtable Economic Survey found that, “industry executives’ expectations for growth this year are improved, but hindered by concerns about underlying macroeconomic and political risks”. 

What does this mean for office tenants? Building owners are starting to pull back on concessions such as free rent and tenant improvement allowances while being more conservative with increases in asking rent.  If the unemployment rate keeps on dropping ( Bureau of Labor expects the rate to be mid 7% by November) we could see asking rents going north quickly.  In other words, if’ you’re considering a move or lease renewal in the next twelve months, now may be the time to act.

Update on Proposed Accounting Rules

https://byobroker.wordpress.com/2011/08/18/chages-to-accounting-standards-will-affect-office-leases/

In a developing story (and a follow up to our Aug 11 post here ), the International Accounting Standards Board (IASB) is preparing a draft of proposed accounting changes that may have a dramatic effect on commercial real estate lessees, owners and investors.  The new rules call for companies to capitalize office and equipment leases as long term liabilities that diminish over time.  While this may bring US accounting standards more in line with international norms, it would also have the effect of increasing balance sheet liabilities and reducing access to capital.  From a commercial real estate perspective, signing a long term lease would negatively affect the amount of credit available to a company.  Shorter term leases usually mean higher rental rates, effectively raising the operating costs for a business.  Landlords, while getting higher rental rates, would see their property lose value as a building full of short term leases is not as valuable as one with long term leases.

Free Chicago Office Market Report

At BYOBroker we know that information is power, and our mission is to provide our clients with the same information that professional commercial real estate brokers use.  In the same spirit, another brokerage house, Jones Lang LaSalle, recently published a free report that gives commercial office tenants a chance to see behind the curtain of the Chicago office market.  The report features information on average rental rates and vacancies for 54 downtown buildings and shows vacancy on a floor by floor basis.  It also provides an analysis of occupancy trends by building class (A,B and C) as well as their take on where the market is and where it’s headed.  For a free copy, send an e-mail request to: Chicago.Skyline@am.jll.com

JLL Graphic

For more information see David Roeder’s article in today’s Sun-Times: http://www.suntimes.com/business/roeder/10943558-452/take-a-peek-at-where-chicago-office-space-rentals-are.html

Mid Year Office Leasing Report

CoStar released its Mid Year Office Leasing Report today and you can find it here.  Among its conclusions were that despite 1) slower than expected job growth, 2) concern about the U.S. debt-ceiling crisis and 3) the European debt crisis, the office leasing market continues to make improvements.  While this seems counter-intuitive, given that the unemployment rate still stands at 9.2%, they cite businesses “gradually add(ing) workers and absorb(ing) space” as contributing factors.

Their data shows tenants “trading up” spaces in the down market.  With the price of Class A space 10% lower than in 2008, many businesses are taking this opportunity to improve their image.  This is reflected in an uptick in vacancy of Class B buildings. 

The report goes on to conclude that if companies start expanding again, office rents may start increasing ahead of demand growth.  These speculative increases in rental rates would reflect landlord’s hope that the lack of new development (of office space) will support the higher rates, despite the data from the New York market which shows that an increase in rental rates (7.3%) resulted in negative absorption (of space) around 1 million square feet. 

Another conclusion that landlords probably aren’t thrilled about is that the number of square feet per employee is dropping precipitously.  From 2003-2008, for each new employee added, companies increased their office footprint by approximately 233 sq ft.  Reflecting changes in the way offices operate–including “hoteling”–this number is now just 88 sq ft.  

If you have any questions on this report or how it translates into negotiable information,  contact me at stuart@byobroker.com.

Downtown vacancy lowest since end of 2009?

Faithful BYOBlog readers (okay, I’m hoping the masses will find this site soon), when you see headlines like this you can be sure of two things:

1) You need to read the details, where you will find that although direct vacancy for downtown space dropped to 14.5% from 14.9% in the second quarter, most of the demand for new space was driven by a handfull of firms like Groupon and McKinsey & Co, as opposed to broader demand from small to medium sized firms, which would signal a more optimistic outlook

2) This is little like putting a bow on a pig.  While Net Absorbption, which measures the change in leased and occupied space from quarter to quarter, was positive for the fourth quarter in a row (549,090 sq ft), the positive trend seems limited to Class A buildings.  Class B buildings actually saw vacancy edge up, while Class C buildings had a small drop.  The general concensus is that there is still downward pressure on demand for office space.

The takeaway from this article is that landlords are looking for any good news to signal a bottom on rental rates.  When tenants approach them without a broker—or BYOBroker–they can justify higher rates with articles like these.  Without the credible market information we provide, you will be negotiating on heresay which in the end will cost you dearly.