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The gap between buyers’ and sellers’ price expectations is slowing sales activity throughout the metro area, with
most of the deceleration being recorded in the suburbs. Buyers have been increasingly reticent to enter the suburban
office market because of weakening fundamentals; however, well-located, well-designed assets, particularly those in the
west and southwest employment corridors, will continue to garner interest. Investors with market knowledge and ele-
vated risk tolerance are seeking value-add properties in the Northwest Suburbs and O’Hare submarkets, where cap rates
are in the low- to mid-8 percent range. These areas offer convenient access to key arterial routes and have below-market
rents, creating upside potential. Opportunities to add value are rarer in the CBD, as the area consists primarily of Class
A space. These trophy assets, which have cap rates in the low- to mid-6 percent range, attract institutional buyers. The
small number of Class B/C offerings recently sold in the CBD have posted initial yields in the low-7 percent range.
0.1% Employment: Roughly 5,000 jobs are forecast to be cut in Chicago this year, a modest 0.1 per-
decrease in cent reduction that follows a gain of 0.5 percent in 2007. Office-using sectors are projected to
total
employment eliminate approximately 1,300 spots for a contraction of 0.1 percent.
2.6 million Construction: Completions are expected to reach nearly 2.6 million square feet in 2008, adding
square feet 1.1 percent to inventory. Last year, new construction totaled 1.2 million square feet, all of which
will be
completed was in the suburbs.
100 basis Vacancy: Reduced demand, driven by losses in the financial industries, is forecast to push
point vacancy up 100 basis points to 16.4 percent by year-end 2008. Weakening employment condi-
increase in
vacancy tions in the suburbs will account for most of this increase, as the CBD remains relatively healthy.
2.9% Rents: Decreasing occupancy will lead to slower rent growth this year. Asking rents are fore-
increase in cast to finish the year at $27.35 per square foot, rising 2.9 percent, while effective rents gain 1.9
asking
rents percent to $22.39 per square foot. Last year, asking and effective growth was 4.2 percent and
5.3 percent, respectively.
ECONOMY
◆ Job growth in Chicago has slowed to 0.5 percent during the past year with
Employment Trends
6% Nonfarm
the addition of 24,000 employees, down from a gain of 43,000 positions in the
Office-Using previous 12-month period.
Year-over-Year Change
4%
◆ Expansion in the professional and business services sector did not complete-
2% ly offset losses in the financial activities segment. As such, office-using
employment has contracted by 0.3 percent, or nearly 3,000 employees, over
0% the last 12 months.
-2% ◆ In the second quarter, several financial services companies throughout the
04 05 06 07 08* metro, including Wachovia, Freddie Mac and Bank of America, announced
* Forecast job cuts. Early estimates have total losses in these businesses at around 1,200
Sources: Marcus & Millichap Research Services, BLS, Economy.com
positions.
Office Completions ◆ Outlook: Roughly 5,000 jobs are forecast to be cut in Chicago this year, a
4 City modest 0.1 percent reduction that follows a gain of 0.5 percent in 2007.
Suburban
Office-using sectors are projected to eliminate approximately 1,300 spots for
Millions of Square Feet
2 CONSTRUCTION
1
CITY
◆ No new office space has come online in the CBD over the past 12 months,
0 although construction activity has accelerated recently.
04 05 06 07 08*
* Forecast
Sources: Marcus & Millichap Research Services, Reis ◆ Builders have 4.5 million square feet under way downtown. The largest proj-
ect slated for arrival this year is the first phase of Joseph Freed & Associates’
400,000-square foot Block 37 development. The project is more than 80 per-
cent pre-leased and is scheduled to be completed during the fourth quarter.
◆ Outlook: Developers are on pace to add nearly 780,000 square feet of office
space in the CBD this year. Deliveries are expected to accelerate in the com-
ing years, as 3.7 million square feet is scheduled for completion in 2009 and
more than 8.6 million square feet is planned. Some projects could be delayed,
Vacancy Rate Trends however, if the economy continues to cool.
24% City
Suburban
20% SUBURBAN
Vacancy Rate
◆ Outlook: Builders are expected to complete more than 1.8 million square feet
of office space in the suburban submarkets this year, following the delivery
of 1.3 million square feet in 2007.
Year-over-Year Change
sector has declined 200 basis points to 12.6 percent, while vacancy among 4%
Class B/C properties has fallen 110 basis points to 13.6 percent.
2%
◆ Asking rents climbed 3.8 percent during the last year to an estimated $30.69
per square foot in the second quarter, while effective rents gained 4.7 percent 0%
to $25.69 per square foot.
-2%
◆ Outlook: As slowing employment growth limits expansion plans downtown, 04 05 06 07 08*
vacancy is expected to rise 90 basis points to 13 percent by year-end 2008. As * Forecast
Sources: Marcus & Millichap Research Services, Reis
a result, asking and effective rent gains are forecast to slow to a still-healthy
3.3 percent and 2.4 percent, respectively.
SUBURBAN
◆ The average vacancy rate in the suburban submarkets has risen 80 basis
points during the past year to 19.3 percent. The area’s Class A properties
recorded a 30 basis point year-over-year uptick in vacancy to 20.1 percent,
while vacancy in Class B/C product increased 90 basis points to 19 percent.
Sales Trends
◆ Over the last 12 months, asking rents in the suburbs have advanced 3.4 per- $180 City
Suburban
◆ Outlook: While tenant demand is expected to grow going forward, supply $140
additions will place upward pressure on suburban vacancy rates through
2008. Vacancy in the suburbs is forecast to reach 20.1 percent this year, 110 $120
basis points higher than the rate at year-end 2007. Asking and effective rents
are anticipated to rise 2.2 percent and 1.1 percent, respectively. $100
04 05 06 07 08*
* Trailing 12-Month Period
SALES TRENDS** Sources: Marcus & Millichap Research Services, CoStar Group, Inc., RCA
CITY
◆ Fewer office listings in the CBD have pushed transaction velocity down 19
percent during the most recent 12-month period.
◆ Demand remains strong for city office assets, keeping the median price rela-
tively stable at $158 per square foot for the past two years. Cap rates have
risen over the last 12 months to the high-6 percent to low-7 percent range.
Medical Office Vacancy
◆ Outlook: Sales activity in the CBD will be heavily dependent on past operat- 14% Metro Area
United States
ing fundamentals and lease terms. Healthy investor interest will persist but
may be hampered by reduced offerings this year, placing mild downward 12%
Vacancy Rate
SUBURBAN
8%
◆ Transaction velocity in the suburban submarkets has decelerated 13 percent
year over year, as investors have shown increased wariness over office-using
6%
employment prospects. 04 05 06 07 08*
* 2Q Estimate
◆ The area’s median price has increased 2.4 percent to $137 per square foot dur- Sources: Marcus & Millichap Research Services, CoStar Group, Inc.
◆ Outlook: With cap rates increasing, owners may be inclined to list properties
to take advantage of current pricing. Local buyers are expected to intensify ** Data reflect a full 12-month period, calculated on
their interest in high-growth areas like the West submarket. a trailing 12-month basis by quarter.
◆ The Federal Reserve held the fed funds rate at 2 percent during its June meet-
ing. The Fed had cut the rate by 275 basis points since last September, but the
potential for inflation stemming from elevated food and energy prices
Alan L. Pontius remains a concern.
Senior Vice President, National Director
National Office and Industrial Properties Group ◆ Office mortgage originations in the first quarter were down 75 percent from
Tel: (415) 963-3000
apontius@marcusmillichap.com one year earlier and 21 percent below the previous quarter. Much of the
decline was driven by conduits, which recorded a 96 percent year-over-year
decrease in originations.
◆ The yield on the 10-year Treasury rose to 4.2 percent in June but has since
dropped to 4 percent. Through the rest of this year, the yield on the 10-year
Prepared and edited by
Josh Gisselquist
Treasury is expected to remain in the high-3 percent to mid-4 percent range.
Research Associate
Research Services
Tel: (602) 952-9669
jgisselquist@marcusmillichap.com
Chicago Office:
Greg LaBerge CITY SUBMARKET VACANCY RANKING
Sales Manager
glaberge@marcusmillichap.com Vacancy Y-O-Y Basis Effective Y-O-Y
8750 W. Bryn Mawr Avenue, Suite 650 Rank Submarket Rate Point Change Rents (psf) % Change
Chicago, Illinois 60631
Tel: (773) 867-1500
1 City North 5.2% 70 $17.04 0.6%
Fax: (773) 867-1510 2 City West 7.6% -50 $15.99 0.8%
3 River North 10.5% -80 $21.56 2.2%
Chicago Downtown Office:
John Przybyla 4 West Loop 11.1% -220 $29.33 9.9%
Regional Manager
5 Central Loop 13.3% -290 $25.51 5.7%
jprzybyla@marcusmillichap.com
333 W. Wacker Drive, Suite 200
Chicago, Illinois 60606
Tel: (312) 327-5400
Fax: (312) 327-5410
Notes: Employment growth is calculated using seasonally adjusted quarterly averages. Construction, rent and vacancy figures exclude build-to-suit, flex-space and medical office properties unless otherwise noted.
The information contained in this report was obtained from sources deemed to be reliable. Every effort was made to obtain accurate and complete information; however, no representation, warranty or guarantee, express or implied, may be made as to the accuracy or reliability of the informa-
tion contained herein. Sources: Marcus & Millichap Research Services, Bureau of Labor Statistics, CoStar Group, Inc., Economy.com, Property & Portfolio Research, Real Capital Analytics, Reis, Torto Wheaton Research Services.