Research & Forecast Report DOWNTOWN CHICAGO | OFFICE Third Quarter 2017
Supply Outpacing Demand Robert Patterson Research Analyst | Downtown Chicago
Chicago’s downtown office market Market Indicators Q3 2016 Q2 2017 CURRENT posted another stable quarter of VACANCY 11.2% 12.7% 12.7% demand during the third quarter of QTR ABSORPTION 841,235 -386,469 245,552 the year. With 245,552 square feet YTD ABSORPTION 920,856 30,262 275,814 of positive net absorption, the CBD’s RENTAL RATE $37.33 $38.95 $39.22 vacancy rate remained unchanged at 12.7 percent, as the positive demand was offset by the delivery of vacancy rate should reside closer to its historical equilibrium of approximately 287,000 square feet 13.2 percent, as tenants’ options for space continue to increase with supply. Considering the Fulton Market submarket will deliver of new supply delivered to the Fulton two additional speculative developments in the second half of Market submarket. At 12.7 percent, 2018 that will add approximately 266,000 square feet to the submarket with minimal preleasing at the moment, and the Old the CBD’s vacancy rate remains at its Main Post Office is slated to deliver a whopping 2.5 million square highest point in more than two years. feet to the market in 2019, the CBD’s market will likely continue to The delivery of approximately 2.6 shift in favor of tenants over the next 24 months. million square feet to the market over Trends the past 10 months has pushed the While leasing activity remains strong throughout the CBD, the vacancy rate up 145 basis points. amount of large leasing activity, or leases signed in excess of 40,000 square feet, diminished during the third quarter. The While the CBD remains a landlord’s market, tenant demand has continued trends of traditional users downsizing into more not met the recent influx of supply and will be hard-pressed to efficient spaces while younger technology companies continue to keep up with an additional 1.25 million square feet that will hit expand remained prevalent, as Northern Trust signed a lease to the market by June 2018 when The John Buck Company’s new relocate from multiple locations into 468,000 square feet at 333 807,000-square-foot tower at 151 N. Franklin and White Oak S. Wabash in what the company described as “part of its ongoing Realty’s 435,000-square-foot development at 625 W. Adams focus to drive efficiency.” GATX announced it will decrease its deliver to the market. The buildings are currently a combined footprint by approximately 30,000 square feet in a move to occupy 35 percent preleased with tenants shrinking their footprints in 90,000 square feet at the Willis Tower, while software producer relocations to the new developments. By mid-2018, the CBD’s Relativity (formerly kCura) signed a lease to expand its space at 231 S. LaSalle by 46,219 square feet. Trends (continued)
Investment sales activity within the CBD is gaining momentum after a sluggish first half of the year. While only three properties traded during the third quarter, five additional properties are expected to close during the fourth quarter, including the sale of 401 N. Michigan Avenue – with the new Apple Store on its property – to Walton Street Capital for approximately $366 million ($484.77/SF). Prudential Plaza is expected to sell in the fourth quarter to local developer Sterling Bay for approximately $680 million ($308.78/SF). Despite the increased investment sales activity expected as the year ends, the CBD is unlikely to match the rapid investment sales activity it has enjoyed throughout 2015 and 2016, as the increasing interest rate environment, transitioning office market, and high-pricing achieved in recent sales offer potential buyers few opportunities to attain strong yields in the short term. Despite the limited number of investment sales transactions, Blackstone’s recently announced $500 million-dollar investment to revamp the Willis Tower, 601W Companies ongoing $500 million-dollar rehabilitation of the Old Post Office, and Sterling Bay’s massive land acquisitions in the Clybourn Corridor illustrate investors optimism in Chicago’s long-term health.
Leasing & Sale Highlights
Large leasing activity decreased during the third quarter, as the CBD posted six lease transactions larger than 40,000 square feet, making it the weakest quarter on a transactional volume basis since the third quarter of 2016. Despite the muted large leasing activity, Northern Trust signed a lease to occupy approximately 462,000 square feet of the space CNA Financial will vacate at 333 S. Wabash. This deal will prove unusually important for Chicago’s market in the coming years, as it will help the market cope with the massive negative absorption set to occur when CNA Financial vacates its current space of 750,000 square feet in June 2018 and moves into approximately 300,000 square feet at its new tower located at 151 N. Franklin. As CNA is set to vacate a much larger space than the one it will occupy, the market’s vacancy rate would have been driven much higher without Northern Trust stepping in to backfill CNA’s space. Provided that Northern Trust is relocating from a location outside of the CBD’s inventory, no other submarket will suffer due to Northern Trust’s relocation. The market’s other major lease transaction of the quarter was WPP’s announcement that it will occupy 253,000 square feet of a proposed office development that developer Sterling Bay will build at 331 N. Halsted in the Fulton Market. The deal indicates that another development of at least 500,000 square feet will break ground in the Fulton Market submarket, and that the development will have large blocks of space available to other users, unlike McDonald’s build-to-suit in the submarket.
Investment sales activity within Chicago remained steady during the third quarter, with three properties trading during the quarter and five others nearing sales. Boston-based Beacon Capital Partners continued its spending spree in Chicago, purchasing 231 S. LaSalle from Michael Silberberg for $165 million ($176.13/SF), while investors continued to demonstrate strong demand for loft-office space as 213 W. Institute Place was purchased by KBS Realty Advisors for $43.5 million ($254.39/SF). After many of Chicago’s strongest Class A assets traded throughout 2015 and 2016, investors are beginning to target more Class B and C options throughout the CBD, as six of the eight properties that either sold or are likely to sell in the near future are Class B assets with strong locational attributes. The fourth quarter should increase the number of Class A sales on the year, as the sales of 401 N. Michigan Avenue and Prudential Plaza are expected to close, but 2017 will not come close to matching the overall investment sales activity the city experienced over the past two years. While investors will continue to remain attracted to the significant discount in pricing Chicago’s assets offer relative to their counterparts on the coasts, the rising interest rate environment, record-pricing of CBD assets and softening local market will likely ensure that the most active period of investment sales activity of this cycle is in Chicago’s past.
Outlook
Looking ahead, fundamentals suggest that both tenants and landlords feel confident in the future despite the risks sizeable local and state budget deficits, further interest rate increases, and local crime rates pose to Chicago’s market. Continued corporate migration into the CBD will be a key factor moving forward as approximately 2 million square feet of Class A product is set to hit the market by the end of 2018 and many traditional tenants are actively working to downsize their spaces to reduce costs. As the additional space hits the market, followed by the delivery of an additional 2.5 million square feet in 2019 when the Old Main Post Office’s rehabilitation is completed, it is hard to imagine a scenario where tenant demand can keep up with supply barring major relocations into the CBD from out of the market. Despite momentum moving in tenants’ favor, Chicago’s downtown office market appears to have a bright future as companies remain attracted to Chicago’s diverse local economy, talented labor pool, and world-class infrastructure.
2 Research & Forecast Report | Third Quarter 2017 | Downtown Chicago / Office | Colliers International Statistical Highlights Net Absorption & Vacancy | Chicago CBD Office Market The CBD posted 245,552 square feet of positive net absorption during the third quarter, bringing the total amount of net 1,600,000 14.5% 1,463,456 14.2% absorption since the beginning of the year to 275,814 square 1,400,000 1,319,108 14.0% feet of positive demand. Tenant flight to quality remains strong, 1,200,000 13.8% 1,600,000 14.5% 1,463,456 13.5% as the CBD’s Class A Inventory has posted 464,036 square Vacancy 1,000,000 14.2% 13.4% 932,682 1,400,000 feet of positive net absorption throughout 2017, while its Class 1,319,108 790,152 794,246 14.0% 800,000 13.0% 1,200,000 13.8% 12.8% B and C assets have reported 9,318 square feet of positive 578,831
Square Footage 12.7% 600,000 13.5% 12.5% Vacancy demand and 197,540 square feet of negative demand over 1,000,000 13.4% 932,682 400,000 790,152 794,246 275,814 the same period. Additionally, tenants continue to flock to the 800,000 12.0% 13.0% 11.9% 200,000 12.8% 11.9% West Loop from the older inventory base of the Central Loop, 578,831 Square Footage 600,000 12.7% 0 11.5% 12.5% as the West Loop submarket has posted 833,206 square feet of 2011 2012 2013 2014 2015 2016 2017 400,000 35 positive absorption over the last nine months, while the Central Absorption Vacancy 275,814 12.0% Loop has reported 739,470 square feet of negative demand 200,000 31 11.9% 11.9% Source: CoStar,30 Colliers International Research 27 over the same period. 0 26 26 11.5% 25 2011 2012 2013 2014 2015 2016 2017
Absorption Vacancy The average direct asking rental rate in the CBD currently 20 19 17 resides at $39.22 per square foot gross, up from $38.95 per $50.00 15 square foot in the second quarter. Despite the mild increase $45.00 Number of Sales 13 across the CBD’s aggregate asking rate, the CBD’s Class A $40.00 10 9 $35.00 inventory reported the first decrease in its average asking rates Asking Gross5 Rental Rates | Chicago CBD Office Market $30.00 since 2013, as the average direct asking rate among Class A $50.00 $25.00 0 assets decreased by $0.13 per foot during the quarter, landing $45.00$20.00 2010 2011 2012 2013 2014 2015 2016 2017 at $44.73 per foot gross. As the Class A inventory asking rental $40.00$15.00 Class A Class B Class C rate is now three cents lower than that reported during the first $35.00$10.00 quarter of the year, the explosive rental growth the CBD’s Class $30.00$5.00 $0.00 A inventory has experienced over the past three years appears $25.00 2011 2012 2013 2014 2015 2016 2017 to be over, giving way to a flattened rental rate environment. $20.00 Class A Class B Class C Average Given the shifting landscape of the market away from landlords $15.00 4,000,000 $10.00 3,652,913 control and towards historical equilibrium, rents across all asset 3,500,000 $5.00 classes are expected to flatten through the end of the year. 3,000,000 $0.00 2,500,0002011 2012 2013 2014 2015 2016 2017 Large Blocks of Availability 2,000,000 1,892,460Class 1,897,981 A Class B Class C Average 1,504,364 1,572,332
Square Footage 1,500,000 Source: CoStar, Colliers International Research 1,081,702 933,710 1,000,000 Contiguous blocks of space available on a direct basis decreased 665,000 479,000 531,190 by three during the third quarter of 2017, bringing the total 500,000 0 0000 0 available to 27 such blocks. Large block composition currently 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 YTD resides at 20 Class A blocks and seven Class B Blocks.
The largest block of contiguous space available on a direct Submarket Vacancy Rates | Chicago CBD Office Market basis exists at 625 W. Adams Street as the building is being developed on speculation, meaning that it has broken ground 15.0% 14.1% 13.2% 13.5% 13.5% 12.9% 12.6% on construction despite having yet to attain any preleasing. 12.1% 12.5% 11.3% 11.6% Therefore, the entire 432,709 square foot development is 9.7% ) 10.0% 9.4% 9.4% 8.6% currently the largest block of contiguous space available in the (% 7.5% city, followed by a 363,204-square-foot block of space at 311 Vacancy W. Monroe and a 322,223-square-foot block of space at the 5.0% Aon Center.
0.0% The number of high-rise view spaces that are available in top- Central Loop East Loop North Michigan Ave. River NorthWest Loop tier assets has diminished over the past few years, however, 2015 2016 2017 the new development at 151 N. Franklin has a 257,016-square- foot block of space available between the 26th and 35th floors, Source: CoStar, Colliers International Research and the Aon Center has a 322,223-square-foot block of space available for mid-2018 occupancy between floors 32 and 42.
4,000,000 30
3,500,000 3,698,756 25 3,000,000 20 2,500,000 2,525,051 3 Research & Forecast Report | Third Quarter 2017 | Downtown2,000,000 Chicago / Office | Colliers International15
1,500,000 1,698,445 9 10 1,000,000 445 500,000
0 0 As of 1Q - 2015 As of 1Q - 2016 As of 1Q - 2017
SF of Transactions # of Transactions Construction
There are currently seven office developments underway Large Block Availabilities | Chicago CBD Office Market throughout the CBD, ranging from Fulton Market speculative developments consisting of 63,000 square feet, to the John 100,000+ square feet Buck Company’s 807,000-square-foot trophy tower at 151 N. BUILDING CLASS SIZE (SF) FLOOR TYPE Franklin. Following the recent deliveries of 150 N. Riverside, 444 W. Lake, and 1330 W. Fulton, Chicago’s construction outlook CENTRAL LOOP has been substantially altered, as each of those developments 203 N. LaSalle A 277,349 14-20 Direct had healthy preleasing activity prior to their deliveries, while the 2 N. LaSalle A 232,757 Mezz- Direct pipeline of buildings currently set to deliver by the end of 2018 11 has a combined 48 percent of its aggregate space consisting of 125 S. Clark B 195,812 5-12 Direct approximately 2 million square feet preleased, meaning it could 222 N. LaSalle A 164,926 3-6 Direct significantly shift the market in favor of tenants if developers are 175 W. Jackson A 162,130 18-20 Direct unable to secure meaningful preleasing in the coming months. 175 W. Jackson A 133,071 11-12 Direct Notably, White Oak Realty’s 435,000-square-foot development at 1 S. Dearborn A 106,624 14-17 Direct 625 W. Adams Street has yet to secure any preleasing despite EAST LOOP being a mere six months away from delivery. If the building 200 E. Randolph A 322,223 32-42 Direct delivers unoccupied, it will cause the CBD’s vacancy rate to rise approximately 30 basis points past its current two year high of 401 S. State B 166,205 4-6 Direct 12.7 percent. 233 N. Michigan B 143,067 22-25 Direct 200 E. Randolph A 131,268 68-71 Direct Construction is well underway at the John Buck Company’s new 333 S. Wabash B 113,864 21-24 Direct 35-story office tower at 151 N. Franklin in the West Loop. The NORTH MICHIGAN AVENUE development has secured anchor tenants CNA Financial and law firm Hinshaw and Culbertson to leases for approximately ------300,000 square feet and 130,000 square feet, respectively. 151 RIVER NORTH N. Franklin will deliver 807,355 square feet to the market in June 222 Merchandise Mart B 153,900 4-5 Direct 2018 and will look to land another large anchor tenant throughout WEST LOOP 2017, as it is currently 53 percent preleased. 625 W. Adams A 432,709 7-20 Direct 311 W. Monroe B 363,204 2-15 Direct Class A Large Blocks | Chicago CBD Office Market 151 N. Franklin A 257,016 26-35 Direct 300 S. Riverside Plz A 238,505 2-6 Direct 20 71 S. Wacker A 214,069 9-17 Direct large direct blocks of CBD 200 W. Monroe B 161,287 7-12 Direct Class A space 550 W. Jackson A 144,207 2-7 Direct consisting of 500 W. Madison A 141,404 8-10 Direct 3,683,214 222 W. Adams A 139,034 5-8 Direct square feet 30 S. Wacker A 129,216 31-35 Direct 12 123 N. Wacker A 121,428 23-30 Direct large blocks of 227 W. Monroe A 116,934 54-58 Direct West Loop 111 S. Wacker A 112,052 12-16 Direct Class A space 444 W. Lake A 106,292 44-49 Direct consisting of 2,152,866 square feet
4 large blocks of West Loop Class A space consisting of 609,458 square feet
4 Research & Forecast Report | Third Quarter 2017 | Downtown Chicago / Office | Colliers International Construction (continued)
A separate West Loop mid-rise office tower is well underway after a joint venture of White Oak Realty Partners and Vanderbilt Investment Investment Sales Activity | Chicago CBD Office Market Properties secured a $97.2-million-dollar construction loan to break 35 ground on a new 20-story, 434,931 square foot office building 31 at 625 W. Adams Street during the second quarter of 2016. The 30 26 26 27 development broke ground on speculation, and has yet to secure any 25 preleasing commitments from tenants. With the building’s delivery 20 19 scheduled for April 2018, the developer is in serious risk of the 17 35 15 building delivering to the market without landing an anchor tenant. Number of Sales 31 13 30 10 9 26 26 27 Developer Sterling Bay currently has multiple developments under 25 construction in the rapidly emerging Fulton Market, as construction 5 20 19 continues on a 608,000-square-foot build-to-suit at 110 N. Carpenter 0 17 2010 2011 2012 2013 2014 2015 2016 2017 15 that will be the future home of the McDonalds Corporation’s Global Number of Sales Class A Class B Class C 13
Headquarters upon in completion in mid-2018. Additionally, the 10 9 developer broke ground on a 12-story, 203,000-square-foot office Source: CoStar, Colliers International Research development at 210 N. Carpenter during the third quarter. The 5 developer has secured construction giant Leopardo to occupy 0 2010 2011 2012 2013 2014 2015 2016 2017
23,000 square feet, or one full floor, of the development and will Class A Class B Class C 4,000,000 rely on strong tenant demand for office space in the Fulton Market 3,652,913 3,500,000 neighborhood to attract additional tenants prior to its delivery in 3,000,000
October 2018. 2,500,000
2,000,000New Construction1,892,460 1,897,981 | Chicago CBD Office Market 1,504,364 1,572,332
Rehabilitation work on the Old Main Post Office continued during the Square Footage 1,500,000 1,081,702 933,710 1,000,0004,000,000 third quarter of 2017, continuing one of the largest redevelopment 665,000 3,652,913 479,000 531,190 projects in the country. New owner 601W Companies has announced 500,0003,500,000 0 0000 3,000,0000 plans to pour $500 million into the 2.7-million-square-foot 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2,500,000 building, which has remained empty and decaying since 1995. This YTD 2,000,000 1,892,460 1,897,981 1,504,364 1,572,332 redevelopment is transforming the property into an office building Square Footage 1,500,000 1,081,702 933,710 1,000,000 consisting of approximately 2.5 million square feet, and is slated to be 665,000 479,000 531,190 completed in 2019. The renovations include replacing the building’s 500,000 0 0000 15.0% 0 14.1% existing mechanical systems, removing asbestos, fixing the building’s 13.2% 13.5%2003 2004 2005 2006 2007 2008 2009 2010 2011 201213.5% 2013 2014 2015 2016 2017 12.9% 12.6% 12.1% 12.5% YTD façade, and several other significant capital-intensive projects. The 11.3% 11.6% Source: CoStar, Colliers International Research9.7% landlord is currently courting several of the city’s largest tenants, and) 10 .0% 9.4% 9.4% 8.6% (% will look to secure significant preleasing commitments over the next 7.5%
several years. Vacancy 5.0% 15.0% 14.1% 13.2% 13.5% 13.5% 12.9% 12.6% 12.1% 12.5% 11.3% 11.6% 0.0% 9.7% ) 10.0% 9.4% 9.4% Central Loop East Loop North Michigan Ave. River No8.6%rthWest Loop (% 7.5% 2015 2016 2017 Vacancy 5.0%
0.0% Central Loop East Loop North Michigan Ave. River NorthWest Loop
2015 2016 2017 4,000,000 30
3,500,000 3,698,756 25 3,000,000 20 2,500,000 2,525,051 2,000,000 15
1,500,000 1,698,445 9 10 1,000,000 4,000,000 30 445 500,000 3,500,000 3,698,756 25 0 0 3,000,00As0 of 1Q - 2015 As of 1Q - 2016 As of 1Q - 2017 20 2,500,000 SF of Transactions # of2, 5Tr25,051ansactions 2,000,000 151 N FRANKLIN15 STREET RENDERING 1,500,000 1,698,445 9 10 1,000,000 445 500,000
0 0 5 Research & Forecast Report | Third Quarter 2017 | Downtown ChicagoAs of 1Q -/ 2015 OfficeAs of 1Q| - 2016 ColliersAs ofInternational 1Q - 2017 SF of Transactions # of Transactions Significant Lease and Sale Activity
Chicago CBD Office Leasing Activity – 3Q 2017
TENANT BUILDING SUBMKT CLASS SIZE (SF) DEAL TYPE Scor Reinsurance 233 S. Wacker WL A TBD Renewal Northern Trust 333 S. Wabash EL B 462,000 New Lease WPP Group Coyne College Site FM A 253,000 New Lease Quarles & Brady 300 N. LaSalle RN A 100,000 Renewal/Expansion GATX 233 S. Wacker WL A 90,000 New Lease kCura 231 S. LaSalle CL B 46,219 Expansion Spaces 159 N. Sangamon FM A 39,723 New Lease Belvedere Trading 10 S. Riverside WL A 36,648 Renewal The Marketing Store 55 W. Monroe CL B 36,000 Renewal/Expansion Trunk Club 333 W. Ohio RN B 30,286 Expansion CL = Central Loop EL = East Loop NMA = North Michigan Avenue RN = River North WL = West Loop FM = Fulton Market
6 Research & Forecast Report | Third Quarter 2017 | Downtown Chicago / Office | Colliers International Significant Lease and Sale Activity (continued)
Chicago CBD Office Investment Sales – 3Q 2017
STATUS ADDRESS SUBMKT CLASS SIZE (SF) SALE PRICE PRICE/SF SELLER BUYER S 500 N. Michigan NMA B 324,027 $87,000,000.00 $268.50 Macerich Co Schapira Family, David Bossy S 231 S. LaSalle CL B 936,800 $165,000,000.00 $176.13 Michael Silberberg Beacon Capital Partners S 213 W. Institute Place RN C 171,000 $43,500,000.00 $254.39 Ameritus, Alcion Ventures KBS Realty Advisors P 730 N. Franklin RN C 92,000 $23,300,000.00 $253.26 American Asset Feil Organization Management Services P 300 N. Elizabeth, 316 FM B 166,000 $43,000,000.00 $259.04 Sterling Bay Alvarez & Marsal N. Elizabeth, 320 N. Elizabeth P 1-33 S. State EL B 745,106 $180,000,000.00 $241.58 Madison Capital, KKR 601W Companies P 130 E. Randolph, 180 N. EL A 2,202,199 $680,000,000.00 $308.78 601W Companies Sterling Bay Stetson P 401 N. Michigan NMA A 761,164 $350,000,000.00 $459.82 Zeller Realty Walton Street Capital FS 1 S. Dearborn CL A 828,838 TBD TBD Olen Commercial Realty TBD Corporation FS 875 N. Michigan Ave NMA A 980,000 TBD TBD Hearn Co. TBD FS 209 W. Jackson WL B 143,000 TBD TBD Farbman Group TBD FS 225 W. Wacker WL A 650,812 TBD TBD Mirae Asset Global TBD Investments FS 105 W. Adams CL C 314,855 TBD TBD Crown Commercial Real TBD Estate & Development FS 625 N. Michigan NMA B 290,000 TBD TBD CIM Group/Golub TBD FS 161 N. Clark CL A 1,068,877 TBD TBD CBRE Global Investors TBD FS 35 W. Wacker CL A 1,118,042 TBD TBD UBS TBD FS 111 N. State EL B 700,000 TBD TBD The Macy's Department TBD Stores Company FS 220 N. Green St FM B 90,000 TBD TBD Shapack Parnets, TBD A.J. Capital Partners, Shorenstein Properties S = Sold P = Pending FS = For Sale
7 Research & Forecast Report | Third Quarter 2017 | Downtown Chicago / Office | Colliers International CLARK WILLOW
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FULTON WACKER Submarket HighlightsSOUTH WATER & Forecast
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WALLACE 24TH 24TH
NORMAL 24TH PL 24TH PL Stevenson Expwy CORBETT 55 KING DR 200,000 square feet over the next nine months, it will rely on its newfound ability to lure technology-centric users looking for Net Absorption & Vacancy | Central Loop Office Market large, efficient floorplates and tenant-friendly lease terms to fill spaces vacated by large users. 1,000,000 16.0% 1,000,000 826,059 16.0% 800,000 14.2% 14.3% 14.0% 14.2% 826,059 14.0% 800,000 13.2% Looking ahead, the Central Loop submarket will rely on its 600,000 14.0% 14.2% 14.2% 14.3% 14.0% 12.1% 1213.2.0%% tenant-friendly rental rates and aggressive concessions 600,000400,000 314,77511.3 % 12.1% 12.0% 10.0% packages relative to the West Loop and River North to attract 400,000200,000 314,77511.3 % Vacancy 67,687 31,387 10.0% and retain large office users. The sustained growth of the 200,0000 8.0% Vacancy 67,687 31,387 (50,908) -200,000 (92,776) submarket’s emerging technology community, highlighted by 0 6.0% 8.0% Square Footage -400,000 (50,908) the recent leases of Snapsheet and ActiveCampaign at 1 N. -200,000 (92,776) 4.0% 6.0% Square Footage -600,000 Dearborn, will prove vital to its health moving forward. -400,000 2.0% -800,000 (739,470) 4.0% -600,000 Statistical Highlights -1,000,000 0.0% 2.0% -800,000 2011 2012 2013 2014 2015 2016 2017 (739,470)
-1,000,000 Absorption Vacancy 0.0% The Central Loop’s aggregate vacancy rate increased by 40 2011 2012 2013 2014 2015 2016 2017 basis points during the third quarter, landing at 13.2 percent. Source: CoStar, Colliers International Research The submarket’s Class A inventory was responsible for the Absorption Vacancy overall increase, as Class A vacancy rose 90 basis points to
13.2 percent during the quarter. Amidst the Class A vacancy $50.00 increase, which was driven by Cars.com’s move out of the Asking$45.00 Gross Rental Rates | Central Loop Office Market submarket, demand across Class B and C inventory was $50.00$40.00 stagnant, posting 8,271 square feet and 26,222 square feet of $45.00$35.00 $30.00 negative net absorption, respectively. $40.00 $25.00 $35.00 The direct average asking rent in the submarket currently $20.00 $30.00 resides at $37.56 per foot gross, down slightly from $37.61 $15.00 $25.00 posted in the second quarter of the year. The rental rate $10.00 $20.00 decrease was driven solely by the submarket’s class A assets, $5.00 $15.00 reporting a $0.47 cent decrease in direct average asking rent $0.00 2011 2012 2013 2014 2015 2016 2017 $10.00 per square foot. Rental rates within the submarket are likely to Class A Class B Class C Average continue experiencing downward pressure over the next year $5.00 $0.00 as additional supply hits the tenant-desirable West Loop and 2011 2012 2013 2014 2015 2016 2017
Fulton Market submarkets. Class A Class B Class C Average Large Blocks of Availability Source: CoStar, Colliers International Research
There are currently seven large blocks of contiguous and direct space containing at least 100,000 square feet in the Large Block Availabilities | Central Loop Office Market submarket. 125 S. Clark currently has a 195,812-square foot block of contiguous space available, however, the building has 100,000+ square feet experienced substantial leasing activity over the past six months, BUILDING CLASS SIZE (SF) FLOOR TYPE which has shrunk the block of available space substantially. 203 N. LaSalle A 277,349 14-20 Direct Construction 2 N. LaSalle A 232,757 Mezz- Direct 11 No new construction was delivered to the Central Loop during 125 S. Clark B 195,812 5-12 Direct the quarter, however, architect-developer Thomas Roszak has 222 N. LaSalle A 164,926 3-6 Direct pending plans to construct a 20-story, 224,300 square foot 175 W. Jackson A 162,130 18-20 Direct creative-loft office building at 145 S. Wells. The developer has 175 W. Jackson A 133,071 11-12 Direct declared that construction will not begin on speculation, or 1 S. Dearborn A 106,624 14-17 Direct without a portion of the building preleased to future tenants. If the developer is able to secure significant preleasing and the subsequent financing needed to get the building off the ground, it will mark the first new office space delivered to the submarket since the delivery of 22 W. Washington in 2008.
9 Research & Forecast Report | Third Quarter 2017 | Downtown Chicago / Office | Colliers International Lease & Sale Highlights
The Central Loop experienced a diminished level of large leasing activity during the second quarter, as Relativity’s expansion for 46,219 square feet at 231 S. LaSalle was the sole large lease transaction reported during the quarter. The submarket’s most recent three large lease transactions have included surging technology-centric company’s, as Snapsheet (55,000 SF) and ActiveCampaign (52,000 SF) signed large leases during the second quarter, highlighting the submarket’s increasing ability to land technology tenants priced out of the West Loop and River North.
Investment Sales activity within the Central Loop increased during the third quarter as Boston-based Beacon Capital Partners purchased 231 S. LaSalle from Michael Silberberg for 1 N DEARBORN STREET $165,000,000 (176.13/SF). Additionally, Olen Properties placed 1 S. Dearborn on the market for sale shortly after securing anchor tenant Sidley Austin to a long-term renewal for roughly Significant Lease and Sale Activity seventy percent of the building. With 1 S. Dearborn, 161 N. Clark Central Loop Office Leasing Activity – 3Q 2017 and 35 W. Wacker all on the market for sale, the submarket has more secure Class A buildings on the market than any other TENANT BUILDING CLASS SIZE (SF) DEAL TYPE submarket in the CBD. Relativity (kCura) 231 S. LaSalle B 46,219 Expansion
Central Loop Office Investment Sales Activity – 3Q 2017
STATUS ADDRESS CLASS SIZE (SF) SALE PRICE PRICE/SF SELLER BUYER
S 231 S. LaSalle B 936,800 $165,000,000 $176.13 Michael Silberberg Beacon Capital Partners
FS 1 S. Dearborn A 828,838 TBD TBD Olen Commercial Realty Corporation TBD
FS 161 N. Clark A 1,068,877 TBD TBD CBRE Global Investors TBD
FS 35 W. Wacker A 1,118,042 TBD TBD UBS TBD
FS 105 W. Adams C 314,855 TBD TBD Crown Commercial Real Estate TBD
FS = For Sale S = Sold
10 Research & Forecast Report | Third Quarter 2017 | Downtown Chicago / Office | Colliers International CLARK WILLOW
LA SA LLE EUGENIE
CONCORD CONCORD
CONCORD VINE NORTH
NORTH NORTH NORTH R WEED STO ON A 1000 FEET ARK YT BURTON
DA BLACKHAWK FREMONT TH P BLACKHAWK
OGDEN NOR
WELLS 300 METERS ORLEANS SEDGWICK WIELAND
EASTMAN SCHILLER CLEVELAND MOHAWK HUDSON EVERGREEN EVERGREEN BANKS TH BRANCH GOETHE RITCHIE NOR
HOOKER SCOTT SCOTT SCOTT EVERGREEN DIVISION DIVISION EastDIVISION LoopST ONE CHERRY ELM ELM ELM CEDAR HILL RUSH HICKORY The East Loop possesses a dynamic inventory base that includes office towers MAPLE BLISS HOBBIE WENDELL BELLEVUE HAINES interspersed amongst residential condominium buildings. With Millennium Park, OAK OAK OAK the city’s largest public space, serving as the submarket’s focal point, the East Loop WALTON WALTON
offers a uniqueMICHIGAN office environment that is conducive to the work-life balance often LOCUST DELAWARE
CHESTNUT desired byCHESTNUT the tenants thatT office there. RABEE LLE R Y FRY S VAN DER ROHE S VAN CLARK DEARBORN SA DE WIT LA SEDGWICK HUDSON INSTITUTE PL. PEARSON
MA The East Loop possesses a dynamic inventory base that includes SING
E S LA MIE
L LE office towers interspersed amongst residential condominium CHICAGO I Market Indicators Q3 2016 Q2 2017 CURRENT
S CHICAGO
buildings. With MillenniumM Park, the city’s largest public space, E SUPERIOR CARPENTER L Y VACANCY 12.4% 12.9% 12.9% SUPERIOR serving as the submarket’sT focal point, the EastA Loop offers a HURON GREEN K MORGAN TAT E
N AIRBANK F S S H
E ANGAMON unique office environment that is conducive to the work-life O 112,812 -222,291 29,244
S HURON QTR ABSORPTION R
C E KINGSBUR I
HALSTED balance often desired by the tenants that office there. Although D PE ORIA
AIR R ERIE F NORTH 297,680 -109,821 -80,577 I
Ke nn e d y E x p w y V YTD ABSORPTION I ERIE the East Loop’s distinct culture continues to remainE attractive
. CL N ST ONTARIO ASH MICHIGAN
G $34.10 $34.96 $34.90 to more eclecticB office tenants such as advertising firms, not- RENTAL RATE
RUSH A OHIO RIVER for-profit WA organizations and educational institutions, recently,
OHIO M
AVENUE G
NORTH landlords of the submarket have been successful in retaining
GRAND E GRAND McCLUR
and attracting traditionalH office space users by offering more ILLINOIS affordable space optionsT relative to those available in the Central Submarket Highlights & Forecast HUBBARD ORLEANS FRANKLIN WELLS and West Loop. The submarket is bordered by the Chicago River
HUBBARD TH CITY FRONT NEW ARK AZA DRIVE P The East Loop was home to the most significant lease transaction of on the north, Van Buren StreetNOR PL on theNORTH South, WATER Lake Michigan on PE ORIA KINZIE KINZIE the East, and State Street on the West. the third quarter, as Northern Trust signed a lease to occupy 462,000 square feet of the 750,000 square feet CNA Financial will vacate at WACKER 90 333 S. Wabash. With CNA’s massive departure set for June 2018, the sizeable amount of looming shadow space threatened to destabilize the FULTON WACKER SOUTH WATER East Loop, however, Northern Trust’s lease ensures that the submarket 94 SON will remain relatively stable. A key indicator for the submarket moving LAKE LAKE LAKE LAKE ET ST forward will be whether Northern Trust exercises its rights to expand EAST LOOP 41 into a footprint larger than the 462,000 square feet, as the building still RANDOLPH RANDOLPH RANDOLPH RANDOLPH HARBOR has 288,000 square feet of shadow space scheduled to become vacant
GREEN in mid-2018. RACINE
PE ORIA WEST CENTRAL MORGAN
WASHINGTON HALSTED WASHINGTON WASHINGTON WASHINGTON MILLENNIUM ANGAMON ABERDEEN S CARPENTER LOOP LOOP P ARK Prior to the third quarter, the East Loop’s recent success had been
MADISON MADISON MADISON MADISON MADISON ignited by its Class A assets, as the Aon Center and Prudential Plaza have been able to attract large tenants such as Kraft Heinz, Wilson
MONROE S MONROE MONROE MONROE Sporting Goods, and Clark Hill PLC over the past 16 months to occupy
LLE large blocks of space in the submarket. With the East Loop’s Class E ASH B CKER SA
TAT B assets now gathering momentum via Northern Trust’s decision to FRANKLIN WELLS LA DESPLAINE JEFFERSON CLINTON CANAL WA DEARBORN ADAMS ADAMS CLARK S WA MICHIGAN relocate to the submarket, the East Loop is continuing to prove that
JACKSON JACKSON JACKSON JACKSON tenants are willing to forego West and Central Loop locations closer GRANT to mass transit hubs in exchange for the relatively inexpensive rental P ARK VAN BUREN VAN BUREN VAN BUREN VAN BUREN AKE SHORE DRIVE L 290 Eisenhower Expwy CONGRESS CONGRESS COLUMBUS HARRISON HARRISON HARRISON LLE VERNON PARK
SA BALBO INANCIAL PLYMOUTH CLARK FEDERAL F LA WELLS DEARBORN
POLK
ABERDEEN POLK 8TH R
JEFFERSON CABRINI CABRINI ARK TER CARPENTER MILLER MORGAN E P 9TH ASH B
TAYLOR TAT WA MICHIGAN S
11TH COLUMBUS
ROOSEVELT ROOSEVELT
12TH PL RY O’BRIEN 90 SOLIDARITY
MORGAN 13TH 13TH NEWBER MAXWELL MAXWELL MAXWELL McFETRIDGE FEDERAL PLYMOUTH LIBERTY 94 CLARK 14TH 14TH 14TH
an Expwy w p x E n ya R n a D RAIRIE P
14TH PL 14TH PL
15TH PL
16TH 16TH LAKE SHORE DRIVE S 17TH RY
MILLER 17TH PE ORIA 17TH PL JEFFERSON CLINTON DESPLAINE FEDERAL NEWBER DEARBORN 18TH 18TH 18TH
19TH
CANAL 19TH CANALPORT NORMAL
Y 19TH PL T CLINTON CULLERTON ANGAMON
MORGAN CULLERTON CARPENTER MILLER SHELB S PE ORIA RAIRIE CALUME P E R UBLE ASH B CHINA PL TAT
LUMBER S INDIANA WA MICHIGAN CLARK
CERMAK CERMAK N
22ND PL RTH TO ARCHER GROVE ALEXANDER
RINCE 23RD WENTWO P 23RD
23RD PL LUMBER
WALLACE 24TH 24TH
NORMAL 24TH PL 24TH PL Stevenson Expwy CORBETT 55 KING DR Submarket Highlights & Forecast (continued) rates, aggressive concession packages and picturesque views found Net Absorption & Vacancy | East Loop Office Market in the East Loop. 500,000 18.0% 414,976 500,000 16.0% 18.0% 400,000 15.2% 15.5% While the submarket scored a significant victory in landing Northern 14.9% 15.1% 414,976 14.0% 16.0% 400,000 15.5% 13.5% 300,000 15.2% 14.9% 15.1% 12.9% Trust during the quarter, the East Loop still has approximately 262,585 12.5% 228,889 12.0% 14.0%
13.5% Vacancy 638,000 square feet of space yet to be preleased that CNA Financial 300,000 12.9% 200,000 12.5% 10.0% 228,889 151,919 262,585 12.0% (288,000 square feet) and DDB Worldwide (350,000 square feet) Vacancy 100,000200,000 8.0% 151,919 10.0% will combine to vacate in the 2nd quarter of 2018. Therefore, the Square Footage 6.0% submarket will likely remain stable, with vacancy slowly decreasing 100,0000 8.0% 4.0% Square Footage (46,154) 6.0% until mid-2018, when the submarket’s vacancy rate will rise -100,000 0 (78,851) (80,577) 2.0% noticeably. 4.0% -200,000 (46,154) 0.0% -100,000 2011 2012 2013 2014 2015 2016 2017 (78,851) (80,577) 2.0%
Absorption Vacancy Statistical Highlights -200,000 0.0% 2011 2012 2013 2014 2015 2016 2017 Source: CoStar, Colliers International Research The East Loop posted 29,244 square feet of positive net absorption Absorption Vacancy across all classes during the third quarter, led by its Class A assets reporting 57,663 square feet of positive net absorption, while its Class B inventory posted a mere 1,837 square feet of positive demand $50.00 and its Class C inventory posted 30,256 square feet of negative net $45.00 Asking$40.00 Gross Rental Rates | East Loop Office Market demand. In all, the net positive demand of 29,244 square feet left $50.00 $35.00 the East Loop’s aggregate vacancy rate unchanged at 12.9 percent. $30.00$45.00
$25.00$40.00 Class A Vacancy in the East Loop decreased by 80 basis points $20.00$35.00 during the third quarter, landing at 9.7 percent. Over the past 24 $15.00$30.00 months, Class A vacancy within the East Loop has decreased from $10.00 $25.00 16.8 percent to today’s 9.7 percent, highlighting the scintillating $5.00 $20.00 demand for Class A space in the submarket. $0.00 $15.00 2011 2012 2013 2014 2015 2016 2017 The average direct asking rent in the East Loop currently resides at $10.00 Class A Class B Class C Average $34.90 per square foot gross, down from the $34.96 per square foot $5.00 $0.00 posted in the second quarter of 2017. Looking ahead, asking rates in 2011 2012 2013 2014 2015 2016 2017 the East Loop are likely to remain flat due to the amount of newly Class A Class B Class C Average vacant space hitting the market in the Central Loop, as landlords in each submarket compete for a similar tenant base whose options Source: CoStar, Colliers International Research are expanding.
Large Blocks of Availability Large Block Availabilities | East Loop Office Market
The number of available, large, contiguous blocks of space available 100,000+ square feet on a direct basis currently resides at five blocks. The 322,223-square- foot block of space at 200 E. Randolph is currently one of the largest BUILDING CLASS SIZE (SF) FLOOR TYPE available blocks of contiguous space throughout the city. 200 E. Randolph A 322,223 32-42 Direct 401 S. State B 166,205 4-6 Direct Construction 233 N. Michigan B 143,067 22-25 Direct 200 E. Randolph A 131,268 68-71 Direct No new construction was delivered to the East Loop during the 333 S. Wabash B 113,864 21-24 Direct third quarter. There are no office developments currently planned in the submarket, however, The Macy’s Department Stores Company is currently marketing approximately 700,000 square feet of the department store located at 111 N. State for sale as an office redevelopment opportunity, so the submarket may see additional office product within the next 24 months.
12 Research & Forecast Report | Third Quarter 2017 | Downtown Chicago / Office | Colliers International Lease and Sale Highlights
The submarket’s sole large lease transaction of the quarter was the CBD’s largest, as Northern Trust announced that it will relocate 2,500- 3,000 employees into approximately 462,000 square feet of space at 333 S. Wabash in 2020. In the meantime, the building will undergo two years of upgrades after CNA Financial moves out of the building in June 2018. Additionally, media reports surfaced during the third quarter mentioning that Tronc Media (formerly Tribune Publishing) is in serious negotiations to lease approximately 130,000 square feet of low-rise space at 130 E. Randolph in a relocation from its longtime home at Tribune Tower.
Investment sales activity remained lively in the East Loop during the third quarter, as local developer Sterling Bay has a contract to purchase the two- tower Prudential Plaza complex for approximately $680 million ($308.78/ SF) and New York-based 601W Companies has a contract to purchase The Sullivan Center from a joint venture of Madison Street Capital and KKR. 601W Companies knows the submarket very well, having rescued Prudential Plaza from financial distress in 2013 and subsequently leasing the buildings to their current combined occupancy rate of approximately 90 percent. Significant Lease and Sale Activity ONE PRUDENTIAL PLAZA | 130 E RANDOLPH
East Loop Office Leasing Activity – 3Q 2017
TENANT BUILDING CLASS SIZE (SF) DEAL TYPE
Northern Trust 333 S. Wabash B 462,000 New Lease
East Loop Office Investment Sales Activity – 3Q 2017
STATUS ADDRESS CLASS SIZE (SF) SALE PRICE PRICE/SF SELLER BUYER 130 E. Randolph UC & 180 N. Stetson A 2,202,199 $680,000,000 $308.78 601W Companies Sterling Bay (Prudential Plaza) Madison Street Capital, Kohlberg Kravis Roberts UC 1-33 S. State B 745,106 $180,000,000 241.58 601W Companies & Co.
FS 111 N. State* B 700,000 TBD TBD The Macy’s Department Stores Company TBD
UC = Under Contract FS = For Sale * Selling top several floors of Macy’s flagship building for office use.
13 Research & Forecast Report | Third Quarter 2017 | Downtown Chicago / Office | Colliers International CLARK North Michigan Avenue WILLOW
LA SA LLE EUGENIE The North Michigan Avenue submarket possesses a unique building composition CONCORD CONCORD CONCORD VINE made up of hotels, retail space, office buildings, medicalNORTH facilities and residential NORTH NORTH NORTH
properties.R This, along with its peripheral location, makes it an appealing home for WEED STO ON A 1000 FEET ARK YT BURTON less traditional office tenants.
DA BLACKHAWK FREMONT TH P BLACKHAWK
OGDEN NOR The North Michigan Avenue submarket possesses a unique
WELLS 300 METERS ORLEANS SEDGWICK WIELAND building composition comprised of hotels, retail space, office EASTMAN SCHILLER Market Indicators Q3 2016 Q2 2017 CURRENT buildings, medical facilities and residential properties. Its CLEVELAND MOHAWK HUDSON VACANCY 9.5% 7.5% 7.5% EVERGREEN EVERGREEN uniqueBANKS inventory composition and a peripheral location make TH BRANCH GOETHE it an appealingRITCHIE home for less traditional office tenants. The QTR ABSORPTION 138,397 64,931 7,671 NOR
HOOKER SCOTT SCOTT submarket’s small office tenant base is comprised of primarily SCOTT 369,256 215,832 223,503 EVERGREEN advertising firms, media agencies and a growing number of YTD ABSORPTION ST ONE DIVISION DIVISION medicalDIVISION office users that desire close proximity to the large RENTAL RATE $34.51 $35.84 $36.17
CHERRY ELM ELM ELM hospitals in the area. The submarket is bordered by Oak Street onCEDAR the north, the Chicago River on the South, State Street on HILL RUSH HICKORY MAPLE BLISS HOBBIE WENDELL the WestBELLEVUE and Lake Michigan on the east. HAINES OAK Submarket Highlights & Forecast OAK OAK
WALTON WALTON The North Michigan Avenue submarket experienced its ninth consecutive MICHIGAN LOCUST DELAWARE quarter of positive net absorption during the third quarter, posting 7,671
CHESTNUT CHESTNUT T square feet of positive demand, which left the submarket’s vacancy rate RABEE LLE R Y FRY S VAN DER ROHE S VAN CLARK DEARBORN SA DE WIT LA HUDSON SEDGWICK INSTITUTE PL. PEARSON
MA unchanged at 7.5 percent. After struggling for years coming out of the SING
E S LA MIE
L LE Great Recession, the North Michigan Avenue submarket is undergoing a CHICAGO I
S CHICAGO
M E SUPERIOR remarkable turnaround as its vacancy rate has dropped by 5.2 percent CARPENTER L Y
SUPERIOR T A
HURON GREEN K MORGAN TAT E
N AIRBANK since the end of 2015. F S S H
E ANGAMON O
S HURON R
C E KINGSBUR I
HALSTED D PE ORIA
AIR R ERIE F NORTH Ke nn e d y E x p w y I While its peripheral location and boutique office user base have
V I ERIE E
. CL N ST
ONTARIO ASH MICHIGAN historically led to low leasing volume relative to other submarkets in the G B
RUSH A OHIO RIVER WA CBD, the submarket’s strong medical and education-based tenants have
OHIO M
AVENUE G
NORTH helped the submarket rebound from poor market fundamentals over
GRAND E GRAND McCLUR H the past three years to its now record-low vacancy rate of 7.5 percent.
ILLINOIS T HUBBARD In conjunction with the sharp decrease in its aggregate vacancy rate, ORLEANS FRANKLIN WELLS
HUBBARD TH CITY FRONT NEW ARK AZA DRIVE the North Michigan Avenue submarket’s direct average asking rate has P
NOR PL NORTH WATER PE ORIA KINZIE KINZIE increased by roughly 9.0 percent since the end of 2015, indicating the
WACKER continued demand for space in the submarket. 90
FULTON WACKER SOUTH WATER
94 SON LAKE LAKE LAKE LAKE ET ST EAST LOOP 41
RANDOLPH RANDOLPH RANDOLPH RANDOLPH HARBOR GREEN RACINE
PE ORIA WEST CENTRAL MORGAN
WASHINGTON HALSTED WASHINGTON WASHINGTON WASHINGTON MILLENNIUM ANGAMON ABERDEEN S CARPENTER LOOP LOOP P ARK
MADISON MADISON MADISON MADISON MADISON
MONROE S MONROE MONROE MONROE LLE E ASH B CKER SA TAT FRANKLIN WELLS LA DESPLAINE JEFFERSON CLINTON CANAL WA S MICHIGAN CLARK WA ADAMS ADAMS DEARBORN
JACKSON JACKSON JACKSON JACKSON GRANT P ARK VAN BUREN VAN BUREN VAN BUREN VAN BUREN AKE SHORE DRIVE L 290 Eisenhower Expwy CONGRESS CONGRESS COLUMBUS HARRISON HARRISON HARRISON LLE VERNON PARK
SA BALBO INANCIAL CLARK PLYMOUTH FEDERAL F LA WELLS DEARBORN
POLK
ABERDEEN POLK 8TH R
JEFFERSON CABRINI CABRINI ARK TER CARPENTER MILLER MORGAN E P 9TH ASH B
TAYLOR TAT WA MICHIGAN S
11TH COLUMBUS
ROOSEVELT ROOSEVELT
12TH PL RY O’BRIEN 90 SOLIDARITY
MORGAN 13TH 13TH NEWBER MAXWELL MAXWELL MAXWELL McFETRIDGE FEDERAL PLYMOUTH LIBERTY 94 CLARK 14TH 14TH 14TH
an Expwy w p x E n ya R n a D RAIRIE P
14TH PL 14TH PL
15TH PL
16TH 16TH LAKE SHORE DRIVE S 17TH RY
MILLER 17TH PE ORIA 17TH PL JEFFERSON CLINTON DESPLAINE FEDERAL NEWBER DEARBORN 18TH 18TH 18TH
19TH
CANAL 19TH CANALPORT NORMAL
Y 19TH PL T CLINTON CULLERTON ANGAMON
MORGAN CULLERTON CARPENTER MILLER SHELB S PE ORIA RAIRIE CALUME P E R UBLE ASH B CHINA PL TAT
LUMBER S INDIANA WA MICHIGAN CLARK
CERMAK CERMAK N
22ND PL RTH TO ARCHER GROVE ALEXANDER
RINCE 23RD WENTWO P 23RD
23RD PL LUMBER
WALLACE 24TH 24TH
NORMAL 24TH PL 24TH PL Stevenson Expwy CORBETT 55 KING DR Submarket Highlights & Forecast (continued) Net Absorption & Vacancy | N Michigan Ave Office Market The looming conversion of the recently-sold Tribune Tower from an office building into a mixed-use asset will reduce 500,000 16.0% 14.7% 14.5% the submarket’s overall office inventory and illustrate the 13.8% 390,665 14.0% 500,000400,000 13.6% 16.0% 12.6% submarket’s ability to retain tenants who are forced to vacate 14.7% 14.5% 12.0% 13.8% 390,665 14.0% 400,000300,000 13.6% their existing spaces. The conversion may prove particularly 12.6% 10.0% Vacancy 217,675 9.4% 223,503 12.0% challenging for the submarket, as its rapidly increasing rental 199,694 300,000200,000 8.0%
7.5% Vacancy 10.0% rates may now force long-time occupants of the building with 9.4% 223,503 Square Footage 217,675 6.0% 100,000 199,694 favorable rental rates out of the submarket entirely. 200,000 8.0% 30,005 7.5% 16,222 4.0%
Square Footage 0 6.0% Moving forward, the submarket will continue to rely on 100,000 2.0% 30,005 4.0% medical-centric tenants attracted to the area’s medical -100,000 (71,159) 16,222 0.0% 0 2011 2012 2013 2014 2015 2016 2017 infrastructure consisting of the Rehabilitation Institute of 2.0% Absorption Vacancy Chicago’s recently-completed $500 million-dollar facility -100,000 (71,159) 0.0% 2011 2012 2013 2014 2015 2016 2017 at 630 N. McClurg Court and Northwestern Memorial Source: CoStar, Colliers International Research Healthcare’s $300 million-dollar research center currently Absorption Vacancy under construction in the submarket. The submarket’s ability to continue to transform itself into a medically-powered $50.00 agglomeration economy will prove vital to its office market, Asking$45.00 Gross Rental Rates | N Michigan Ave Office Market as the influx of supply in other submarkets will likely provide $40.00 more options to tenants currently occupying space in the North $50.00$35.00 Michigan Avenue submarket who desire to be more centrally $45.00$30.00 located. $40.00$25.00 $20.00 $35.00 $15.00 Stastical Highlights $30.00 $10.00 $25.00 $5.00 Demand within the submarket waned during the third quarter, $20.00 $0.00 as minimal absorption across all asset Classes resulted in $15.00 2011 2012 2013 2014 2015 2016 2017 Class A Class B Class C Average 7,671 square feet of positive net absorption. Despite the limited $10.00 demand during the quarter, the submarket has reported $5.00 $0.00 223,503 square feet of positive absorption throughout 2017. 2011 2012 2013 2014 2015 2016 2017 Demand within the submarket throughout the year has been Class A Class B Class C Average driven by tenant flight to quality, as the submarket’s Class A Source: CoStar, Colliers International Research inventory has reported 66,034 square feet of positive demand and its Class B assets posted 159,160 square feet of positive net absorption, while its Class C inventory has experienced 1,691 square feet of negative net absorption over the same period. Large Block Availabilities | N Michigan Ave Office Market The average gross asking direct rental rate increased for the 100,000+ square feet ninth consecutive quarter during the third quarter of the year, increasing to $36.17 per square foot gross from $35.84 one BUILDING CLASS SIZE (SF) FLOOR TYPE quarter prior. Overall, the average gross asking rent across all ------classes in the submarket has increased by a healthy 4 percent over the past 12 months, however, the submarket continues to remain a cheaper option for tenants than the Central Loop, River North, and the West Loop.
Large Blocks of Availability
There are currently no large, contiguous blocks of space available within the North Michigan Avenue submarket.
Construction
No new construction was delivered to the North Michigan Avenue submarket during the third quarter. There are no office developments anticipated in the submarket in the near future.
15 Research & Forecast Report | Third Quarter 2017 | Downtown Chicago / Office | Colliers International Lease and Sale Highlights
There were no large lease transactions in the North Michigan Avenue submarket during the third quarter.
Investment sales activity in the North Michigan Avenue submarket remained lively during the third quarter, as the Macerich company sold 500 N. Michigan Avenue to an investment group including Tel- Aviv based Schapira Family for $87 million ($268.50/SF). Additionally, Zeller Realty Group is nearing a sale of 401 N. Michigan Avenue to Chicago-based Walton Street Capital for approximately $366 million ($484.77/SF). The sale price includes Apple’s new 22,000-square-foot retail-flagship on the property’s plaza, which helps explain the extremely high cost of the building. Additionally, the office portion of 625 N. Michigan Avenue remains on the market for sale by a joint venture of Golub and the CIM Group. Significant Lease and Sale Activity
North Michigan Avenue Office Leasing Activity – 2Q 2017
TENANT BUILDING CLASS SIZE (SF) DEAL TYPE 401 N MICHIGAN AVENUE NO SIGNIFICANT LEASE TRANSACTIONS
North Michigan Avenue Investment Sales Activity – 2Q 2017
STATUS ADDRESS CLASS SIZE (SF) SALE PRICE PRICE/SF SELLER BUYER
S 500 N. Michigan B 324,027 $87,000,000 $268.50 Macerich Company Schapira Family
p 401 N. Michigan A 755,000 $366,000,000 $484.77 Zeller Realty Group Walton Street Capital
FS 625 N. Michigan B 290,000 TBD TBD CIM Group & Golub TBD
S = Sold P = Pending FS = For Sale
16 Research & Forecast Report | Third Quarter 2017 | Downtown Chicago / Office | Colliers International River North
River North continues to be one of the fastest growing submarkets in the CBD. The result of new office development, a booming residential community and most recently, an infiltration of the city’s technology companies, River North has transformed from a once fairly undeveloped area consisting of warehouses and loft properties into a lively and dynamic office environment.
River North continues to be one of the fastest growing submarkets in the CBD. The result of new office development, Market Indicators Q3 2016 Q2 2017 CURRENT CLARK WILLOW a booming residential community and most recently, an LA SA LLE VACANCY 9.8% 10.0% 9.7% infiltration of the city’s technologyEUGENIE companies, River North has
CONCORD CONCORD
transformed VINE from a once fairly undeveloped area consisting CONCORD QTR ABSORPTION -35,798 -12,666NORTH 51,061 NORTH of warehouses and loft propertiesNORTH intoNORTH a lively and dynamic R WEED YTD ABSORPTION -194,645 -104,342 -53,281 STO ON office environment. River North now contains A a mix of office 1000 FEET ARK YT BURTON
DA BLACKHAWK FREMONT TH P BLACKHAWKoptions ranging from Class B and C brick and timber loft-style RENTAL RATE $38.44 $40.02 $41.83
OGDEN NOR
WELLS 300 METERS ORLEANS SEDGWICK WIELAND
EASTMANproperties to some of its newest Class ASCHILLER trophy office towers. CLEVELAND MOHAWK The range in officeHUDSON space options captures the interest of EVERGREEN EVERGREEN BANKS TH BRANCH
RITCHIE Submarket Highlights & Forecast both traditional and unconventional officeGOETHE users. This diverse NOR
HOOKER SCOTT SCOTT mix has contributed to the submarket’s stabilitySCOT Tand is one of EVERGREEN
ST ONE Strong tenant demand for office space in River North continues to DIVISION the reasons it boastsDIVISION a low vacancy rate. TheDIVISION submarket’s
CHERRY ELM make the submarket one of Chicago’s best performing submarkets, as boundariesELM include Oak StreetELM on the north, the Chicago River CEDAR HILL RUSH its inventory boasts the second lowest vacancy rate in the CBD and HICKORY MAPLE BLISS on the southHOBBIE and west and State Street on the east. WENDELL BELLEVUE its Class A assets have the highest average direct asking rental rates HAINES OAK OAK OAK in the city. The submarket’s ability to attract traditional tenants to its WALTON WALTON MICHIGAN LOCUST DELAWARE trophy towers in conjunction with its position as the hub of Chicago’s
CHESTNUT CHESTNUT T technology community sets it apart from competing submarkets. The RABEE LLE R Y FRY S VAN DER ROHE S VAN CLARK DEARBORN SA DE WIT LA HUDSON SEDGWICK INSTITUTE PL. PEARSON MA SING
E S LA MIE submarket’s diversity was on display once again during the third quarter,
L LE
CHICAGO I
S CHICAGO
M E SUPERIOR as law firm Quarles and Brady renewed it lease for approximately CARPENTER L Y
SUPERIOR T A K HURON GREEN MORGAN TAT E
N
AIRBANK
S F S H
E ANGAMON 100,000 square feet at 300 N. LaSalle and trendy fashion company O
S HURON R
C E KINGSBUR I
HALSTED D PE ORIA
AIR R
F NORTH Ke nn e d y E x p w y ERIE I V
I Trunk Club signed a lease to expand by roughly 30,000 square feet at ERIE E
. CL N ST
ONTARIO ASH MICHIGAN G B
RUSH 333 W. Ohio. While the submarket has posted 53,281 square feet of A OHIO RIVER WA
OHIO M
AVENUE G
NORTH negative net absorption throughout 2017, its long-term health remains
GRAND E GRAND
McCLUR H
ILLINOIS T unquestioned, as the leases signed earlier in the year by Outcome HUBBARD WELLS ORLEANS FRANKLIN
HUBBARD TH CITY FRONT NEW ARK AZA DRIVE Health (394,000 square feet) and General Growth Properties (160,000 P NOR PL NORTH WATER PE ORIA KINZIE KINZIE square feet) will combine to deliver approximately 490,000 square
WACKER 90 feet of positive net absorption to the
FULTON WACKER SOUTH WATER
94 SON LAKE LAKE LAKE LAKE ET ST EAST LOOP 41
RANDOLPH RANDOLPH RANDOLPH RANDOLPH HARBOR GREEN RACINE
PE ORIA WEST CENTRAL MORGAN
WASHINGTON HALSTED WASHINGTON WASHINGTON WASHINGTON MILLENNIUM ANGAMON ABERDEEN S CARPENTER LOOP LOOP P ARK
MADISON MADISON MADISON MADISON MADISON
MONROE S MONROE MONROE MONROE LLE E ASH B CKER SA TAT FRANKLIN S MICHIGAN DESPLAINE JEFFERSON CLINTON CANAL WA WELLS LA CLARK WA ADAMS ADAMS DEARBORN
JACKSON JACKSON JACKSON JACKSON GRANT P ARK VAN BUREN VAN BUREN VAN BUREN VAN BUREN AKE SHORE DRIVE L 290 Eisenhower Expwy CONGRESS CONGRESS COLUMBUS HARRISON HARRISON HARRISON LLE VERNON PARK
SA BALBO INANCIAL CLARK PLYMOUTH FEDERAL F LA WELLS DEARBORN
POLK
ABERDEEN POLK 8TH R
JEFFERSON CABRINI CABRINI ARK TER CARPENTER MILLER MORGAN E P 9TH ASH B
TAYLOR TAT WA MICHIGAN S
11TH COLUMBUS
ROOSEVELT ROOSEVELT
12TH PL RY O’BRIEN 90 SOLIDARITY
MORGAN 13TH 13TH NEWBER MAXWELL MAXWELL MAXWELL McFETRIDGE FEDERAL PLYMOUTH LIBERTY 94 CLARK 14TH 14TH 14TH
an Expwy w p x E n ya R n a D RAIRIE P
14TH PL 14TH PL
15TH PL
16TH 16TH LAKE SHORE DRIVE S 17TH RY
MILLER 17TH PE ORIA 17TH PL JEFFERSON CLINTON DESPLAINE FEDERAL NEWBER DEARBORN 18TH 18TH 18TH
19TH
CANAL 19TH CANALPORT NORMAL
Y 19TH PL T CLINTON CULLERTON ANGAMON
MORGAN CULLERTON CARPENTER MILLER SHELB S PE ORIA RAIRIE CALUME P E R UBLE ASH B CHINA PL TAT
LUMBER S INDIANA WA MICHIGAN CLARK
CERMAK CERMAK N
22ND PL RTH TO ARCHER GROVE ALEXANDER
RINCE 23RD WENTWO P 23RD
23RD PL LUMBER
WALLACE 24TH 24TH
NORMAL 24TH PL 24TH PL Stevenson Expwy CORBETT 55 KING DR Submarket Highlights & Forecast (continued) Net Absorption & Vacancy | River North Office Market submarket when the companies move into their new spaces in early 2018, driving the submarket’s aggregate vacancy rate 500,000500,000 16.0% 16.0% 415,786 415,786 towards a CBD low 6.7 percent vacancy rate. 14.0% 14.0% 400,000400,000 13.6%13.6% 12.7% 12.7% 12.0% 300,000 11.6% 12.0% With its unique inventory consisting of modern Class A trophy 300,000 11.6% 10.0% 9.4% 9.7% Vacanc 10.0% 200,000 174,978 9.2% Vacanc towers interspersed with several of the city’s most technology 154,656 9.4% 9.7% 200,000 132,786 174,978 9.2% 8.6% 154,656 8.6% 8.0%
132,786 90,726 y centric office buildings, such as the Merchandise Mart and 600 100,000 8.0%
90,726 y 100,000 6.0% Square Footage West Chicago, River North projects to remain the strongest 6.0%
Square Footage 0 4.0% submarket in the CBD through the end of the year. The most 0 (53,281) 4.0% significant challenge to River North’s status as the strongest (100,000) 2.0% (128,241) (53,281) (100,000) 2.0% submarket in the CBD over the next few years will come from (200,000) 0.0% 2011 2012 2013 2014 2015 2016 (128,2412017) the West Loop submarket as tenants are attracted to the four (200,000) 0.0% 2011 2012 2013 2014 2015 2016 2017 new developments the submarket will have delivered by the end Absorption Vacancy of 2018. Additionally, the ability of the Fulton Market submarket Source: CoStar, Colliers International ResearchAbsorption Vacancy to poach technology-centric users from River North will be a trend that may put pressure on the submarket, however, the lack of immediately available large blocks of space in Fulton Market will preclude large users from vacating River North until $50.00 new inventory is delivered in the emerging submarket. $45.00Asking Gross Rental Rates | River North Office Market $40.00$50.00 Statistical Highlights $35.00$45.00 $30.00$40.00 $25.00 River North posted 51,061 square feet of positive net absorption $35.00 $20.00 across all classes during the third quarter, led by its Class B $30.00 $15.00 $25.00 assets reporting 50,893 square feet of positive demand, while $10.00 $20.00 its Class A assets posted 12,356 square feet of negative net $5.00 absorption and its Class C inventory reported 12,524 square $15.00$0.00 2011 2012 2013 2014 2015 2016 2017 $10.00 feet of positive net absorption. Class A Class B Class C Average $5.00
The average direct asking rental rate in the submarket currently $0.00 2011 2012 2013 2014 2015 2016 2017 resides at $41.83 per foot gross, up substantially from $40.02 Class A Class B Class C Average posted during the second quarter of the year. The rental rate increase was driven primarily by the submarket’s Class A Source: CoStar, Colliers International Research product, which experienced a $0.57 increase during the quarter. Within the submarket’s Class A inventory, the Merchandise Mart largely accounted for the increase in average direct asking rental rate, as the building increased the gross asking rents for Large Block Availabilities | River North Office Market nearly all available space in the building by $2.00 to $3.00 per 100,000+ square feet foot over the past three months. BUILDING CLASS SIZE (SF) FLOOR TYPE Large Blocks of Availability 222 Merchandise Mart B 153,900 4-5 Direct
The number of available large, contiguous blocks of space available on a direct basis currently resides at one block. The sole large block of space available is located at the Merchandise Street in River North. The building at 412 N. Wells is being developed Mart and consists of 153,900 square feet on the fourth and by Chicago-based developer Centrum Partners and is projected to fifth floors. The extremely limited availability of sizable blocks be completed by the end of 2017. The building has landed the rapidly of space within the submarket makes large relocations into the growing Chicago Bar Company to occupy the entire building. submarket unlikely relative to other submarkets in the CBD. Lease and Sale Highlights Construction Large leasing activity remained prevalent in the submarket during the No new construction was delivered to River North during the third quarter with Quarles and Brady renewing its lease and expanding third quarter. There is an eight- story, 56,000 square foot Class by approximately 25,000 square feet at 300 N. LaSalle, while Trunk A office building currently under construction at 412 N. Wells Club expanded its existing space at 333 W. Ohio by approximately
18 Research & Forecast Report | Third Quarter 2017 | Downtown Chicago / Office | Colliers International Lease and Sale Highlights (continued)
30,000 square feet. The Quarles and Brady lease was notable as River North will work to retain large users in its Trophy towers in the coming years, as notable developments in the West Loop such as 151 N. Franklin and 110 N. Wacker will attract tenants looking for state-of-the-art trophy space.
Investment sales activity in River North increased during the third quarter as a joint venture of Ameritus Real Estate Investments and Alcion Ventures sold 213 W. Institute Place to California-based KBS Realty Advisors for $43.5 million ($254.39/square foot). Additionally, American Asset Management Services sold 730 N. Franklin to the Feil Organization for $23.3 million ($253.26/square foot). Both transactions involved nontraditional office space, as investors continue to see value in loft-office properties with enviable locations in River North. Significant Lease and Sale Activity 350 N ORLEANS STREET River North Office Leasing Activity – 3Q 2017
TENANT BUILDING CLASS SIZE (SF) DEAL TYPE Renewal/ Quarles & Brady 300 N. LaSalle A 100,000 Expansion
Trunk Club 333 W. Ohio B 30,286 Expansion
River North Investment Sales Activity – 3Q 2017
STATUS ADDRESS CLASS SIZE (SF) SALE PRICE PRICE/SF SELLER BUYER
S 213 W. Institute C 171,000 $43,500,000 $254.39 Ameritus, Alcion Ventures KBS Realty Advisors
P 730 N. Franklin C 92,000 $23,300,000 $253.26 American Asset Management Services Feil Organization
S = Sold P = Pending
19 Research & Forecast Report | Third Quarter 2017 | Downtown Chicago / Office | Colliers International CLARK WILLOW
LA SA LLE EUGENIE
CONCORD CONCORD
CONCORD VINE NORTH
NORTH NORTH NORTH R WEED STO ON A 1000 FEET ARK YT BURTON
DA BLACKHAWK FREMONT TH P BLACKHAWK
OGDEN NOR
WELLS 300 METERS ORLEANS SEDGWICK WIELAND
EASTMAN SCHILLER CLEVELAND MOHAWK HUDSON EVERGREEN EVERGREEN BANKS TH BRANCH GOETHE RITCHIE NOR
HOOKER SCOTT SCOTT SCOTT EVERGREEN
DIVISION DIVISION DIVISION ST ONE
CHERRY ELM West Loop ELM ELM CEDAR HILL RUSH HICKORY MAPLE BLISS HOBBIE The West Loop’s reputation as theWENDEL CBD’sL leading BELLEVUEsubmarket is the result of it possessing HAINES OAK the largest officeOAK inventoryOA Kof any submarket, its proximity to public transit and tenant WALTON WALTON MICHIGAN desire for the image associatedLOCUST with being locatedDELAWARE on or near Wacker Drive, an address
CHESTNUT CHESTNUT T
that has a long-standingRABEE positive reputation for office tenants. LLE R Y FRY S VAN DER ROHE S VAN CLARK DEARBORN SA DE WIT LA HUDSON SEDGWICK INSTITUTE PL. PEARSON MA SING
E S LA The West Loop’s reputation as the CBD’s leading submarket MIE
L LE
CHICAGO I
S CHICAGO
is the result of it possessing the largest office inventory of M E SUPERIOR CARPENTER L Y any submarket, its proximity to public transit and tenantSUPERIOR T A K HURON GREEN Market Indicators Q3 2016 Q2 2017 CURRENT MORGAN TAT E
N
AIRBANK F S S H
E ANGAMON desire for the image associated with being located on or O
S HURON R VACANCY C 11.0% 14.6% 14.1% E KINGSBUR I
HALSTED D
PE ORIA near Wacker Drive, an address that has a long-standing AIR R
F NORTH Ke nn e d y E x p w y ERIE I
V I ERIE E . CL 348,556 50,705 282,342 positive reputation for office tenants. Further contributing QTR ABSORPTION N ST
ONTARIO ASH MICHIGAN G B RUSH
to the submarket’s growth was the development boom A OHIO RIVER YTD ABSORPTIONWA 273,771 550,864 833,206
OHIO M AVENUE G experienced over the past decade which added several NORTH
GRAND E $39.17 $42.60 $42.69 highly-efficient,GRAND state-of-the-art trophy towers to building RENTAL RATE
McCLUR H
inventory. The West Loop is bordered on the north ILLINOISby T HUBBARD WELLS Kinzie Street, on the south by Van Buren Street,ORLEANS FRANKLIN by Halsted
HUBBARD TH CITY FRONT NEW ARK AZA DRIVE P
Street on the west and Wells street on the east. NOR PL NORTH WATER PE ORIA KINZIE KINZIE Submarket Highlights & Forecast
The West Loop postedWACKER 282,342 square feet of positive net absorption 90 during the third quarter, which resulted in the submarket’s vacancy rate
FULTON WACKER decreasing by 50 basis SOUTHpoints WATER to 14.1 percent. Following the deliveries
94 of 150 N. Riverside and SON 444 W. Lake over the past 10 months, the LAKE LAKE LAKE LAKE ET submarket’s vacancy rateST climbed 3.6 percent, however, relocations into the West Loop by large EASTusers such LO as SeyfarthOP and Shaw41 and Cars.com RANDOLPH RANDOLPH RANDOLPhaveH helpedRANDOLPH offset some of the negative absorptionHARBOR created as large GREEN RACINE PE ORIA WEST CENTRALtenants moving into the new towers leave behind bigger footprints than MORGAN
WASHINGTON HALSTED WASHINGTON WASHINGTON WASHINGTON MILLENNIUM ANGAMON ABERDEEN S CARPENTER LOOP LOOP those they are occupyingP ARKin their new buildings. In all, the submarket’s vacancy rate is now up 3.1 percent from its low point of this building MADISON MADISON MADISON MADISON MADISON cycle, which was 11.0 percent 12 months ago.
MONROE S MONROE MONROE MONROE Despite the submarket’s recent increase in vacancy due to the 2.36 LLE E ASH B CKER SA
millionTAT square feet delivered over the past ten months, the West Loop MICHIGAN S LA DESPLAINE JEFFERSON CLINTON CANAL WA FRANKLIN WELLS CLARK WA ADAMS ADAMS DEARBORN remains Chicago’s most active submarket, as developers and tenants
JACKSON JACKSON JACKSONcontinueJACK toSON be attracted to the submarket’s modern inventory and transit oriented location. Amidst theGRANT city’s growth westward, the submarket P ARK VAN BUREN VAN BUREN VAN BUREN VAN BUREN AKE SHORE DRIVE L 290 Eisenhower Expwy CONGRESS CONGRESS COLUMBUS HARRISON HARRISON HARRISON LLE VERNON PARK
SA BALBO INANCIAL PLYMOUTH CLARK FEDERAL F LA WELLS DEARBORN
POLK
ABERDEEN POLK 8TH R
JEFFERSON CABRINI CABRINI ARK TER CARPENTER MILLER MORGAN E P 9TH ASH B
TAYLOR TAT WA MICHIGAN S
11TH COLUMBUS
ROOSEVELT ROOSEVELT
12TH PL RY O’BRIEN 90 SOLIDARITY
MORGAN 13TH 13TH NEWBER MAXWELL MAXWELL MAXWELL McFETRIDGE FEDERAL PLYMOUTH LIBERTY 94 CLARK 14TH 14TH 14TH
an Expwy w p x E n ya R n a D RAIRIE P
14TH PL 14TH PL
15TH PL
16TH 16TH LAKE SHORE DRIVE S 17TH RY
MILLER 17TH PE ORIA 17TH PL JEFFERSON CLINTON DESPLAINE FEDERAL NEWBER DEARBORN 18TH 18TH 18TH
19TH
CANAL 19TH CANALPORT NORMAL
Y 19TH PL T CLINTON CULLERTON ANGAMON
MORGAN CULLERTON CARPENTER MILLER SHELB S PE ORIA RAIRIE CALUME P E R UBLE ASH B CHINA PL TAT
LUMBER S INDIANA WA MICHIGAN CLARK
CERMAK CERMAK N
22ND PL RTH TO ARCHER GROVE ALEXANDER
RINCE 23RD WENTWO P 23RD
23RD PL LUMBER
WALLACE 24TH 24TH
NORMAL 24TH PL 24TH PL Stevenson Expwy CORBETT 55 KING DR Submarket Highlights & Forecast (continued) has two additional office towers currently under construction Net Absorption & Vacancy | West Loop Office Market 1,200,000 16.0% at 151 N. Franklin and 625 W. Adams, which will combine to 1,200,000 960,905 16.0% 1,000,000 960,905 14.0% 14.1% 14.0% deliver approximately 1.24 million square feet of additional Class 13.514.1% % 1,000,000 14.0% 12.8% 14.0% 12.4% 13.5% 833,206 12.8% 833,206 12.0% A product to the submarket by mid-2018. As 151 N. Franklin is 800,000 12.4% 11.4% 11.6% 12.0%
800,000 11.4% 11.6% Vacancy approximately fifty percent preleased and 625 W. Adams has yet Vacancy 10.0% 579,580 10.0% 579,580 to secure any preleasing, these developments will combine to 600,000600,000 445,517 445,517 8.0% 8.0% Square Footage push the submarket’s vacancy upwards by an additional 170 basis Square Footage 400,000400,000 6.0% 6.0% points if they are unable to secure additional preleasing over the 232,174232,174 200,000200,000 4.0% 4.0% next nine months. In the interim, the submarket’s vacancy rate 41,037 41,037 0 2.0% is likely to stabilize, as positive absorption generated by large 0 2.0% (85,980) (200,000) (85,980) 0.0% users anticipated relocations into the submarket will be offset (200,000) 2011 2012 2013 2014 2015 2016 2017 0.0% by existing users, such as Deloitte and Mayer Brown, giving back 2011 2012 2013 2014 2015 2016 2017 Absorption Vacancy large blocks of space. Landlords in the West Loop will continue Absorption Vacancy to rely on their transit oriented locations and modern inventory Source: CoStar, Colliers International Research base to draw tenants out of competing submarkets, however, tenants in the market for space currently have many more options than they did a year ago, and can now utilize the sizable Asking$50.00 Gross Rental Rates | West Loop Office Market $45.00 concessions and favorable asking rental rates currently offered $50.00 $40.00 in competing submarkets to force landlords in the West Loop $45.00 $35.00 to increase concession packages and flatten rental rate growth $40.00 $30.00 moving forward. $35.00 $25.00 $30.00 The West Loop has likely passed its tightest vacancy rate of this $20.00 $15.00$25.00 building cycle and will continue to soften moving into 2018 as $10.00$20.00 additional supply is delivered. While strong leasing activity in $15.00$5.00 the submarket over the past nine months illustrates continued $0.00 $10.00 2011 2012 2013 2014 2015 2016 2017 demand for quality space in the submarket, demand will be hard $5.00 Class A Class B Class C Average pressed to keep up with the aggregate supply of the deliveries $0.00 scheduled for 2018 and beyond as larger users continue to 2011 2012 2013 2014 2015 2016 2017 relocate into smaller spaces than those they vacate. Additionally, Class A Class B Class C Average the anticipated delivery of 2.5 million square feet of office space Source: CoStar, Colliers International Research at the Old Post office in 2019 coupled with an additional 1,350,000 square feet of supply via the delivery of 110 N. Wacker in 2020 will ensure that the submarket’s tightest window of this cycle Large Block Availabilities | West Loop Office Market has passed over a longer period. Considering the submarket has experienced a 3.1 percent increase in vacancy due to the 100,000+ square feet delivery of 2.36 million square feet of supply throughout this BUILDING CLASS SIZE (SF) FLOOR TYPE building cycle despite a steady stream of suburban companies relocating into the CBD and a strong labor market, the delivery of 625 W. Adams A 432,709 7-20 Direct an additional five million square feet over the next four years will 311 W. Monroe B 363,204 2-15 Direct likely push the submarket’s dynamics well in favor of tenants. 151 N. Franklin A 257,016 26-35 Direct 300 S. Riverside Plz A 238,505 2-6 Direct Statistical Highlights 71 S. Wacker A 214,069 9-17 Direct The West Loop’s average direct asking rental rate remained 200 W. Monroe B 161,287 7-12 Direct flat during the third quarter, rising a mere $0.09 per square 550 W. Jackson A 144,207 2-7 Direct foot gross up to $42.69. After posting significant rental rate 500 W. Madison A 141,404 8-10 Direct inflation early in 2017 due to the delivery of two trophy towers 222 W. Adams A 139,034 5-8 Direct and their market-high asking rents, the submarket’s rental rate 30 S. Wacker A 129,216 31-35 Direct has flattened over the past six months, highlighted by a mere 123 N. Wacker A 121,428 23-30 Direct $0.05 increase in the submarket’s Class A average direct asking 227 W. Monroe A 116,934 54-58 Direct rental rale over the period. Looking ahead to the end of the year, 111 S. Wacker A 112,052 12-16 Direct rental rates in the submarket are likely to remain flat as landlords experience a more tenant favorable environment and competing 444 W. Lake A 106,292 44-49 Direct submarkets continue to become more aggressive in their pursuit to land tenants.
21 Research & Forecast Report | Third Quarter 2017 | Downtown Chicago / Office | Colliers International Stastical Highlights (continued)
The West Loop’s 282,342 square feet of positive net absorption during the quarter was largely attributable to its Class B assets, as its Class B inventory reported 210,658 square feet of positive demand, led by Cars.com’s relocation into 158,000 square feet at 300 S. Riverside.
Large Blocks of Availability
There are currently 14 large, contiguous blocks of space available on a direct basis in the West Loop. The West Loop currently has two properties under construction that are contributing to the large block availability in the submarket.
Construction
After delivering 2,366,106 square feet via the deliveries of 444 W. Lake and 150 N. Riverside over the last 10 months, the West Loop is now left with two additional towers under construction. The John Buck Company is set to deliver a 35-story, 807,355-square-foot trophy tower at 151 N. Franklin Street in June 2018. The developer is currently searching for a final anchor tenant to accompany CNA Financial and law firm Hinshaw & Culbertson in the building, which is approximately 50 percent preleased. Additionally, a second office development owned by a joint venture of Vanderbilt Investment Properties and White Oak Realty Partners at 625 W. Adams Street is under construction. The 20-story, 434,931 square foot development is being built on speculation, meaning that building’s ownership has yet to prelease any space in the building to future tenants. As the building nears its scheduled delivery of June 2018 without any preleasing, pressure is mounting on the developers to land an anchor tenant for the property. The developer’s ability to attain significant preleasing over the next nine months will prove important to the submarket’s overall health, as the submarket’s vacancy rate will increase nearly 90 basis points if the building delivers without occupants.
A third new office tower is set to break ground in the first quarter of 2018, as an ownership venture of Chicago-based Riverside Investment & Development and Dallas-based Howard Hughes Company secured Bank of America as an anchor tenant for their planned office tower at 110 N. Wacker during the second quarter of the year. The planned 52-story, 1,350,000 square foot trophy tower will replace the low-rise General Growth building at 110 N. Wacker when construction commences in early 2018 and concludes in the second half of 2020.Thru the end of the year, the joint venture will look to land additional anchor tenants to join Bank of America, who signed a lease to occupy approximately 42 percent of the building, to land favorable construction financing. The building will be the fifth new office tower constructed in the West Loop during this building cycle, resulting in a combined total of 4,958,392 square feet of newly constructed Class A tower space in the market.
In addition to the two towers currently under construction and third set to begin in the coming months, the West Loop is home to two of the country’s largest rehabilitation projects, as construction at the Old Post Office building at 433 W. Van Buren is underway and the Willis Tower is in the midst of a $547 million-dollar repositioning. After buying The Old Post Office in mid-2016, New York based 601W Companies broke ground on its projected $500 million-dollar redevelopment of the building in early 2017. This redevelopment, which will transform empty property into an office building consisting of approximately 2.5 million square feet, could be completed as soon as 2019 and includes replacing the building’s existing mechanical systems, removing asbestos, fixing the building’s façade, and several other capital-intensive projects. While not adding additional office space to the West Loop’s existing inventory, the $547 million-dollar overhaul at the Willis Tower is modernizing the office portion of the building, while reconfiguring the asset’s retail and tourist spaces.
22 Research & Forecast Report | Third Quarter 2017 | Downtown Chicago / Office | Colliers International Lease and Sale Highlights
After an extremely active first half of 2017, large leasing activity in the West Loop subsided during the third quarter, with two lease transactions greater than 30,000 square feet taking place. The submarket’s largest lease transaction of the quarter was GATX’s deal to relocate from approximately 120,000 square feet at 222 W. Adams into 90,000 square feet at the Willis Tower. Additionally, Belvedere Trading renewed its lease for 36,648 square feet at 10 S. Riverside.
Investment sales activity remained lethargic within the West Loop during the third quarter, as 209 W. Jackson was placed on the market for sale by the Farbman Group and 225 W. Wacker remains on the market. Significant Lease and Sale Activity
West Loop Office Leasing Activity – 3Q 2017
TENANT BUILDING CLASS SIZE (SF) DEAL TYPE
GATX 233 S. Wacker A 90,000 New Lease
Belvedere Trading 10 S. Riverside A 36,648 Renewal THE FUTURE 110 N WACKER DRIVE
West Loop Office Investment Sales Activity – 3Q 2017
STATUS ADDRESS CLASS SIZE (SF) SALE PRICE PRICE/SF SELLER BUYER
FS 225 W. Wacker A 650,812 TBD TBD Mirae Asset Global Investments TBD
FS 209 W. Jackson B 143,000 TBD TBD Farbman Group TBD
FS = For Sale
23 Research & Forecast Report | Third Quarter 2017 | Downtown Chicago / Office | Colliers International Fulton `FULLERMarketTON ASHLAND The Fulton Market’s reputation as Chicago’s top emerging submarket is the result
of it possessing the most uniqueLINCOLN inventory of any submarket, tenant desire for the image associatedARMITAGE with being located in the trendy Fulton Market Neighborhood, and the
penetration of the city’sLINCOLN technology PARK companies.
Fulton Market’s reputation as Chicago’s top emerging CLARKSubmarket Highlights & Forecast LA SA LLE submarket is the result of it possessing the most uniqueEUGENIE
inventory of any submarket,CONCORD tenant desire for the imageCONCORD Chicago’s historic meatpacking district, now termed the Fulton
CONCORD VINE CLYBOURN associated with beingNORTH located in the trendy Fulton MarketNORTH MarketNORTH submarket, continues to rapidly transform from an
90 R WEED
Neighborhood, and the penetration of the city’s creative industrializedSTO area focused on the storage of consumer goods to ON A ARK 94 YT BURTON
DA BLACKHAWK FREMONT companies. Fulton Market is currently transforming fromTH P the City’s most dynamic and forward-thinking submarket for office BLACKHAWK
OGDEN NOR WELLS ORLEANS an underdeveloped area consisting of warehouse SEDGWICK and WIELAND tenants. Since Google announced its decision to relocate its regional EASTMAN SCHILLER CLEVELAND MOHAWK industrial properties into a rapidly emerging officeHUDSON and headquartersGOLD into the neighborhood in 2014, no office submarket in GOOSE EVERGREEN OLD EVERGREEN BANKS
TH BRANCH COAST ASHLAND residential environment. The submarket contains a mix the city has matchedRITCHIE Fulton Market’s ability to reinvent its inventory ISLAND TOWN GOETHE NOR
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NORMAL 24TH PL 24TH PL Stevenson Expwy CORBETT 55 KING DR Submarket Highlights & Forecast (continued)
During the third quarter, local developer Sterling Bay delivered 287,928 square feet of Class A space to the submarket, as its modern-loft development at 1330 W. Fulton Street (Fulton West) concluded construction. The building delivered 62 percent preleased, as the developer has struggled to land two final occupiers to fill the building. The building’s location on the western edge of the submarket has proved challenging, as the submarket’s transformation is moving East to West, meaning the western edge of the submarket doesn’t currently offer the trendy neighborhood feel and or retail amenities that occupiers associate with the submarket. Despite opening with significant vacancy, the building’s tenant roster illustrates the submarket’s draw to creative users, as online job marketplace Glassdoor will occupy 53,000 square feet, Dyson’s U.S. headquarters will inhabit 58,000 square feet, and digital agricultural company The Climate Corporation will occupy roughly 21,000 square feet. As the users relocate into their new spaces during the fourth quarter, they will bring approximately 800 jobs into the submarket, likely helping spur further retail and residential development westward.
Because of the strong demand for creative office space in the Fulton Market submarket, there are currently four office developments under construction, including McDonald’s new 608,000-square-foot headquarters building, Tucker Development’s 45,614-square-foot redevelopment at 159 N. Sangamon, and Sterling Bay’s speculative development consisting of approximately 204,000 square feet at 210 N. Carpenter. Additionally, there are more than 10 proposed office developments in the submarket, highlighted by Sterling Bay’s plan to develop over 500,000 square feet on a parking lot located at 331 N. Halsted, which will likely break ground in early 2018 after WPP signed a lease to occupy 250,000 square feet of the development during the quarter. However, most of the proposed developments are smaller than 200,000 square feet due to the neighborhood’s strict zoning ordinances and scarce land availability. Given the small-scale of the proposed developments, the submarket is unlikely to be flooded with space at any one point, allowing landlords to largely control rental rates in their favor, which is already evident as landlord’s preleasing Class A space in the submarket are asking for base rents between $45.00 and $50.00 per square foot gross, making the submarket’s Class A space more expensive than every submarket in the city outside of River North and the West Loop.
Moving forward, the lack of large campus-type development opportunities in the submarket means that there will finite opportunities to attract tenants as sizable as WPP and McDonalds, limiting the submarket’s maximum density for large office tenants. The submarket is likely to experience strong demand from creative tenants less than 50,000 square feet, who are looking for Class A creative loft space at the proposed development sites and those under construction. Given the sky-high asking rates the submarket’s Class A developments are asking, up roughly 30 percent over the past three years, tenants looking for creative space outside the traditional CBD will likely to turn northward as an increasing number of options on Goose Island and in the Clybourn Corridor emerge.
Lease and Sale Highlights
WPP’s lease to occupy 250,000 square feet at Sterling’s Bay planned development at 331 N. Halsted was the submarket’s marquee lease transaction during the quarter and the second largest throughout the CBD. Additionally, Amsterdam-based coworking provider Spaces signed a 40,000-square-foot lease to occupy Tucker Development’s nearly finished 45,614 redevelopment at 159 N. Sangamon, and construction firm Leopardo became the first tenant to prelease space at 210 N. Carpenter, signing a lease 23,309 square feet at the 200,000 square foot development under construction.
Investment sales activity within the submarket remained extremely active during the quarter as Sterling Bay is under contract to sell a three-building complex located at 300 N. Elizabeth for approximately $43 million ($259.04/SF) and local developer Shapack Partners and its capital partners announced that their Class B asset at 220 N. Green Street is now on the market for sale. These two sales share a common theme, as both developers will cash out on assets they acquired a redeveloped well before the area’s true land rush took place.
1330 W FULTON MARKET
25 Research & Forecast Report | Third Quarter 2017 | Downtown Chicago / Office | Colliers International Significant Lease and Sale Activity
Fulton Market Office Leasing Activity – 3Q 2017
TENANT BUILDING CLASS SIZE (SF) DEAL TYPE
WPP 331 N. Halsted A 252,000 New Lease
Spaces 159 N. Sangamon A 39,729 New Lease
Fulton Market Office Investment Sales Activity – 3Q 2017
STATUS ADDRESS CLASS SIZE (SF) SALE PRICE PRICE/SF SELLER BUYER 300 N. Elizabeth P 316 N. Elizabeth A 650,812 TBD TBD Mirae Asset Global Investments TBD 320 N. Elizabeth Shapack Partners, A.J. Capital Partners, FS 220 N. Green St B 90,000 TBD TBD TBD Shorenstein Properties
P = Pending FS = For Sale
26 Research & Forecast Report | Third Quarter 2017 | Downtown Chicago / Office | Colliers International Third Quarter 2017 Office Market Statistics | Local Standards (includes competitive owner-occupied properties)
DIRECT SUBLEASE TOTAL DIRECT NET SUBLET NET TOTAL NET YTD NET ASKING GROSS TOTAL DIRECT SUBLEASE TOTAL CLASS BLDGS VACANCY VACANCY VACANCY ABSORPTION ABSORPTION ABSORPTION ABSORPTION DIRECT RENT INVENTORY SF VACANCY SF VACANCY SF VACANCY SF % % % (SF) (SF) (SF) (SF) PER SF CENTRAL LOOP Class A 15 15,143,125 1,944,947 53,307 1,998,254 12.8% 0.4% 13.2% -125,356 (10,656) -136,012 -381,776 $41.22 Class B 32 20,011,061 2,484,818 161,259 2,646,077 12.4% 0.8% 13.2% 7,728 (16,439) (8,711) (313,292) $35.64 Class C 15 2,554,894 338,260 6,728 344,988 13.2% 0.3% 13.5% -23,646 -2,576 -26,222 -44,402 $28.06 Subtotal 62 37,709,080 4,768,025 221,294 4,989,319 12.6% 0.6% 13.2% -141,274 (29,671) -170,945 -739,470 $37.56 EAST LOOP Class A 4 6,785,561 625,783 32,238 658,021 9.7% 0.5% 9.7% 33,842 23,821 57,663 142,820 $41.06 Class B 16 12,711,882 1,675,605 139,242 1,814,847 13.2% 1.1% 14.3% 6,381 -4,544 1,837 (48,453) $35.36 Class C 35 7,005,449 923,830 16,565 940,395 13.2% 0.2% 13.4% (29,046) (1,210) (30,256) (174,944) $28.80 Subtotal 55 26,502,892 3,225,218 188,045 3,413,263 12.2% 0.7% 12.9% 11,177 18,067 29,244 (80,577) $34.90 NORTH MICHIGAN AVENUE Class A 6 3,786,721 312,759 4,950 317,709 8.3% 0.1% 8.4% 14,519 0 14,519 66,034 $42.24 Class B 23 6,660,819 519,304 33,093 552,397 7.8% 0.5% 8.3% 2,205 (5,383) -3,178 159,160 $32.77 Class C 9 1,453,438 20,233 0 20,233 1.4% 0.0% 1.4% (4,226) 556 -3,670 -1,691 $28.30 Subtotal 38 11,900,978 852,296 38,043 890,339 7.2% 0.3% 7.5% 12,498 (4,827) 7,671 223,503 $36.17 RIVER NORTH Class A 9 11,247,224 856,528 116,068 972,596 7.6% 1.0% 8.6% -23,998 11,642 (12,356) (218,018) $47.59 Class B 29 4,469,234 501,668 9,736 511,404 11.2% 0.2% 11.4% 45,226 5,667 50,893 148,531 $35.87 Class C 13 1,107,367 120,591 26,731 147,322 10.9% 2.4% 13.3% 9,343 3,181 12,524 16,206 $27.03 Subtotal 51 16,823,825 1,478,787 152,535 1,631,322 8.8% 0.9% 9.7% 30,571 20,490 51,061 (53,281) $41.83 WEST LOOP Class A 29 28,352,873 3,368,932 489,451 3,858,383 11.9% 1.7% 13.6% 253,910 (200,085) 53,825 816,285 $47.20 Class B 29 18,419,887 2,589,009 454,910 3,043,919 14.1% 2.5% 16.5% 148,137 62,521 210,658 (10,634) $38.39 Class C 29 3,964,206 230,479 4,221 234,700 5.8% 0.1% 5.9% 7,550 10,309 17,859 27,555 $29.52 Subtotal 87 50,736,966 6,188,420 948,582 7,137,002 12.2% 1.9% 14.1% 409,597 (127,255) 282,342 833,206 $42.69 FULTON MARKET Class A 2 819,118 266,797 0 266,797 32.6% 0.0% 32.6% 38,691 0 38,691 38,691 $46.42 Class B 19 892,272 77,104 3,829 80,933 8.6% 0.4% 9.1% 15,358 0 15,358 74,006 $41.17 Class C 15 652,042 93,828 24,283 118,111 14.4% 3.7% 18.1% -12,437 4,567 -7,870 -20,264 $28.80 Subtotal 36 2,363,432 437,729 28,112 465,841 18.5% 1.2% 19.7% 41,612 4,567 46,179 92,433 $37.94 TOTAL CHICAGO CBD Class A 65 66,134,622 7,375,746 696,014 8,071,760 11.2% 1.1% 12.2% 191,608 (175,278) 16,330 464,036 $44.73 Class B 148 63,165,155 7,847,508 802,069 8,649,577 12.4% 1.3% 13.7% 225,035 41,822 266,857 9,318 $36.42 Class C 117 16,874,196 1,674,759 93,355 1,768,114 9.9% 0.6% 10.5% (231,291) 54,937 (176,354) (159,905) $28.71 Subtotal 329 146,037,173 16,950,475 1,576,611 18,527,086 11.6% 1.1% 12.7% 364,181 -118,629 245,552 275,814 $39.22 QUARTERLY COMPARISONS Q3-17 329 146,037,173 16,950,475 1,576,611 18,527,086 11.6% 1.1% 12.7% 364,181 -118,629 245,552 275,814 $39.22 Q2-17 329 145,886,045 17,026,728 1,457,982 18,484,710 11.7% 1.0% 12.7% -468,223 81,754 -386,469 30,262 $38.95 Q1-17 329 145,886,045 16,558,505 1,539,736 18,098,241 11.4% 1.1% 12.4% 628,050 -211,319 416,731 416,731 $38.73 Q4-16 328 144,601,641 15,831,687 1,369,181 17,200,868 10.9% 0.9% 11.9% -13,197 25,023 11,826 932,682 $37.97 Q3-16 327 143,519,939 14,736,788 1,394,204 16,130,992 10.3% 1.0% 11.2% 832,897 8,338 841,235 920,856 $37.33
27 Research & Forecast Report | Third Quarter 2017 | Downtown Chicago / Office | Colliers International MARKET CONTACT: 396 offices in Robert Patterson Research Analyst | Chicago countries on +1 312 777 2634 68 [email protected] 6 continents CONTRIBUTORS: Stephanie Bujwit | Senior Financial Analyst United States: 153 Stephanie Roberts | Communications Manager Canada: 29 Colliers International | Chicago Latin America: 24 200 South Wacker, Suite 700 Asia Pacific:86 Chicago, IL EMEA: 111 +1 312 648 9150
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Copyright © 2015 Colliers International. The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.