The Rock Report Chicago Central Business District (CBD) Q4 2018 New developments and office space trends are key Total RBA Average Estimated Gross Class components in the Chicago office market, playing a (RSF) Vacancy Rental Rates significant role in the increased vacancy rate within the CBD. A 56,219,708 13.8% $44.00 - $62.00/SF Through December 2018, Chicago’s CBD vacancy B 62,040,951 15.3% $35.00 - $43.00/SF rate increased by 39 basis points with six (6) new office building deliveries. Class A+ Trophy buildings in Chicago’s CBD are in the spotlight, generating C 14,784,979 12.7% $28.00 - $33.00/SF ferocious competition among users looking to occupy office space. If strong preleasing and demand for Class A Prospective Tenants that demand amenity-rich buildings persists, the development pipeline will spaces with abundant natural light in a continue to grow in 2019 to meet demand for this transit-oriented location have their eyes set on new product type. construction, while older Class B and C buildings seek to maintain occupancy by increasing Class A assets reported 2,111,989 of positive net concessions and adding amenities to their existing absorption in 2018, while Class B assets reported space. 631,028 of negative net absorption. Professional service firms continued the trend of densification in relocations and emerging technology firms continue At year-end, Trophy buildings recorded a 10.0% to credit their office space and environment as overall vacancy, while Class A stood at 13.8% and key components of the recruitment and retention Class B increased to 15.3% vacancy rate. process. Tenants demanding high-end buildings continue to Landlords of new developments and updated gravitate towards securing space in new deliveries, assets with substantial Tenant amenities continue leasing 71.7% of the 2.0 million square feet to hold record high rental rates in place, while delivered in 2018, preleasing 29.8% of 2.3 million Landlords of older Class B assets that have yet to square feet of current construction, and preleasing properly reposition themselves in the market are 25.7% of 3.6 million square feet of proposed experiencing substantial vacancy and implementing buildings. Chicago Central Business District (CBD) - Q4 2018 aggressive Tenant concession packages and rental Lastly, two co-working providers signed leases: New rates in an effort to lure Tenants to their assets. York based Bond Collective with 68,123 square feet at 20 North Wacker Drive and WeWork signed Tenants that are in the market for high-quality, Class a lease for its ninth Chicago location at 222 South A space will continue to experience a tight market Riverside Plaza for 60,000 square feet. through 2019, while more cost-conscious users Coworking companies have experienced the most willing to occupy space in older assets are facing an growth of the CBD office Tenants. Coworking increasingly favorable market in the near term. companies are set to lease nearly one million SF of space within the CBD by 2020. WeWork continues to dominate the coworking arena, now operating 26.2% Leasing of coworking space. Leasing activity was quite active in the fourth quarter, with multiple significant leases signed within Chicago’s CBD. Migration Patterns SUBURBAN TO URBAN MIGRATION: Salesforce announced it would anchor a Hines Walgreens, Ferrara Candy, McGraw-Hill, FTD, and development at Wolf Point South, or Salesforce One Span signed leases throughout 2018, and will Tower, for 500,000 square feet, helping bring 393,800 square feet in total of positive gross accommodate an additional 1,000 employees over absorption to Chicago’s CBD over the next twelve the next few years. months. CDW announced it would occupy 625 West Adams The biggest suburban migrator will be Walgreens, Street for 300,000 square feet, expanding by which announced plans to bring 1,300 employees about 75,000 square feet. from its Deerfield HQ into the city as it opens a new 200,000 square foot office at the Old Main Post UBS agreed to give back more than 100,000 square Redevelopment upon the building’s delivery in 2019. feet at 1 North Wacker Drive over the next few years, for a total footprint of about 175,000 square feet. 77,000 SF BMO Harris Bank confirmed that it will anchor a 200,000 SF 50-story office tower at 225 South Canal Street, Union Station, leasing 500,000 square feet of space in the building. The BMO Tower, which it will be 40,000 SF 11,800 SF called, will open in 2022. 65,000 SF TECH FIRM MIGRATION: Bank of America will lease about 500,000 square feet at 110 North Wacker Drive, a new 1.35 million Technology firms, such as Google, Facebook, square-foot high rise development. As part of the and Salesforce, also plan to expand their existing move, Bank of America will vacate over 800,000 footprint in Chicago. Google will expand in Chicago’s square feet of space it currently leases at 135 South CBD by 132,000 square feet, bringing the company’s Lasalle Street. total footprint to 570,000 square feet. Facebook announced is move to 151 North Franklin Street, Google, having outgrown its 1000 West Fulton which equate to a 263,000 square foot move. Market office, signed a 132,000 square foot lease Finally, Salesforce plans on occupying 500,000 at 210 North Carpenter Street in Fulton Market, square feet in Salesforce Tower, or Wolf Point South, bringing the tech company’s footprint to over which is expected to begin construction sometime in 570,000 square feet in Chicago. 2020. Chicago Central Business District (CBD) - Q4 2018 for $510,000,000 However, despite the bump in activity, the CBD is unlikely to match the investment sales activity peak of 2015. 132,000 SF 500,000 SF 263,000 SF Expansion Although investment sales activity is not in its peak as it was in 2015, Blackstone’s $667.8 million-dollar Investment Sales rehabilitation of the Willis Tower, 601W Companies current $500 million-dollar rehabilitation of the Old Investment sales activity within the CBD during the Post Office, and Sterling Bay’s land acquisitions in fourth quarter consisted of four transactions: the Clybourn Corridor illustrate investors’ optimism in Chicago’s long-term health. • Manulife’s sale of One South Wacker Drive for $315,000,000 to 601W Companies • Blue Star Properties sale of 125 South Clark Street (The National) for $194,500,000 to Commerz Real • GLL Real Estate’s sale of 444 North Michigan Avenue for $138,000,000 to CIM Group • Sterling Bay’s sale of 121 West Wacker Drive for $118,500,000 to Ameritus Real Estate In 2018, the sales transaction volume increased by six buildings compared to 2017. The increase in sales volume was primarily driven by developer’s Sterling Bay’s acquisitions of Prudential Plaza for $680,000,000 from 601W Companies and 600 West Chicago Avenue from Equity Commonwealth 2018 Top Sale Transactions Square Address Seller Buyer Price/Per SF Footage One & Two 2,202,000 The 601W Companies Sterling Bay $680,000,000 / $309 Prudential Plaza Portfolio 600 West Chicago Avenue 1,571,000 Equity Commonwealth Sterling Bay $510,000,000 / $325 Brookfield Asset 175 West Jackson Boulevard 1,452,000 Extell Development Company $305,000,000 / $210 Management One South Wacker Drive 1,195,000 John Hancock Real Estate The 601W Companies $317,000,000 / $265 Beacon Capital 303 East Wacker Drive 859,000 Franklin Street Properties $182,000,000 / $212 Partners Olen Commercial Realty Cor- Vanderbilt Partners JV One South Dearborn Street 829,000 $305,000,000 / $343 poration Starwood Capital Chicago Central Business District (CBD) - Q4 2018 New Developments Post Office 151 North Franklin St. 625 West Adams St. Under Construction/ Under Construction Completed Redevelopment Developer: John Buck Developer: White Oak Developer: 601W Companies Size: 820,000 SF Size: 432,000 SF Size: 2.5 Million SF Rental Rate: $32.00-40.00 Net Rental Rate: $32.00-34.00 Net Rental Rate: $30.00-32.00 Net NOTABLE LEASES: NOTABLE LEASES: NOTABLE LEASES: 275,000 SF 300,000 SF 200,000 SF 100,000 SF 77,000 SF Wolf Point South 110 North Wacker St. 225 South Canal St. Under Construction Under Construction Proposed Developer: Hines Developer: Howard Hughes Developer: Riverside Size: TBD Size: 1.4 Million SF Size: TBD (50 stories) Rental Rate: TBD Rental Rate: $39.00-46.00 Net Rental Rate: TBD NOTABLE LEASES: NOTABLE LEASES: NOTABLE LEASES: 500,000 SF 500,000 SF 500,000 SF Chicago Central Business District (CBD) - Q4 2018 Rental Rates The average direct asking rental rate in the CBD ended 2018 at $41.50 per square foot gross, Class Submarket Vacancy Rates A inventory reported an average direct asking rental rate range of $44.00 - $62.00 per square foot gross during the fourth quarter and Class C inventory reported a range of $28.00 - $33.00 per square foot gross. Landlords of large Tenants are in advantageous positions at the negotiations table, as Tenants looking to relocate or renegotiate more favorable terms have fewer options to use as leverage due to strong demand for high-quality space within the market. Source: CoStar Following a slight increase of rates, rents are likely to stabilize. The stabilization in rental rates will be Asking Gross Rental Rates dependent on existing space left behind by Tenants that move into newer developments in Fulton Market, the Old Main Post Office and other sought after buildings and submarkets within Chicago’s CBD. Due to the continued Tenant demand of quality assets, Landlords of such buildings are unlikely to experience downward pressure on rates through 2019, whereas older assets that have not properly maintained and upgraded amenity packages in Source: CoStar demand from Tenants are likely to soften rental rates in an effort to offset mounting vacancy.