(Crain's) — Downtown office landlords took another step forward in the third quarter, but a sputtering economy could stand in the way of a full recovery.
The downtown office vacancy rate, including sublease space, fell to 15.8% in the quarter, down from 15.9% a quarter earlier and 17.0% a year earlier, according to a report from CB Richard Ellis Inc. It was the third quarterly decline in a row.
Net absorption, a key demand gauge measuring the change in the amount of leased and occupied space compared with the previous period, was positive for a fifth consecutive quarter, the report shows. Downtown net absorption totaled 192,976 square feet, down from 549,090 in the second quarter.
The positive numbers are good news for building owners still smarting from the recession. Yet with the economy slowing down, few landlords are feeling confident about the future.
“It wouldn't take much to stop the positive momentum we've seen,” says CB Richard Ellis Executive Vice-president Cal Wessman, who represents tenants. “If people decide a second recession is coming, or if a major employer decides to scale back, that could put the brakes on it.”
Asking rents averaged $31.98, barely up from $31.82 the previous period and $31.67 a year earlier. And actual downtown rents remain virtually unchanged in recent quarters, according to many real estate professionals.
Many tenants are signing leases for less office space after cutting jobs since the recession. But there are pockets of growth, especially in the technology sector. Mr. Wessman says many small tech firms have expanded, going, say, from 10,000 to 20,000 square feet, leases that have a positive cumulative effect on the market.
“There are a lot of technology companies out there who are saying, ‘We want to double our space. We want to take another floor,'” he says. “That's a great sign for Chicago.”
One-fourth of office jobs created in the U.S. within the past 18 months were in high-tech software and services, according to a new report from Chicago-based real estate firm Jones Lang LaSalle Inc. The report classifies Chicago as an emerging high-tech market and says “the announced acquisition of Motorola Mobility by Google could bolster start-up activity and lend to the creation of a mobile high-tech cluster.”
The JLL report notes that new social media, digital marketing and application and Web development companies are driving growth in the area, mostly downtown.
“Though the sector is experiencing overall growth in Chicago, it has not yet reach a large enough critical mass to impact office market conditions in a metro (area) containing 235 million square feet of space,” the report says.
On the supply side, several developers continue to court big tenants to anchor new downtown buildings. None have succeeded yet, good news for existing landlords.
“It's possible that a new building gets announced in the next 12 months,” Mr. Wessman says. “More than one would be tough in this environment.”
Direct vacancy at downtown buildings fell for a fifth consecutive quarter. It is now 14.3%, a drop from 15.1% a year ago. Direct vacancy at Class A buildings was flat at 13.2%, but fell to 14.8% from 15.3% at Class B buildings. The Class C direct vacancy rate was unchanged at 15.4%.
Big tenants that signed leases in the third quarter included Fifth Third Bank, which expanded and renewed at 222 S. Riverside Plaza. The bank, Mr. Wessman''s client, now rents 218,135 square feet in the West Loop building, an increase of 35,000 square feet.
“Fifth Third was kind of anomaly, in that they increased space,” he says.
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