Suburban office vacancy hits 2-year high
(Crain's) — The vacancy rate for suburban office space shot up during the second quarter to the highest level in more than two years, as demand for space fell amid the weakening economy.
The vacancy rate jumped to 13.1% in the second quarter, compared to 12.6% during the first quarter and 12.5% during the second quarter of 2007, according to commercial real estate services firm Transwestern. The vacancy rate is at its highest level since the first quarter of 2006, when it was 13.7%.
Including space available for sublease, the vacancy rate was 14.6% during the second quarter, compared to 14.1% during the first quarter and 14.1% during the second quarter of 2007. Most experts agree that the suburban office market is in a slump, although Transwestern puts the vacancy level as lower than some of its rivals.
The vacancy rate rose partly because demand for space declined by 203,000 square feet during the quarter, compared to an increase of 302,000 square feet during the first quarter. Demand is measured by net absorption, the change in the amount of leased and occupied space.
Now, amid the uncertainty in the economy created by rising gas prices and a falling stock market, the suburban office market stands at a crossroads.
On the one hand, should the economy continue to deteriorate, the suburban vacancy rates are likely to rise.
On the other hand, things might stop getting worse. In a sign that the suburban office market could tread water, Transwestern says the Chicago-area economy will be sluggish for the remainder of 2008, with no increase in jobs.
"We will kind of bump along here for a while, but I don't expect the local economy is going to get dramatically worse," says Fred Ishler, a senior vice-president in Transwestern's Chicago office. The suburban vacancy rate "will slightly improve for all for suburban markets overall between now and the end of the year, but I don't think it will improve dramatically."
That sober assessment is the optimist's view, and not every one shares it.
"I think there's going to be a continuation of the same level of both vacancy and absorption that you've seen," says tenant representative Steven Steinmeyer, an executive vice-president with Chicago-based real estate firm Jones Lang LaSalle Inc. "The question is: Is it going to get worse?"
New construction also contributed to the higher vacancy rate. The total amount of space in the suburban market rose 4.2%, to almost 210 million square feet, during the second quarter, compared to the prior period. But the pace of new office developments is slowing, the report says.
Vacancy rates continued to rise during the second quarter in two trouble spots, the O'Hare and Northwest suburban submarkets. But Mr. Ishler predicts the vacancy rate in both areas will decline by the end of the year.
"I fully expect, based on the activity that we are seeing now, a number of substantial deals will happen," he says.
A couple large, second-quarter lease deals were still being confirmed, but some of the notable transactions during the quarter include:
* The North American subsidiary of bus company National Express PLC leased a 49,637-square-foot call center at 4300 Weaver Parkway, Warrenville, in the Cantera mixed-use development. The single-story structure is owned by a venture called Levy Cantera LLC, which includes developer/restaurateur Lawrence Levy.
* Adventure travel firm Abercrombie & Kent Ltd. is expanding by more than half, to about 42,000 square feet, as part of a move planned for August to Executive Towers West in Downers Grove. The three-building complex is owned by Indianapolis-based Duke Realty Corp.
* Hospital bed and medical equipment manufacturer ArjoHuntleigh leased 30,641 square feet at 2349 W. Lake St. in the Meadows Office Park in west suburban Addison. The two-building complex is managed by Itasca-based developer Hamilton Partners.
