Lack of demand stymies suburban office market
(Crain's) — The suburban office vacancy rate climbed for the 13th straight quarter, and despite a pickup in activity and property sales, the weak job market is dampening expectations of a recovery.
The overall vacancy rate, which includes sublease space, climbed to 25.4% in the second quarter from 25.2% in the first quarter, according to data from Jones Lang LaSalle Inc. The second quarter's rate is the highest in more than a decade and is more than a percentage point above the year-ago level of 24.3%.
Despite increased activity from businesses scouting for space — including a handful of big firms looking for more than 100,000 square feet — expansions remain scarce and the vacancy is likely to continue rising.
"We're not going to see marked improvement," says Jeffrey Shay, a senior vice-president with Chicago-based Jones Lang who represents suburban office landlords. "There's not enough demand."
The U.S. Labor Department reported Friday that the private sector added just 83,000 jobs nationwide last month. Economists surveyed by Bloomberg News had expected private-sector payrolls to gain 110,000 jobs. Non-farm payrolls nationwide declined by 125,000 as the government cut almost a quarter-million temporary employees who were working on the 2010 census. It was the first monthly drop recorded this year.
While Jones Lang's Mr. Shay says he's encouraged by the big prospects currently in the market — they weren't there a year or even six months ago — demand from smaller firms continues to lag.
Diane Swonk, chief economist with Chicago-based Mesirow Financial, echoed that point in a June 30 report.
"Large companies are regaining confidence and appear to be dipping their toes back in the water of hiring again. Small businesses, which generate the lion's share of new jobs in the U.S., however, remain hesitant to hire," Ms. Swonk wrote. "The recovery continues, but with more growth coming from productivity growth than job growth."
Demand for suburban office space, as measured by net absorption, was -347,452 square feet through the first half of the year, according to Jones Lang data. The bright side is that's an improvement from last year, when net absorption for the year was a whopping -2.17 million square feet. Net absorption is the change in the amount of leased and occupied space compared with the prior period.
The investment sales market has picked up, with year-to-date volume of $192 million. Much of the activity stems from distressed properties going back to lenders — a process Jones Lang euphemistically dubs "lender reclamation."
In hopes of snaring tenants, landlords of distressed and healthy buildings continue to push generous incentive packages, loaded with months of free rent and tenant-improvement allowances. Many also are doing deals that extend leases of current tenants out into future years in exchange for rent reductions.
"Everybody's doing aggressive deals," says Joseph Neverauskas, a Chicago-based senior vice-president with real estate investment firm BPG Properties Ltd.
The so-called direct vacancy rate, which doesn't count sublease space because it's leased, also has risen 13 straight quarters and now stands at 22%, according to Jones Lang data. Average overall asking rents dropped for an eighth straight quarter to $21.71 per square foot. That's the lowest rents have been since the first quarter of 2007, when rents were $20.91 a foot.
Mr. Neverauskas of Pittsburgh-based BPG, which owns two local office complexes in northwest suburban Long Grove and southwest suburban Bolingbrook, says the big companies weighing their options aren't moving fast.
"They're very slow to make decisions right now, and there are so many doggone options," he says. "I'm still concerned about the fundamentals because of the amount of space — and good quality space — that's available. Anything that's not primo is going to have a hard time getting leased."
Notable deals in the second quarter included:
• PrimeSource Healthcare Systems Inc., which provides mobile health care and billing services, leased 77,000 square feet for a new headquarters at 2100 E. Lake Cook Road in Buffalo Grove. The deal triples the size of the company's current headquarters space at 775 Waukegan Road in Deerfield.
• CompTIA, an information technology trade group, leased 32,289 square feet at 3500 Lacey Road in Downers Grove for a new headquarters. CompTIA is moving from 1815 S. Meyers Road in Oakbrook Terrace.
• Restaurant.com, which offers online restaurant coupons, expanded and extended its lease at One North Arlington in Arlington Heights in a 28,685-square-foot deal.
