Highest vacancy in 3 years for suburban offices

By Eddie Baeb, Oct. 06, 2008

(Crain’s) — The suburban office vacancy rate rose to the highest level in more than three years, as new construction outpaced feeble demand due to corporate downsizing.

The direct vacancy rate, which doesn’t count space available for sublease, edged up to 19.1% in the third quarter, compared with 18.6% in the second quarter, according to commercial real estate services firm Jones Lang LaSalle Inc.

Today’s rate is more than 2 percentage points higher than a year ago, when it stood at 17%. When sublease space is included, the vacancy rate in the suburbs is 22.5%, compared with 20.6% in the third quarter last year.

Vacancies are likely to go higher still, as few companies are expanding given the strong likelihood of recession along with the turmoil in the lending markets and upheaval in the financial sector. The U.S. Labor Department reported Friday that companies cut 159,000 jobs in September, the ninth straight month of job losses, and the biggest cut in five years.

“Companies are tightening their belts,” says Fred Schuler, a managing director with Jones Lang who co-heads the company’s group that represents suburban Chicago office tenants.

Mr. Schuler, whose group became part of Jones Lang with the company’s recent acquisition of Dallas-based Staubach Co., predicts vacancies will rise and rents will fall.

Asking rents had been defying the vacancy trend and pushing higher before dipping in the third quarter to $22.51 per square foot from $22.54 in the second quarter.

Demand, which is measured by net absorption, was 125,112 square feet in the third quarter. But for the year, net absorption is -592,089 square feet, according to Jones Lang data. Net absorption is the change in the amount of leased and occupied space compared with the prior period.

Mr. Schuler says the economy’s woes and the increasing supply of available space have made the market more tenant-friendly.

He says a client recently had him search for 200,000-square-foot spaces throughout the suburbs, and that he turned up 12 viable options. That’s two to three times as many as there were a year or more ago, Mr. Schuler says.

Also, three new office buildings were completed in the third quarter. One is in west suburban Downers Grove while two are in the northern suburbs of Glenview and Lake Forest. The buildings total about 480,000 square feet, and so far just about 34,000 square feet has been leased.

“Tenants have a lot of options,” Mr. Schuler says.

The trends have landlords concerned, with some acknowledging that rents are likely to come down. But most worrisome to Peter Holstein, investment director with Chicago-based Romanek Properties Ltd., is that in recent months the flow of prospective tenants has dwindled to a trickle.

“If you have traffic, you can find a way to make deals,” Mr. Holstein says. “And traffic is slow right now.”

Notable leases in the third quarter included:

• Solo Cup Co. leased 130,000 square feet at 150 S. Saunders Road in Lake Forest. The maker of disposable plates and cups is moving its headquarters from Highland Park, while also closing its factory there and moving people to Lake Forest from an office at 200 Tri State International in Lincolnshire.

• Astellas Pharma U.S. Inc., the U.S. arm of a Japanese pharmaceutical firm, added 50,000 square feet at the Parkway North complex in Deerfield at 6 Parkway North. The company’s new lease amounts to a 22% expansion in the complex, as the company also has 230,000 square feet at 3 Parkway North.

• Great Lakes Dredge & Dock Co., the nation’s largest provider of dredging services, increased its headquarters space by about 30% to 52,033 square feet as part of a lease renewal and extension at 2122 York Road in Oak Brook.