MarketView Chicago Downtown Office Q3/2005 - Crain's Chicago ...

MarketView
Chicago Downtown Office
““Dominating the
leasing activity are
law firms and
professional
services firms,
which are the only
industries keeping
the vacancy rate
from rising
significantly.”
QUICK STATS
Vacancy 15.7%
Lease Rates
$29.05 G
Net Absorption* (586,154)
Construction
Current
1.32 msf
“
Change from last
Yr.
Qtr.
* The arrows are trend indicators over the specified time period and do not
represent a positive or negative value. (e.g., absorption could be negative,
but still represent a positive trend over a specified period.)
HOT TOPICS
• A lack of new space
requirements or
expansions contributed to
an increased vacancy rate
of 15.7%, up from 15.5%
at second quarter.
• Year-to-date net
absorption registered
negative 254,664 square
feet at the quarter-lower
when compared to the
same period last year.
• Boeing Co. is under
contract to purchase its
riverfront headquarters at
100 N. Riverside Plaza for
$165 million.
Struggling to gain any positive momentum, the
downtown leasing market increased in vacancy
twenty basis points during the third quarter to
15.7% from 15.5% at second quarter. When
including sublease space, the vacancy rate came
in at 19.3%, up from 18.9% at second quarter.
The majority of the activity remains to be
dominated by early renewals and lease
extensions, as opposed to new space
requirements or expansions.
Throughout the quarter, Brinks Hofer Gilson &
Lione expanded at NBC Tower to 120,000
square feet, and Kirkland & Ellis signed a
600,000-square-foot lease for the 1.3 millionsquare-foot
speculative office building at 300 N.
LaSalle, making the law firm the anchor tenant
of Houston-based Hines’ building which is
scheduled to open in 2009. Morningstar also
announced plans to move its headquarters to the
development planned at Block 37, joining
WBBM-Channel 2 as major tenants committed to
the site.
Year-to-date net absorption registered negative
254,664 square feet at the quarter, which is
significantly lower when compared to the same
period last year, which registered negative
1,106,292 square feet. Demonstrating just how
far the market has to come before reaching
equilibrium, when compared to the same period
in 2003 and 2002, net absorption showed
negative 141,517 square feet and negative
66,641 square feet, respectively.
% Vacancy
16%
14%
12%
10%
8%
6%
4%
2%
0%
© 2005 CB Richard Ellis, Inc.
THIRD QUARTER 2005
Chicago remains on the radar screen as a viable
location for major companies. As Mittal Steel
signs to move its U.S. headquarters to One South
Dearborn, German carmaker Audi is eyeing
Chicago, Los Angeles, New York and other cities
for its new U.S. headquarters and 190 jobs,
however the move would be about five years
away.
The investment market for CBD office properties
continued to be very active with numerous
investors seeking opportunities to place capital.
Boeing Co. is under contract to purchase its
riverfront headquarters at the 770,300-squarefoot
tower at 100 N. Riverside Plaza for $165
million, and Broadway Partners purchased the
512,000-square-foot tower at 300 S. Wacker
Drive from Lincoln Property. German investment
fund DIFA Deutsche Immobilien Fonds AG
agreed to buy the one million-square-foot tower
at 111 S. Wacker Drive for approximately $410
million. Several other assets remain in the
market expected to sell before the year end.
No new construction was delivered during the
third quarter, however One South Dearborn is on
schedule for delivery in the fourth quarter. A new
skyscraper is planned for 300 N. LaSalle, on the
north bank of the Chicago River. Houston-based
developer Hines Interests LP has applied for a
zoning change on the property and submitted to
city officials a design by architect Jon Pickard.
VACANCY RATE VS. LEASE RATE Vacancy Rate 15.7%
Lease Rate $ 29.05 G
4Q01
2Q02
4Q02
2Q03
4Q03
2Q04
4Q04
2Q05
$35
$30
$25
$20
Gross Avg. $/psf

CB Richard Ellis | Chicago Downtown Office | 3Q 2005
Market
Rentable
Area
Direct
Vacancy
Rate %
Net
Absorption
SF
Under
Construction SF
Average Asking
Net Lease Rate $
SF/YR
Overall Vacancy
Rate%*
West Loop 39,913,855 16.3% 9,976 470,000 21.1%
Class A 26,172,378 15.2% (1,027) 470,000 $15-$28 20.2%
Class B 9,394,268 19.0% 99,511 — $7-$14 24.5%
Class C 4,347,209 17.5% (88,508) — $6-$12 18.9%
Central Loop 40,763,262 13.8% (270,977) 850,000 16.7%
Class A 15,255,623 15.6% (106,008) 850,000 $12-$28 20.6%
Class B 16,627,236 10.5% 89,452 — $7-$13 12.6%
Class C 8,880,403 16.9% (254,421) — $5-$10 17.5%
East Loop 21,652,474 18.6% (305,398) — 21.5%
Class A 5,930,836 22.6% (242,852) — $11-$21 28.1%
Class B 10,082,835 20.6% (14,235) — $7-$14 23.0%
Class C 5,638,803 10.8% (48,311) — $5-$10 11.7%
North Michigan 11,860,446 11.8% (62,118) — 14.4%
Class A 4,357,168 13.7% (20,748) — $11-$21 16.6%
Class B 6,685,711 11.3% 7,665 — $8-$15 14.2%
Class C 817,567 4.6% (49,035) — $7-$13 4.6%
River North 4,455,052 25.2% 42,363 — 30.5%
Class A 382,436 25.7% 0 — $10-$16 25.7%
Class B 2,459,111 33.1% 52,043 — $8-$13 42.2%
Class C 1,613,505 13.1% (9,680) — $6-$11 13.8%
Chicago CBD 118,645,089 15.7% (586,154) 1,320,000 19.3%
* Includes Sublease Space
UNEMPLOYMENT RATE
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
Chicago 6.4%
IL State 6.1%
US 4.9%
Although the U.S. economic picture remained relatively
unchanged for the most part, according to recent
statistical measures, Illinois continues to see steady
growth. The Bureau of Labor Statistics of the U.S.
Department of Labor reported that non-farm
employment dipped slightly by 35,000 in September and
the unemployment rate was virtually unchanged at 4.8%.
According to the Commerce Department, real gross
domestic product (GDP) increased at an annual rate of
3.3% in the second quarter of 2005, down from 3.8% at
first quarter 2005.
2.0%
1.0%
0.0%
4Q02
1Q03
2Q03
3Q03
4Q03
1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
Illinois’ employment picture showed improvement in third
quarter as it posted an unemployment rate of 5.7%,
down from 6.2% at second quarter, reported the Illinois
Department of Employment Security. This was the
seventh consecutive month of job growth, bringing
57,300 new jobs to the area since January.
© 2005 CB Richard Ellis, Inc.

CB Richard Ellis | Chicago Downtown Office | 3Q 2005
VACANCY & NET ABSORPTION
Absorption sf (586,154)
Vacancy 15.7%
AVERAGE ASKING LEASE RATES
1,000.0
20.0%
Absorption sf (000's)
600.0
200.0
(200.0)
(600.0)
(1,000.0)
(1,400.0)
$30.00
18.0%
16.0%
14.0%
12.0%
Vacancy %
Gross Avg. Asking Rent
$25.00
$20.00
(1,800.0)
1Q03
2Q03
3Q03
4Q03
1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
10.0%
$15.00
2000
2001
2002
2003
2004
1Q2005
2Q2005
3Q2005
Sq. Ft. Under Construction
Overall, the CBD vacancy rate increased by 0.2% at third quarter to
15.7% from 15.5% at second quarter. The East Loop submarket showed
the largest increase in vacancy during the quarter at 18.6%, up from
17.2% at second quarter. This is attributed to Deloitte & Touche
vacating space 180 North Stetson and several tenants vacating Aon
Center. Both the Central Loop and North Michigan Avenue submarket
increased in vacancy to 13.8% and 11.8%, respectively, while the West
Loop decreased to 16.3%.
Net absorption for the quarter came in at negative 586,154 square feet
and negative 254,664 square feet year-to-date. The West Loop and
River North submarkets were the only to post positive net absorption at
9,976 square feet and 42,363 square feet, respectively. Year-to-date,
the net absorption is much lower when compared to the same period in
2004 which reported negative 1,106,292 square feet.
CONSTRUCTION ACTIVITY
6,000,000
5,000,000
4,000,000
3,000,000
2,000,000
1,000,000
0
2001
2002
2003
No new buildings were delivered in the third quarter, however, One S.
Dearborn is on schedule to bring over 850,000 square feet to the market
in the fourth quarter. Hines Interests LP submitted plans for a new
skyscraper located at 300 N. LaSalle in the CBD to be designed by
architect Jon Pickard. The year has already experienced over 2.5 million
square feet of new construction year-to-date and by year-end this number
will be more than 2004 and 2003 combined.
2004
1Q2005
2Q2005
3Q2005
Average asking net lease rates remained relatively unchanged during
the quarter. For Class A space, the average asking net lease rate
increased for the West and Central Loop submarkets reporting $15-$28
per square foot. The East Loop, North Michigan Ave and River North
submarkets showed the same average net lease rates as second quarter
reporting $11-$21, $11-$21 and $10-$16, respectively. The tenants
market will continue until a marked improvement is made in the vacancy
rate. Concessions are abundant such as free rent and construction
allowances.
MARKET OUTLOOK
With only one quarter remaining in 2005, the
Chicago downtown office market will continue its
pattern of little to no improvement. Without job
growth or new business, the market will be unable
to overcome the current oversupply of office space
both new and old thus remaining in its current state
of high vacancy and negative net absorption.
The delivery of One S. Dearborn will no doubt
impact the overall CBD as tenants leave holes in
other buildings to relocate into the new tower. With
its delivery also comes over 275,000 square feet of
vacant space.
The investment market will remain active
throughout the rest of the year with several other
buildings changing hands before year end at low
cap rates and high prices per square foot.
© 2005 CB Richard Ellis, Inc.

MarketView | Chicago Downtown Office | 3Q 2005
TOP CHICAGO LEASE TRANSACTIONS
Size (sf) Tenant Address
600,000 Kirkland & Ellis 300 North LaSalle Street
185,000 Morningstar Block 37
90,000 Barton Brands Ltd. 1 South Dearborn Street
63,880 O’Hagen, Smith & Amundsen 150 North Michigan Avenue
55,000 USG 550 West Adams Street
51,929 CATS/NIPC 233 South Wacker Drive
36,010 Chuhak & Tecson 30 South Wacker Drive
CHICAGO SUBMARKET MAP
NET LEASES
Includes all lease types whereby the tenant pays an agreed
rent plus most, or all, of the operating expenses and taxes for
the property, including utilities, insurance and/or maintenance
expenses.
MARKET COVERAGE
Includes all competitive office buildings 20,000 sf and greater
in size.
NET ABSORPTION
The change in occupied square feet from one period to the
next.
NET RENTABLE AREA
The gross building square footage minus the elevator core,
flues, pipe shafts, vertical ducts, balconies, and stairwell areas.
OCCUPIED SQUARE FEET
Building area not considered vacant.
UNDER CONSTRUCTION
Buildings which have begun construction as evidenced by site
excavation or foundation work.
VACANT SQUARE FEET
Existing Building Area which is physically vacant or
immediately available.
VACANCY RATE
Vacant Building Feet divided by the Net Rentable Area.
OVERALL VACANCY RATE
Vacant Building Feet plus sublease space divided by the Net
Rentable Area.
© Copyright 2005 CB Richard Ellis (CBRE) Statistics contained herein may represent a different data set than that used to generate National Vacancy and
Availability Index statistics published by CB Richard Ellis’ Corporate Communications Department or CB Richard Ellis’ research and Econometric
Forecasting unit, Torto Wheaton Research. Information herein has been obtained from sources believed reliable. While we do not doubt its accuracy, we
have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to independently confirm its accuracy and
completeness. Any projections, opinions, assumptions or estimates used are for example only and do not represent the current or future performance of
the market. This information is designed exclusively for use by CB Richard Ellis clients, and cannot be reproduced without prior written permission of
CB Richard Ellis.
For more information regarding the
MarketView, please contact:
Allison Johnson or Jamie Haas, Office Research
Group
CB Richard Ellis
311 South Wacker Drive, Suite 400, Chicago, Illinois 60606
T. 312.935.1400 • F. 312.935.1880
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