Page 1

SECTION TITLE SECTION SUBTITLE FIRST

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2014

R

CENTRAL BUSINESS DISTRICT

SECTION #

CHICAGO CBD

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FIRST QUARTER 2013 | CHICAGO MARKET OVERVIEW

1


F I RST Q UA RT E R

2014

TABLE OF CONTENTS SE CT ION ONE

CHICAGO MARKET OVERVIEW

CHICAGO ECONOMY 01 Economic Analysis

SE CT ION T WO

CHICAGO CENTRAL BUSINESS DISTRICT

MARKET OVERVIEW

02 Chicago CBD Executive Summary SUPPLY 03 New Development 04 Sublease Space 05 Large Blocks of Direct Availability DEMAND 06 Vacancy Rates 07 Large Deals 08 Absorption FEATURES

2013

09 10 11 12 13

Lease Comparables Investment Sales Forecast Submarket Map Market Statistics

SE CT ION T H RE E

ADDITIONAL INFORMATION 14 Glossary 15 About MB Real Estate

The Chicago Market Overview is published quarterly by MB Real Estate. To obtain additional copies or for further information, please contact: Alex Jin, Research Coordinator 181 West Madison Street, Suite 4700 Chicago, Illinois 60602 (312) 726-1700 www.mbres.com


CHICAGO ECONOMY ECONOMIC ANALYSIS The national unemployment rate was unchanged in March at 6.7 percent with 10.5 million people unemployed. These figures have remained relatively static since December 2013. Nationally, professional and business services added 57,000 jobs in March which is in line with its average monthly gain of 56,000 jobs over the past 12 months.

CHICAGO ECONOMIC ANALYSIS

SECTION ONE

Although the national unemployment rate remains stagnant, the 2014 Akerman Real Estate Industry Outlook Survey found that 70 percent of commercial real estate executives are more optimistic about 2014 than they were about 2013. At the end of March, the U.S. Census Bureau released figures related to the year ending July 1, 2013. The Chicago Consolidated Metropolitan Statistical Area (CMSA) includes the inner region of Chicago and portions of Southeast Wisconsin and Northwest Indiana. The CMSA added an estimated 23,230 residents, which is a growth rate of just 0.3 percent. Cook County contributed the majority of growth adding 46,000 residents since 2010. Although unemployment remained stagnant and the city’s population only grew slightly, Site Selection magazine ranked Chicago the “Top Metro” in the U.S. for corporate investment. In 2013, the metro area became home to 373 new and expanding companies, attracting over $2.8 billion in investment. According to the U.S. Bureau for Labor Statistics, the Chicago-Joliet-Naperville Metropolitan Division, home to 85% of the area’s work force, gained 28,000 new jobs since February of 2013. Two examples from this quarter include plastics firm, Avian, which announced they were moving their headquarters from China to Chicago as well as Archer Daniels Midland moving headquarters from Decatur, Illinois to Chicago. Moody’s Investors Services downgraded Chicago’s credit rating one notch with a negative outlook. This is mainly due to the city’s huge unfunded pension liabilities. While this news is disheartening, not all sources think Chicago is headed to financial ruin. Standard & Poor’s uses a five-point scale (from “very strong” to “very weak”) to determine credit ratings. In the seven categories, Chicago received one “very strong” in liquidity, a “strong” in economy and city management, and one “adequate” in budgetary flexibility. A “weak” was given for institutional framework and “very weak” for budgetary performance and debt, and contingent liabilities. Sources: MBRE Research, BLS, Crain’s Chicago Business, World Business Chicago, Manpower, Moody’s Economy.com

CHICAGO EMPLOYMENT WELL BELOW PEAK AND RECOVERING SLOWLY Chicago MSA Employment (thousands, SA)

4,700 4.593 million Peak: 4.569 million

4,600 4,500 4,400 4.390 million 4,300

Peak-toTrough -7.46%

4,200 Trough: 4.228 million

4,100 4,000 Jul-00

Current: 4.454 million Jan-02

Jul-03

Jan-05

Jul-06

Jan-08

Jul-09

Jan-11

Jul-12

Jan-14

FIRST QUARTER 2014 | CHICAGO MARKET OVERVIEW

1


CENTRAL BUSINESS DISTRICT EXECUTIVE SUMMARY The Chicago Business District (CBD), in total, experienced a net positive absorption of 369,632 square feet in the first quarter. This positive change can be partially attributed to a strong quarter among Central Loop and North Michigan Avenue Class B and C properties. Key Indicators: •

The total CBD direct vacancy rate decreased by 38 basis points and ended the quarter at 14.17 percent. Class B buildings in the River North submarket saw the largest negative absorption, totalling 116,265 square feet. The dissolution of Infinium Capital Management at 600 W. Chicago is indicative of this result. This event in Class B directly contributed to the River North submarket’s net negative overall absorption.

Construction continues at 444 West Lake and is slated to finish in January 2017. This quarter, the building landed two more tenants with DLA Piper preleasing 175,000 square feet, and Servcorp preleasing 25,000 square feet. The proposed O’Donnell building at 150 North Riverside was also able to secure two tenants. William Blair pre-leased 318,000 square feet and Victory Park Capital Advisors LLC pre-leased 25,000 square feet.

The CBD continues to benefit from strong demand drivers that include: a highly educated and sought-after labor force; rapidly expanding tech firms; and government tax incentives put in place by Mayor Rahm Emanuel.

CHICAGO ECONOMIC ANALYSIS

SECTION TWO

The outlook of the overall CBD office market is improving steadily. Direct vacancy has decreased 1.8 percent incrementally since 2010, and the trend looks to continue. New development speculation shows no sign of slowing down due to developer’s continued faith in the CBD. Foreign investors are setting their sights on Chicago due to other showcase markets, such as Manhattan and San Francisco, becoming prohibitively expensive. MB Real Estate’s baseline forecast predicts positive absorption rates and a flat line in office supply over the next two years.

CBD VACANCY AND YEAR-END ABSORPTION SUMMARY Direct Vacancy 1Q2014 Central Loop East Loop N. Michigan Ave. River North South Loop West Loop CBD Chicago Total Net Absorption 1Q2014 Central Loop East Loop N. Michigan Ave. River North South Loop West Loop CBD Chicago Total

A

Change from 4Q2013

11.0% 15.0% 18.5% 9.2% 27.4% 13.2% 13.1%

0.3% -0.6% 2.0% -1.2% 0.0% 0.0% 0.0%

B

Change from 4Q2013

13.3% 23.4% 16.3% 10.8%

-1.6% -0.6% -2.6% 4.4%

12.2% 15.6%

1.2% -0.3%

C

Change from 4Q2013

Total

Change from 4Q2013

14.9% 13.1% 16.3% 8.7% 24.0% 15.1% 14.0%

-0.6% -0.2% -5.6% -1.4% 1.3% -0.5% -1.1%

12.8% 18.2% 17.0% 9.5% 25.6% 13.2% 14.2%

-0.7% -0.4% -2.2% 0.4% 0.7% 0.1% -0.3%

A

B

C

Total

(44,208) 26,292 (40,835) 47,215 38,521 26,985

234,768 76,543 124,255 (116,265) (109,092) 210,210

49,785 (12,705) 33,225 52,484 (24,091) 33,738 132,437

240,345 90,130 116,645 (16,565) (24,091) (36,832) 369,632 Numbers in parentheses are negative

FIRST QUARTER 2014 | CHICAGO MARKET OVERVIEW

2


Potential new developments compete for anchor tenants •

In the first quarter, there were no new additions to the CBD’s inventory. The last building expansion occurred in 2010.

William Blair pre-leased 318,000 square feet at the proposed office building at 150 North Riverside. Victory Park Capital Advisors LLC also pre-leased 25,000 square feet in this building after breaking off negotiations for top floor space at 444 West Lake.

DLA Piper, a Chicago-based law firm, has preleased at 444 W. Lake for 175,000 square feet. They join another Chicago-based law firm, McDermott Will & Emory, which preleased 225,000 square feet in the building in fourth quarter.

2000 - 5 Properties 2001 - 2 Properties 2002 - 2 Properties 2003 - 0 Properties 2004 - 1 Property 2005 - 2 Properties 2006 - 2 Properties 2007 - 0 Properties 2008 - 2 Properties 2009 - 3 Properties 2010 - 1 Expansion 2011 - 0 Properties 2012 - 0 Properties 2013 - 0 Properties 2014 - 0 Properties

2,870,576 904,436 2,236,364 0 1,300,000 2,500,143 1,320,498 0 728,254 3,652,913 933,710 0 0 0 0

Total - 20 Properties

sf sf sf sf sf sf sf sf sf sf sf sf sf sf sf

95.8% 86.9% 94.6% 0.0% 100.0% 97.4% 96.9% 0.0% 70.6% 81.4% 92.9% 0.0% 0.0% 0.0% 0.0%

16,446,894 sf

UNDER CONSTRUCTION/ANNOUNCED 150 N. Riverside 444 West Lake

1,300,000 sf 1,067,400 sf 2,367,400 sf

Total

John Buck’s proposed office tower at 151 North Franklin in the West Loop is working on acquiring tenants. While they have secured $145 million in equity, the project still awaits city approval.

% Leased

SUPPLY

% Leased (Avg)

2000 - 2014 INVENTORY ADDITIONS

CENTRAL BUSINESS DISTRICT

NEW DEVELOPMENT

26.4% 37.5%

2000-2013 INVENTORY ADDITIONS

There are currently 13 tenants in the market seeking spaces greater than 100,000 square feet. Expect to see a few more anchor tenants pre-lease space in these proposed buildings.

Delivered (2000-2013) Delivered (2014)

16,446,894 sf 0 sf

Total Under Construction/Announced Proposed Inventory

16,446,894 sf 2,367,400 sf 711,000 sf

Total

3,078,400 sf

NO NEW DELIVERIES EXPECTED UNTIL 2015 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0%

4,000,000 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 (500,000) (1,000,000) (1,500,000) 2003

2004

2005

2006

New Construction Delivery (square feet)

2007

2008

2009

2010

2011

Absorption (square feet)

2012

2013

2014 YTD

Direct Vacancy Rate %

FIRST QUARTER 2014 | CHICAGO MARKET OVERVIEW

3


Sublease availability inches downward •

The sublease space in the CBD decreased this quarter to 3,027,160 square feet. This is a decrease of 33,597 square feet from the fourth quarter, but all told, sublease availability seems to have leveled off over the last three years.

There are currently 12 large sublease blocks in excess of 50,000 square feet available in Class A and B buildings in the CBD.

Class A buildings in the West Loop have the most sublease space available with 868,305 square feet. The largest block of available Class A sublease space is 154,000 square feet at 550 West Jackson. The largest block in Class B buildings belongs to 225 West Randolph at 239,000 square feet in the old AT&T space.

CENTRAL BUSINESS DISTRICT

SUBLEASE SPACE

2014 SUBLEASE AVAILABILITY SEES SLIGHT DECREASE 6,000,000 SUPPLY

5,000,000 4,000,000 3,000,000

4,467,890

4,644,911

3,714,187

2,376,184

2,404,109

3,158,562

4,201,801

3,576,846

2,897,711

3,214,365

3,060,757

3,027,160

1,000,000

5,458,623

2,000,000

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014 YTD

0

LARGE BLOCKS (MORE THAN 50,000 SQUARE FEET) OF SUBLEASE SPACE CURRENTLY AVAILABLE CLASS A Building Address 550 W Jackson Blvd 77 W Wacker Dr 131 S Dearborn St 1 N Wacker Dr 100 N Riverside 353 N Clark 35 W Wacker Dr Total - 7 Spaces

Size (sf)

Occupancy

Expiration

Floor(s)

Sublandlord

154,418 130,968 128,622 85,496 82,384 75,316 75,000 732,204

Negotiable Vacant Vacant Vacant Negotiable Negotiable 90 Days

June 2017 February 2022 October 2017 March 2015 May 2023 Negotiable December 2024

2-8 11-19 7-8 19-20 7-8 41-42 35-37

Newedge USA United Airlines Citadel Merrill Lynch Hostway Corporation Jenner & Block Winston & Strawn

CLASS B Building Address

Size (sf)

Occupancy

Expiration

Floor(s)

Sublandlord

225 W Randolph St 350 W Mart Ctr 600 W Chicago Ave 10 S Riverside Plz

238,778 126,402 117,101 113,961

Vacant Vacant Vacant 30 Days

December 2022 January 2016 November 2015 Negotiable

22-30 3-5 2 5-6

AT&T AT&T Level 3 Communications Zurich

Total - 4 Spaces

596,242

FIRST QUARTER 2014 | CHICAGO MARKET OVERVIEW

4


Increase in large block availability

The first quarter saw an increase in the total amount of large block space available from the fourth quarter, from 57 blocks to 69 blocks. Most of the availabilities are returning from last quarter. 101 East Erie and 515 North State are both trying to fill the space DraftFCB and the American Medical Association vacated respectively.

CLASS B Building Address 130 E Randolph St 225 W Randolph St 600 W Chicago Ave 303 E Wacker Dr 222 N LaSalle St 233 N Michigan Ave 231 S LaSalle St 410 N Michigan Ave 401 N Michigan Ave 2 N LaSalle St 333 S Wabash Ave 222 S Riverside Plz 222 Merchandise Mart Plz 100 S Wacker Dr 10 S Riverside Plz 120 S LaSalle St 55 E Monroe St 175 W Jackson Blvd 111 E Wacker Dr 205 N Michigan Ave 180 N LaSalle St 230 W Monroe St 1 N Dearborn St 33 N LaSalle St 24 Blocks

Size (sf) 256,362 238,778 231,294 218,822 200,686 133,639 132,336 125,584 104,990 96,753 92,473 84,468 81,225 79,491 71,972 69,519 68,933 68,539 65,804 65,463 61,017 60,182 59,239 59,196 2,726,765

Submarket East Loop West Loop River North East Loop Central Loop East Loop Central Loop North Michigan Avenue North Michigan Avenue Central Loop East Loop West Loop River North West Loop West Loop Central Loop East Loop Central Loop East Loop East Loop Central Loop West Loop Central Loop Central Loop

515 N State St 200 E Randolph St 500 W Monroe St 227 W Monroe St 540 W Madison St 101 E Erie St 10 S Dearborn St 233 S Wacker Dr 550 W Jackson Blvd 77 W Wacker Dr 131 S Dearborn St 440 S LaSalle St 111 S Wacker Dr 20 W Kinzie St 36 E Grand Ave 222 W Adams St 30 S Wacker Dr 333 W Wacker Dr 35 W Wacker Dr 455 N Cityfront Plaza Dr 191 N Wacker Dr 311 S Wacker Dr 181 W Madison St 1 N Wacker Dr 71 S Wacker Dr 1 S Wacker Dr 100 N Riverside Plz 27 Blocks

Size (sf)

Submarket

350,906 339,761 311,049 272,101 241,200 227,569 193,319 189,730 139,763 130,968 128,622 114,912 114,686 95,945 91,316 88,362 86,573 80,736 75,000 68,730 68,029 67,983 67,819 65,496 64,962 57,315 50,000 3,782,852

North Michigan Avenue East Loop West Loop West Loop West Loop North Michigan Avenue Central Loop West Loop West Loop Central Loop Central Loop Central Loop West Loop River North North Michigan Avenue West Loop West Loop West Loop Central Loop North Michigan Avenue West Loop West Loop Central Loop West Loop West Loop West Loop West Loop

SUPPLY

MB Real Estate has identified 40 tenants actively seeking 50,000 square feet or more in the CBD. With the option to prelease inventory before it hits the market or to renew a current lease, large users have a multitude of options. With 69 blocks of large space available in the CBD, the market continues to offer opportunities for companies looking to relocate.

CLASS A Building Address

CENTRAL BUSINESS DISTRICT

LARGE BLOCKS OF DIRECT AVAILABILITY

CLASS C Building Address 311 W Monroe St 401-465 E Illinois St 350 W Mart Ctr 840 S Canal St 111 N Canal St 717 S Desplaines St 401 S State St 2 N Riverside Plz 141 W Jackson Blvd 678 N Kingsbury St 360 N Michigan Ave 740 N Rush St 1-33 S State St 180 N Wabash Ave 363 W Erie St 353 N Clark St 800 S Wells St 435-445 N Michigan Ave 18 Blocks

Size (sf) 354,017 210,000 145,114 144,000 117,082 116,739 110,898 108,340 107,751 83,000 76,855 76,501 70,107 66,466 63,876 58,386 55,000 51,231 2,015,363

Submarket West Loop North Michigan Avenue River North South Loop West Loop South Loop East Loop West Loop Central Loop River North East Loop North Michigan Avenue East Loop East Loop River North River North South Loop North Michigan Avenue

FIRST QUARTER 2014 | CHICAGO MARKET OVERVIEW

5


CBD vacancy rates continue to fall •

Vacancy rates continued to decrease this quarter in the CBD. Total CBD vacancy rates have now dropped 1.8 percent from the most recent peak in 2010. With an improving economy, and a growing demand for Chicago office space, this trend looks likely to continue.

Class A buildings maintained the lowest direct vacancy rate among CBD property classes with 13.1 percent. However, demand seems to have leveled out for Class A, as we saw a marginal 6 basis point increase in direct vacancy since last quarter. Approximately 85,000 square feet of negative net absorption among Central Loop and North Michigan Avenue Class A properties contributed to this change.

Although River North’s vacancy rate increased 37 basis points from last quarter, this submarket still has the lowest vacancy rate in the CBD. While Class A & C saw substantial positive absorption over this period, Class B experienced negative absorption. This can be largely contributed to Infinium Capital Management vacating 92,191 square feet at 600 W. Chicago.

Second only to River North, Central Loop saw a direct vacancy rate of 12.8 percent this quarter. Class B buildings contributed almost 211,000 square feet of positive absorption in this period.

CENTRAL BUSINESS DISTRICT

VACANCY RATES

DEMAND

HISTORIC DIRECT VACANCY : RATES CONTINUE DOWNWARD TREND 18% 16% 14%

13.7%

14.6%

15.7%

17.6%

14.3%

11.7%

11.5%

15.3%

16.0%

15.4%

15.1%

14.5%

14.2%

10%

11.4%

12%

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014 YTD

8%

HISTORIC YEAR-END DIRECT VACANCY MARKET BY CLASS : CLASS RATIO REMAINS CONSISTENT 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2001

2002

2003 Class A

2004

2005

2006

2007

2008

Class B

2009

2010

2011

2012

2013

2014 YTD

Class C

FIRST QUARTER 2014 | CHICAGO MARKET OVERVIEW

6


New large lease activity increases in the first quarter The year started off strong in regard to large leases signed in the CBD. Nineteen new leases were signed that were over 20,000 square feet, nine of which were located in the West Loop.

The largest new lease was William Blair who pre-leased 318,000 square feet at 150 North Riverside which is set to break ground this summer.

The largest renewal belonged to the law firm Katten Muchin Rosenman, which renewed for 245,528 square feet at 525 W. Monroe.

Following suit, DLA Piper signed a lease for 175,000 square feet at 444 West Lake which just broke ground in January and is expected to be completed by early 2017.

OUTLOOK: We expect to see this high number of large lease transactions continue for the remainder of 2014. With both 150 North Riverside and 444 West Lake securing anchor tenants, this will attract other companies to these proposed buildings.

LARGE LEASE TRANSACTIONS

DEMAND

CENTRAL BUSINESS DISTRICT

LARGE DEALS

NEW Tenant

Type

Submarket

Building Address

Size (sf)

William Blair DLA Piper Chicago Public Schools General Electric-Retail Archer Daniels Midland Company Rocket Fuel Context Media Senior Lifestyle Corp Newark Corp SCOR Chicago Cigna R-T Specialty Discover Networked Insights Fusion 92 Victory Park Capital Investors Cap Gemini Blatt, Hasenmiller, Leibsker & Moore Stryker Total - 19 Deals

New New New New New Relo Relo New New New New Relo New New New New New New New

West Loop West Loop Central Loop West Loop Central Loop River North River North East Loop West Loop West Loop West Loop West Loop River North River North River North West Loop West Loop Central Loop River North

150 N. Riverside 444 W. Lake 1 N. Dearborn 227 W. Monroe 77 W. Wacker 350 N. Orleans 330 N. Wabash 111 E. Wacker 300 S. Riverside 233 S. Wacker 525 W. Monroe 500 W. Monroe 350 N. Orleans 350 N. Orleans 440 W. Ontario 150 N. Riverside 333 W. Wacker 10 S. LaSalle 350 N. Orleans

318,000 175,000 161,232 50,000 45,827 35,000 32,650 30,476 30,000 30,000 29,026 27,000 26,136 26,386 25,650 25,000 23,313 22,874 20,551 1,134,121

Tenant

Type

Submarket

Building Address

Size (sf)

Katten Muchin Rosenman EDMC Illinois Institute of Arts Holland & Knight Linked In Havas/Chicago Sprout Social Johnson & Bell Taft Stettinius & Hollister LLP A.T. Kearney SMS Assist Burrell Communications Chicago Stock Exchange American Board of Medical Specialties Total - 12 Deals

Ren Ren Ren Ren Ren Sub Ren Ren Ren Ren/Exp Ren Ren Sub

West Loop River North Central Loop West Loop River North Central Loop Central Loop East Loop West Loop North Michigan Ave East Loop Central Loop River North

525 W. Monroe 350 N. Orleans 131 S. Dearborn 525 W. Monroe 36 E. Grand 131 S. Dearborn 33 W. Monroe 111 E. Wacker 222 W. Adams 875 N. Michigan 233 N. Michigan 440 S. LaSalle 353 N. Clark

245,528 98,997 80,000 80,000 80,000 64,125 60,000 60,000 57,518 50,000 34,508 33,000 27,515 971,191

RENEWAL/EXPANSION/SUBLEASE

Abbreviations: Cons - Consolidation Cont - Contraction Exp - Expansion Relo - Relocation Ren - Renewal Sub - Sublease

FIRST QUARTER 2014 | CHICAGO MARKET OVERVIEW

7


Positive absorption in a strong first quarter •

The CBD experienced 369,632 square feet of positive absorption this quarter with Central Loop, East Loop and North Michigan Avenue submarkets all posting positive net absorptions in the first quarter of 2014.

Merril Lynch vacated 108,280 square feet at 440 S. LaSalle, which is reflected in the net negative absorption for Central Loop Class A.

Even so, the total Central Loop submarket posted 240,345 square feet of positive absorption mainly attributable to Class B buildings. A large contributor to this figure was the 161,232 square foot lease signed by Chicago Public Schools at 1 North Dearborn.

Bank of America’s decision to downsize by four floors at 540 West Madison contributed 157,169 square feet to the net negative absorption seen in the West Loop this quarter. Another contributor was Parsons Brinckerhoff vacating 27,887 square feet from 230 West Monroe.

HISTORIC ABSORPTION: ON TREND FOR 2014 YTD 3,000,000

2,665,184

DEMAND

OUTLOOK: Even as some companies continue to “rightsize” their office space, the CBD continues to post positive net absorption. As more corporations make the decision to move in from suburbs in pursuit of millenial talent, we predict that the CBD will continue to improve for the next few years.

CENTRAL BUSINESS DISTRICT

ABSORPTION

2,566,896

2,500,000 2,000,000 1,500,000 913,519

1,000,000

720,110 472,780

500,000

369,632

0

(1,000,000) (1,500,000)

(136,763)

(186,015)

(500,000)

(509,999) (830,377)

(844,381) (1,144,784)

2002

2003

(720,154)

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014 YTD

HISTORIC ABSORPTION BY SUBMARKET: POSITIVE YEAR-TO-DATE ABSORPTION 2,000,000 1,500,000 1,000,000 500,000 0 (500,000) (1,000,000) 2007 Central Loop

2008 East Loop

2009

2010

2011

North Michigan Avenue

2012

River North

2013 South Loop

2014 YTD West Loop

FIRST QUARTER 2014 | CHICAGO MARKET OVERVIEW

8


More tenant improvement, less average abatement •

Class A initial net rental rates fell from $19.91 to $18.82 for new leases, but Class B and C saw increases.

Tenant improvements increased in all classes for new deals and for classes A & B for renewals, as landlords need to attract tenants by offering more money for improvements at older buildings in the CBD.

Class B renewals saw the largest increase in average initial rate over the past quarter, a change of 6.1 percent. Class A also saw an increase of 5.3 percent over 4Q13.

OUTLOOK: As more building owners look to lease up their buildings in order to sell, landlords have begun offering strong incentive packages. Even so, as average tenant improvement allowance increased almost across the board, average abatement for new deals continues to decline. FEATURES

AVERAGE LEASE TERMS ON NEW AND RENEWAL DEALS NEW DEALS

AVERAGE NET INITIAL RATE

AVERAGE TENANT IMPROVEMENT

AVERAGE ABATEMENT (MONTHS)

AVERAGE TERM (YEARS)

A

B

C

A

B

C

A

B

C

A

B

C

2Q2013 - 1Q2014

$18.82

$16.99

$15.15

$41.53

$37.11

$35.20

6.2

5.5

4.8

7.8

6.5

5.6

2Q2012 - 1Q2013

$19.91

$16.08

$14.34

$34.27

$29.96

$21.93

6.4

6.0

4.7

7.2

6.4

5.5

2Q2011 - 1Q2012

$19.95

$15.08

$13.33

$41.65

$32.08

$22.97

6.8

6.9

5.4

7.7

7.0

5.8

2Q2010 - 1Q2011

$20.11

$15.10

$11.14

$44.58

$26.16

$22.48

8.7

6.8

7.5

8.1

6.7

6.8

2Q2009 - 1Q2010

$19.79

$15.29

$11.97

$39.52

$26.87

$17.74

8.2

6.2

4.4

7.9

6.4

5.6

2Q2008 - 1Q2009

$22.23

$17.04

$13.85

$43.91

$38.87

$32.74

5.2

4.5

4.4

8.6

7.2

7.6

2Q2007 - 1Q2008

$19.40

$15.73

$12.25

$40.56

$38.87

$24.66

4.8

4.4

4.1

7.3

6.7

6.5

2Q2006 - 1Q2007

$18.12

$13.93

$15.39

$49.24

$38.58

$15.19

6.2

5.1

1.9

9.0

7.4

4.8

2Q2005 - 1Q2006

$18.09

$12.67

$10.25

$49.16

$38.58

$26.99

7.2

5.7

4.9

8.9

7.6

7.1

2Q2004 - 1Q2005

$16.67

$12.92

$10.05

$43.12

$42.82

$23.24

7.0

7.2

3.8

10.1

8.7

6.2

2Q2003 - 1Q2004

$17.22

$12.63

$9.43

$40.92

$36.90

$15.89

4.4

5.6

3.1

8.6

8.2

6.2

2Q2002 - 1Q2003

$22.02

$15.34

$11.84

$36.32

$33.66

$27.95

1.6

3.4

1.4

8.1

9.1

6.0

2Q2001 - 1Q2002

$22.65

$16.47

$16.61

$26.88

$27.08

$24.72

1.0

0.3

1.1

7.2

8.4

7.8

RENEWAL DEALS

AVERAGE NET INITIAL RATE

AVERAGE TENANT IMPROVEMENT

AVERAGE ABATEMENT (MONTHS)

CENTRAL BUSINESS DISTRICT

LEASE COMPARABLES

AVERAGE TERM (YEARS)

A

B

C

A

B

C

A

B

C

A

B

C

2Q2013 - 1Q2014

$19.80

$16.35

$12.49

$24.84

$15.34

$9.36

4.4

5.1

3.0

6.0

5.8

3.8

2Q2012 - 1Q2013

$18.80

$15.41

$12.64

$16.00

$10.47

$9.74

5.1

3.1

2.6

6.5

4.5

4.0

2Q2011 - 1Q2012

$19.10

$14.02

$14.09

$14.16

$9.26

$10.70

4.3

4.1

4.1

5.2

4.2

4.6

2Q2010 - 1Q2011

$19.79

$15.24

$10.28

$18.89

$10.56

$7.37

5.8

4.3

5.7

6.1

4.6

4.5

2Q2009 - 1Q2010

$17.80

$15.71

$11.56

$20.47

$10.92

$7.04

6.5

3.4

3.3

6.3

5.1

4.5

2Q2008 - 1Q2009

$21.72

$16.64

$15.36

$22.32

$16.11

$16.49

2.7

3.3

3.0

6.3

5.5

6.7

2Q2007 - 1Q2008

$20.16

$15.58

$13.57

$22.23

$17.28

$21.06

6.1

2.6

2.0

7.4

5.3

7.6

2Q2006 - 1Q2007

$16.07

$13.07

$16.68

$22.14

$17.67

$7.28

4.9

2.9

1.3

6.7

8.4

4.5

2Q2005 - 1Q2006

$16.12

$12.60

$14.39

$24.67

$16.20

$7.45

5.7

1.8

0.0

8.2

6.5

5.4

2Q2004 - 1Q2005

$16.44

$13.07

$10.12

$22.75

$22.50

$8.23

3.5

3.9

0.9

8.1

7.7

5.1

2Q2003 - 1Q2004

$18.54

$13.59

$10.27

$23.36

$16.99

$8.93

2.0

3.1

1.5

8.7

7.0

6.3

2Q2002 - 1Q2003

$22.24

$14.64

$14.50

$16.71

$13.88

$8.20

0.7

1.3

0.3

7.5

7.1

3.5

2Q2001 - 1Q2002

$22.53

$16.54

$12.16

$11.18

$6.05

$3.70

0.2

0.2

0.0

6.2

7.7

3.5

*Lease metrics are compared on a four-quarter basis instead of calendar year, allowing full years of data comparison.

FIRST QUARTER 2014 | CHICAGO MARKET OVERVIEW

9


A busy start to 2014 •

Seven office buildings in the CBD were brought to the market in the first quarter with three located in the West Loop. The largest of the seven buildings available is 70 West Madison which is 1.4 million square feet and listed at $400 million.

Five building sales were also finalized in the first quarter for a total of 3.5 million square feet changing hands and an average price of $184 per square foot. The largest one sold was 311 South Wacker with a total of 1.3 million square feet.

OUTLOOK: The first quarter started out strong in investment sales, and many buildings were added to the current market. Investors continue to view the CBD a favorable investment sales market, so 2014 shows little signs of slowing down.

CENTRAL BUSINESS DISTRICT

INVESTMENT SALES

INVESTMENT SALES: HIGH ACTIVITY TO START 2014

Sale Date

Size (sf)

70 W. Madison 300 N. LaSalle 300 S. Riverside 30 N. LaSalle 230 W. Monroe 101 N. Wacker 200 W. Jackson 131 S. Dearborn 225 W. Randolph 122 S. Michigan 332 S. Michigan 125 S. Clark 555 W. Monroe 20 S. Clark 55 E. Washignton

New On Market New On Market New On Market New On Market New On Market New On Market New On Market On Market On Market On Market On Market On Market On Market On Market On Market

1,420,021 1,302,901 1,040,705 983,000 623,542 599,503 488,000 1,504,364 853,250 512,369 319,401 494,967 419,000 363,657 192,000

309 W. Washington

Price

Price per sf * Class

$ $ $ $ $ $ $

400,000,000.00 880,000,000.00 330,000,000.00 235,920,000.00 125,000,000.00 200,000,000.00 85,000,000.00

$ $ $ $ $ $ $

282.00 675.42 317.09 240.00 200.47 335.00 174.18

$

275,000,000.00

$

322.00

$ $

150,000,000.00 60,000,000.00

$ $

358.00 164.99

Seller

A A A B B A B A B C C B A B C

Gaw/Korean Teachers KBS David Werner/Mizrachi Tishman Speyer Lincoln Property Co. Hines Interests Ares Management Dearborn Capital Group Kushner Companies Ivor Braka Ivor Braka Chicago Public Schools Principal Global M & J Wilkow Morgan Reed Group

Marketing (Eastdil) Marketing (HFF) Marketing (Eastdil) Marketing (JLL) Marketing (HFF) Marketing (JLL) Marketing (Eastdil) N/A Marketing (HFF) Marketing (JLL) Marketing (JLL) Marketing (C&W) Marketing (CBRE) Marketing (JLL) Marketing (CBRE) Marketing (Kiser Group)

On Market

93,610

$

14,700,000.00

$

157.03

C

Ibrahim Shihadeh

541 N. Fairbanks

Under Contract

435,362

$

66,000,000.00

$

152.00

B

101 E. Erie

Under Contract

228,000

$

37,000,000.00

$

162.28

A

32 W. Randolph

Golub & Co. Lexington Corporate Properties Trust David & Barbara Kalish Shorenstein Properties & Fremont Realty Berkley Properties LLC (Michael Silberberg) Farbman Group/ LuburtAdler Partners Equus Capital Partners

Under Contract

226,666

$

13,250,000.00

$

58.46

C

311 S Wacker

1st Qtr 2014

1,300,000

$

302,400,000.00

$

232.62

A

180 N. LaSalle

1st Qtr 2014

770,191

$

126,000,000.00

$

163.60

B

200 W. Monroe

1st Qtr 2014

535,911

$

100,000,000.00

$

187.00

B

359,560 2,965,662

$ $

69,000,000.00 597,400,000.00

$ $

191.90 193.78

B

200 S. Michigan All Sales

1st Qtr 2014 1st Qtr 2014

Status (Buyer or Listing Agent)

FEATURES

Building Address

NMH Geller Undisclosed / CBRE Zeller Realty Group/Cindat Capital Management Beacon Capital Partners Beacon Investments The Shidler Group

*Price per square foot - based off estimated selling price for new to market buildings

FIRST QUARTER 2014 | CHICAGO MARKET OVERVIEW

10


Recovery continues from fourth quarter The CBD direct vacancy rate continued its incremental descent in the first quarter of 2014. Over the last three full years, total vacancy rate has dropped by an average of 50 basis points each year. This year looks to match the trend with substantial net positive absorption across the CBD. Chicago was recently named the number one city for corporate relocations and expansions by Site Selection magazine. Even so, market recovery is slow but steady. We’re optimistic in continued growth, as investment activity in the first quarter alone was $588 million in the CBD.

Class B buildings continue to hold the highest direct vacancy rate of 15.7 percent. In total, however, every class continues to see incremental improvements year-over-year as the economy recovers.

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 YTD 2014 2015

Total Historic and Forecasted Inventory (sf)

Total Historic & Forecasted Occupancy (sf)

120,434,748 119,972,770 118,691,577 121,440,276 122,776,164 124,713,268 125,037,423 126,452,643 128,385,650 126,478,575 125,626,639 125,269,078 130,038,076 130,539,796 130,649,210 131,044,641 131,021,405 130,876,945 130,876,945

104,939,294 106,058,995 106,744,585 109,533,759 108,743,284 107,598,500 106,754,119 106,568,104 105,737,728 108,402,912 110,969,808 110,833,045 110,112,891 109,602,891 110,516,410 111,238,394 111,964,734 112,325,615 112,938,781

1997-2013 Absorption Avg:

613,165

2014 YTD Absorption:

369,632

Direct Vacancy % 12.9% 11.6% 10.1% 9.8% 11.4% 13.7% 14.6% 15.7% 17.6% 14.3% 11.7% 11.5% 15.3% 16.0% 15.4% 15.1% 14.5% 14.2% 13.7%

FEATURES

Mayor Rahm Emanuel has committed himself to attracting new jobs for Chicago’s significant talent pool. He recently attended the South by Southwest Interactive Conference in Austin, Texas to promote Chicago as the perfect city for young entrepreneurs and innovators to get their businesses started.

Year

CENTRAL BUSINESS DISTRICT

FORECAST

While the long-term outlook for the Chicago CBD is positive, Total projected inventory based on addition of projects currently under construction certain obstacles must be addressed in order for the market to Occupancy is forecast based on proprietary assumptions regarding the Chicago MSA’s experience substantial growth. Large tenants continue downsizing total employment due to shrinking space per-employee requirements. This can be attributed to many companies opting for offices with open concepts which decrease the square footage necessary per employee. Another issue arises from the state’s Economic Development for a Growing Economy (EDGE) tax credits. Certain lawmakers cannot agree on the best option to attract and retain big business in Illinois. There are two schools of thought: meeting business’s demands with incentives and breaks, or protecting the state’s revenue. MBRE expects demand to warrant new inventory once the large blocks of availability are absorbed by corporate relocations and technology sector growth. MBRE forecasts decreasing direct vacancy rates as well as improving occupancy levels over the next two years.

HISTORIC & PROJECTED VACANCY: STRONG GROWTH IN OCCUPANCY OVER THE NEXT TWO YEARS 135,000,000

20% 18%

130,000,000

16% 125,000,000

14% 12%

120,000,000

10% 115,000,000

8% 6%

110,000,000

4% 105,000,000

2% 0%

100,000,000 2000

2001

2002

2003

2004

2005

Total Historic and Forecasted Inventory (sf)

2006

2007

2008

2009

2010

2011

2012

Total Historic & Forecasted Occupancy (sf)

2013

YTD 2014

2015

Direct Vacancy %

FIRST QUARTER 2014 | CHICAGO MARKET OVERVIEW

11


CENTRAL BUSINESS DISTRICT

SUBMARKET MAP

FEATURES FIRST QUARTER 2014 | CHICAGO MARKET OVERVIEW

12


CENTRAL LOOP

RBA (sf)

YTD Absorption (sf)

1st Quarter Absorption (sf)

Direct Vacancy (sf)

Direct Vacancy %

Occupancy (sf)

Sublease Vacancy (sf)

Total Vacancy Rate (Direct + Sublease) %

Class A

13,582,321

(44,208)

(44,208)

1,498,295

11.0%

12,084,026

400,507

14.0%

Class B

14,320,601

234,768

234,768

1,907,736

13.3%

12,412,865

363,459

15.9%

Class C

8,618,753

49,785

49,785

1,284,857

14.9%

7,333,895

43,430

15.4%

Total

36,521,675

240,345

240,345

4,690,888

12.8%

31,830,787

807,396

15.1%

EAST LOOP

RBA (sf)

YTD Absorption (sf)

1st Quarter Absorption (sf)

Direct Vacancy (sf)

Direct Vacancy %

Occupancy (sf)

Sublease Vacancy (sf)

Total Vacancy Rate (Direct + Sublease) %

4,063,214

26,292

26,292

611,141

15.0%

3,452,073

55,288

16.4%

10,623,269

76,543

76,543

2,483,985

23.4%

8,139,284

253,364

25.8%

Class C

8,270,579

(12,705)

(12,705)

1,084,211

13.1%

7,186,368

82,071

14.1%

Total

22,957,062

90,130

90,130

4,179,337

18.2%

18,777,725

390,723

19.9%

N. MICHIGAN AVE.

RBA (sf)

YTD Absorption (sf)

1st Quarter Absorption (sf)

Direct Vacancy (sf)

Direct Vacancy %

Occupancy (sf)

Sublease Vacancy (sf)

Total Vacancy Rate (Direct + Sublease) %

Class A

3,996,324

(40,835)

(40,835)

739,633

18.5%

3,256,691

96,287

20.9%

Class B

4,710,688

124,255

124,255

766,421

16.3%

3,944,267

39,229

17.1%

Class C

3,986,596

33,225

33,225

648,934

16.3%

3,337,661

18,572

16.7%

Total

12,693,608

116,645

116,645

2,154,989

17.0%

10,538,619

154,088

18.2%

RIVER NORTH

RBA (sf)

YTD Absorption (sf)

1st Quarter Absorption (sf)

Direct Vacancy (sf)

Direct Vacancy %

Occupancy (sf)

Sublease Vacancy (sf)

Total Vacancy Rate (Direct + Sublease) %

Class A

3,983,086

47,215

47,215

366,450

9.2%

3,616,636

88,088

11.4%

Class B

3,889,765

(116,265)

(116,265)

421,335

10.8%

3,468,430

167,992

15.2%

Class C

5,429,285

52,484

52,484

470,464

8.7%

4,958,821

143,368

11.3%

Total

13,302,136

(16,565)

(16,565)

1,258,249

9.5%

12,043,887

399,447

12.5%

SOUTH LOOP

RBA (sf)

YTD Absorption (sf)

1st Quarter Absorption (sf)

Direct Vacancy (sf)

Direct Vacancy %

Occupancy (sf)

Sublease Vacancy (sf)

Total Vacancy Rate (Direct + Sublease) %

Class A

1,019,325

0

0

279,030

27.4%

740,295

0

27.4%

Class C

1,107,689

(24,091)

(24,091)

265,315

24.0%

842,375

9,786

24.8%

Total

2,127,014

(24,091)

(24,091)

544,345

25.6%

1,582,670

9,786

26.1%

WEST LOOP

RBA (sf)

YTD Absorption (sf)

1st Quarter Absorption (sf)

Direct Vacancy (sf)

Direct Vacancy %

Occupancy (sf)

Sublease Vacancy (sf)

Total Vacancy Rate (Direct + Sublease) %

Class A

27,225,872

38,521

38,521

3,585,902

13.2%

23,639,970

868,305

16.4%

Class B

9,779,425

(109,092)

(109,092)

1,188,727

12.2%

8,590,698

299,007

15.2%

Class C

6,270,153

33,738

33,738

948,893

15.1%

5,321,260

98,408

16.7%

Total

43,275,451

(36,832)

(36,832)

5,723,522

13.2%

37,551,928

1,265,720

16.2%

TOTALS

RBA (sf)

YTD Absorption (sf)

1st Quarter Absorption (sf)

Direct Vacancy (sf)

Direct Vacancy %

Occupancy (sf)

Sublease Vacancy (sf)

Total Vacancy Rate (Direct + Sublease) %

Class A

53,870,142

26,985

26,985

7,080,452

13.1%

46,789,690

1,508,475

15.9%

Class B

43,323,748

210,210

210,210

6,768,204

15.6%

36,555,544

1,123,051

18.2%

Class C

33,683,055

132,437

132,437

4,702,674

14.0%

28,980,381

395,635

15.1%

Total CBD

130,876,945

369,632

369,632

18,551,330

14.2%

112,325,615

3,027,160

16.5%

FEATURES

Class A Class B

CENTRAL BUSINESS DISTRICT

MARKET STATISTICS

Numbers in parentheses are negative

FIRST QUARTER 2014 | CHICAGO MARKET OVERVIEW

13


ADDITIONAL INFORMATION GLOSSARY Absorption: The net change in occupied space over a given period of time. Unless otherwise noted, Net Absorption includes direct and sublease space.

Rental Rates: The annual costs of occupancy for a particular space quoted on a per square foot basis.

Asking Rent: The published rental rate for a space in a building, which may vary from the rent which is negotiated upon by the tenant and landlord.

Sales Price: The total dollar amount paid for a particular property at a particular point in time.

Central Business District: The designations of Central Business District (CBD) and Suburban refer to a particular geographic area within a metropolitan statistical area (MSA) describing the level of real estate development found there. The CBD is characterized by a high density, well organized core within the largest city of a given MSA.

SF: Abbreviation for Square Feet.

Class: A classification used to describe buildings, with Class A reflecting the highest quality and Class C reflecting the lowest quality.

Submarkets: Specific geographic boundaries that serve to delineate a core group of buildings that are competitive with each other and constitute a generally accepted primary competitive set, or peer group. Submarkets are building type specific (office, industrial, retail, etc.), with distinct boundaries dependent on different factors relevant to each building type. Submarkets are non-overlapping, contiguous geographic designations having a cumulative sum that matches the boundaries of the Market they arelocated within.

Direct Vacant Space: Space that is being offered for lease directly from the landlord or owner of a building, as opposed to space being offered in a building by another tenant (or broker of a tenant) trying to sublet a space that has already been leased. Initial Rate: The contracted starting rental rate for the first term of a lease. Inventory: The square footage of buildings that have received a certificate of occupancy and are able to be occupied by tenants. Calculated by adding the Rentable Building Area (RBA) of all properties in a market or submarket. Large Block: The amount of contiguous space available in a building in terms of square footage. Contiguous spaces over 50,000 square feet are considered large by MB Real Estate. Lease Comparable: Comparables are properties with characteristics that are similar in nature. Their signing lease rates and other contracted elements are aggregated to analyze contracted market conditions as opposed to asking market conditions. Market: Geographic boundaries that serve to delineate core areas that are competitive with each other and constitute a generally accepted primary competitive set of areas. Markets are building type specific and are non-overlapping contiguous geographic designations. Markets can be further subdivided into Submarkets. Net Rental Rate: A rental rate that excludes certain expenses that a tenant could incur in occupying office space. Such expenses are expected to be paid directly by the tenant and may include janitorial costs, electricity, utilities, taxes, insurance and other related costs. Preleased Space: The amount of space in a building that has been leased prior to its construction completion date, or certificate of occupancy date. Price/SF: Calculated by dividing the price of a building (either sales price or asking sales price) by the Rentable Building Area (RBA). Rentable Building Area (RBA): The total building square footage that can be occupied by or assigned to a tenant for the purpose of determining a tenant’s rental obligation. Generally, RBA includes a percentage of common areas including all hallways, main lobbies, bathrooms, and telephone closets.

CHICAGO MARKET OVERVIEW

SECTION THREE

Sublease Space: Space that has been leased by a tenant and is being offered for lease back to the market by the tenant with the lease obligation. Sublease space is sometimes referred to as sublet space.

Suburban: The Suburban and Central Business District (CBD) designations refer to a particular geographic area within a metropolitan statistical area (MSA). Suburban is defined as including all office inventory not located in the CBD. Tenant Improvement: Those changes to property to accommodate specific needs of a tenant. TIs include installation or relocation of interior walls or partitions, carpeting or other floor covering, shelves, windows, toilets, etc. The cost of these is negotiated in the lease. Total Vacant Space: Direct plus sublease vacant space. Under Construction: The status of a building that is in the process of being developed, assembled, built or constructed. A building is considered to be under construction after it has begun construction and until it receives a certificate of occupancy. Vacancy Rate: A measurement expressed as a percentage of the total amount of physically vacant space divided by the total amount of existing inventory. Under construction space generally is not included in vacancy calculations. Vacancy rate can be based on direct, sublease, or total vacant space. Vacant Space: Space that is not currently occupied by a tenant, regardless of any lease obligation that may be on the space. Vacant space could be space that is either available or not available. For example, sublease space that is currently being paid for by a tenant but not occupied by that tenant, would be considered vacant space. Likewise, space that has been leased but not yet occupied because of finish work being done, would also be considered vacant space. YTD: Abbreviation for Year-to-Date. Describes statistics that are cumulative from the beginning of a calendar year through whatever time period is being studied.

FIRST QUARTER 2014 | CHICAGO MARKET OVERVIEW

14


Our mission is to provide clients and investors with extraordinary real estate value and unlimited support

MB REAL ESTATE

ABOUT MB REAL ESTATE

At MB Real Estate, our corporate mission is to maximize the value of our clients’ real estate by creating timely and innovative solutions that meet their unique needs and objectives. We offer the highest level of real estate support with our team of committed, results-driven experts in asset and facilities management, leasing, tenant representation, development, project management, and investment services. Supported by dedicated accounting, marketing, human resources, and information technology teams, our unique full-service firm is an industry leader in local and national corporate real estate.

MB REAL ESTATE HEADQUARTERS 181 West Madison, Suite 4700 Chicago, Illinois 60602 phone: 312.726.1700 fax: 312.807.3853

EAST COAST REGIONAL HEADQUARTERS 335 Madison Avenue, 14th Floor New York, New York 10017 phone: 212.350.2300 fax: 212.350.2301

DEPARTMENT LEADERSHIP PATRICIA ALUISI Executive Vice President & Chief Administrative Officer/General Counsel

MARK A. BUTH Executive Vice President & Managing Director of Leasing Services

ANDREW J. DAVIDSON Executive Vice President & Managing Director of Corporate Services & Tenant Advisory

GARY A. DENENBERG Executive Vice President & Managing Director of Leasing Services

DAVID R. GRAFF Senior Vice President of Project Services

COMPANY LEADERSHIP PETER E. RICKER Chairman & CEO

CRAIG G. WALCZYK Senior Vice President/Chief Accounting Officer & Managing Director

KEVIN M. PURCELL Executive Vice President & Chief Operating Officer

JOHN T. MURPHY President

PETER J. WESTMEYER Executive Vice President & Managing Director of Investment Services & MBRE Healthcare Group

FIRST QUARTER 2014 | CHICAGO MARKET OVERVIEW

15

MB Real Estate 1st Quarter Chicago Market Overview  
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