Contact: Jeffron Boynes, (312) 413-8702, [email protected]
UIC STUDY: LOOP OFFICE SPACE SHRINKING
A study conducted by the Center for Urban Real Estate at the University of Illinois at Chicago shows a downtown real estate marketplace with a growing problem: premier office space is shrinking in one of the nation's tightest real estate markets.
Compounding the problem is the fact that the space crunch, which is making it difficult for tenants to find office space in newer, more prestigious buildings, is also sending rental prices for older properties spiraling upward.
John McDonald, director of the center and the department of finance at UIC, researched downtown real estate properties and collected data on office occupancy rates, rents and property taxes in an attempt to verify market trends he uncovered in 1997. He discovered that the downtown office occupancy rate is rapidly increasing. The overall occupancy rate of 88 percent - a 1.7 percent increase over fall 1997 - is at its highest level in nearly ten years.
"The picture that emerges from this study is one of an office market that has run out of class-A or premier office space," says McDonald. "Rent increases are inducing several developers to plan for the construction of additional class-A space. These plans are being driven by recent increases in the sales prices of downtown office buildings."
McDonald drew his conclusions from a sample of 324 downtown buildings that make up about 97 percent of Chicago's Central Business District. He surveyed the properties from Jan. 1 to July 1, 1998. Rent figures were gathered from data on 92 office leases from January to August. McDonald divided downtown office space into three building classifications for his analysis: class A, or space in buildings built since 1985 that boast state of the art systems and excellent accessibility; class B, or space in buildings built between 1961 and 1984 that appeal to a wide range of users with average tenant cost; and class C, or space in pre-1961 buildings, primarily aimed at tenants requiring functional space. His research findings are published in the fall edition of "The Building Owners and Managers Association (BOMA) of Chicago Office Market Report." This is the second in a new series of reports, which represents the most comprehensive examination of the office market in downtown Chicago. The report replaces the "BOMA/Chicago Occupancy Survey," which had been issued annually in the fall and spring, and the "BOMA Rent Barometer," which had been issued in the winter.
In presenting his findings at the 28th annual meeting of the Illinois Economic Association in October, McDonald said the occupancy rate for the 39 newest class-A buildings in the Loop now stands at 95 percent. Furthermore, for the first half of 1998, gross rents for class-A properties stood at $26.26 per square foot, a 2-percent increase over 1997. Class-B properties were 87-percent occupied, with gross rents up 17 percent to $22.94. Class-C gross rents were $17.28, up 3 percent, while occupancy rates registered at 84 percent, a 4-percent increase. At the same time, the market for retail space in downtown office buildings continues to be tight, with a current occupancy rate of 90 percent. O'Hare-area office buildings (those within the Chicago city limits) have an occupancy of rate of 94 percent, reflecting a continuing westward migration of the downtown office market. Gross rents O'Hare properties are close to rents for class-A buildings in the downtown area.
Given this type of market outlook, more tenants may take a closer look at class-B and C properties for their office space requirements, says McDonald. For the foreseeable future, class-A tenants may have to choose alternate sites because there's a shortage of class-A space. In other words, as Class-A space is leased up, demand trickles down to space in aging properties, which are the next available locations in quality.
According to McDonald, it might appear that the broader solution to this growing pattern of limited office space, rising demand and surging rents would be for developers and deal-makers to plunk down investment capital and increase available office space by building newer buildings. But looking beyond the study's results, McDonald cautions building owners and developers not to be quick to invest in new office buildings. "While current rent levels do not justify new construction, the recent increases suggest that, by the time construction is complete, new buildings perhaps can be developed and sold at a profit," he says. "However, potential developers are aware that the recent slowdowns in the growth of the U.S. economy, and the turbulence in domestic and international financial markets, makes investment in new office buildings at this time a risky business."
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