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EXCLUSIVE: Downtown Chicago Office Market Hot, Suburbs Pretty Warm

As new product was poised to enter the Chicago office market earlier this year, the prospect of more sluggish fundamentals during the third quarter reared its head. But it hasn't happened, according to Q3 data made available to Bisnow by the Chicago office of Newmark Knight Frank.

John Buck's 151 North Franklin, where a large block of Downtown office space was taken by Facebook.

"Office fundamentals are strong Downtown, and there are spots of strength in the suburbs," NKF Director of Research Amy Binstein said.

According to NKF, metro vacancy in the Chicago office market dropped to 16.6% during Q3 2018, down 30 basis points compared with the previous quarter and 120 basis points year over year.

Metro rents are up, increasing to an average of $29.75/SF from $29.12/SF quarter over quarter.

Downtown, vacancies dropped fully half a percentage point during the third quarter to 13%, after an uptick in the second quarter. Downtown was awash with deals during Q3, most notably Facebook, which took 260K SF at 151 North Franklin, but CIBC, CTC and WeWork also took large blocks. 

All together, more than 750K SF was absorbed during Q3 in Downtown Chicago, making a year-to-date total of more than 1.6M SF. Currently 5.2M SF is under construction, according to NKF.

Aldi's Chicago-area operation inked the largest suburban office lease during Q3 2018.

"The suburbs are a little patchier than Downtown," Binstein said. "The O'Hare market is doing exceptionally well, and I-88 West is seeing some strong activity, which we haven't seen for a while. Schuaumburg is seeing activity in the office sector as well."

Though the urban core has been attractive in recent years, the suburbs still have their charms for some office space users. 

"Some investors who feel that office buildings are too expensive Downtown are buying properties in the suburbs," Binstein said. "The new owners are doing upgrades to suburban buildings, adding nice amenities, so the buildings can compete for tenants against Downtown properties that might not be so amenity-rich."

There is also the feeling that millennials aren't going to want to live in the city all of their lives, and that as they start families, many will want to be in the suburbs, Binstein said.

"So despite corporate relocations to the city, there's been a quieter interest in some suburban locations."

During the third quarter, the northern suburbs took a thumping with Takeda's decision to close its U.S. HQ in Deerfield and move to Boston, vacating about 770K SF, but there were also some major leases, such as Aldi's taking of 113K SF in the I-88 West market, and WOW Cable and SMS Assist likewise taking space in that market (40K SF and 37K SF, respectively).  

All together, about 240K SF was absorbed in the suburbs during the third quarter, with a year-to-date total of more than 905K SF.