Chicago’s Northwest Suburban Class-A Occupancy Plummeted After Steady 6-Year Climb. Here’s Why Pros Aren’t Alarmed
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“Wait, What Just Happened to the Occupancy Rate” is the title of NAI Hiffman’s new REfocus video, and it is a question many will have after viewing the ostensibly shocking Q4 office leasing data. The Chicago Northwest suburban Class-A occupancy rate steadily climbed from 70% in 2010 to a high-water mark of 80% in Q3 2016, but in the fourth quarter, it plummeted to 75%, falling as much in three months as it rose in the previous four years.
The drop is remarkable both in direction and magnitude, yet few are concerned. NAI Hiffman brokers Michael Flynn, Jason Wurtz and Jack Reardon illuminated why the Northwest office market’s future actually looks quite bright.
Bisnow: Class-A seems to have comprised a greater portion of absorbed office space over the past six years around Chicago than in other regions. Why is this, and why did the Northwest have the highest absorption of any submarket during this period?
Wurtz: The Northwest suburban office market was hit hard by the recession, which damaged the area’s vacancy rates and lowered prices. Competing with other submarkets, it had to be aggressive with renewals at quality assets and structures for new deals. After demonstrating continued growth and stability in our economy, [the area presented] a great opportunity for corporations to take advantage of opportunistic Class-A pricing. This in turn led to a disproportionate but positive post-recession absorption rate for Class-A.
Bisnow: The video presents two causes for the drop observed last quarter: new inventory added by the 1.6M SF Lakewood Center (diminishing Class-A percent by raising total SF) and Zurich Insurance Group moving to its new corporate HQ (leaving 895K SF of Class-A space unoccupied). Are these the only responsible factors?
Reardon: Yes, those two events were the most significant drivers. As evidence of the market’s resilience and positive momentum, Zurich Towers has already re-leased approximately 50% of the vacancy.
Wurtz: Lakewood Center, AT&T’s former campus in Hoffman Estates, will need to be re-leased to one or more very large tenants, as it does not subdivide well for small users. These events created a spike in the vacancy rate, but it’s important to realize that only two properties were affected. The Class-A market is still very well leased.
Bisnow: Can a portion of the drop be attributed to a shift in tenant attitudes or budget constraints that may have forced them to relocate to less desirable spaces?
Flynn: Neither tenant relocated to less desirable space. Zurich chose to create a new environment, meeting new cultural and layout objectives with large floor plates that did not exist in the marketplace.
AT&T no longer had a strategic need for the large facility. They were able to reduce head count and relocate remaining employees to other facilities, like the ones in Arlington Heights and downtown Chicago. This resulted in significant real estate cost savings.
Bisnow: Is there truly no cause for concern?
Reardon: We don’t think there is. Large blocks come back on the market and can have a huge impact to the overall vacancy numbers, but when this happens it’s not necessarily a reflection of the overall submarket health.
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