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Suburban Market Fundamentals Remain Soft

Tenants remain relatively active in suburban Chicago, especially in revived Class-A developments, but overall, it is a tough market for landlords, as availability levels throughout many submarkets keep ticking upward, according to Savills’ midyear report.

Suburban availability rates in the second quarter of 2019

The availability rate for the region increased 120 basis points year over year to 27.5%, and even in Class-A properties, availability jumped 200 basis points to 26.8%, Savills found. The O’Hare submarket, which for several years has been the suburban standout, saw its availability increase 70 basis points from the previous quarter to 21.1%, still the region’s lowest overall availability rate.

“With more than a quarter of all suburban office inventory available for lease, tenant-favorable conditions are likely to persist in the short-to-medium term,” Savills said.  

Despite the big jumps in availability, leasing activity was solid in the second quarter, according to Savills. Tenants leased about 1.5M SF, just at the suburbs’ five-year average. Overall asking rents in the suburbs averaged $23.90/SF, increasing 1.2% year over year.

Class-A properties continue to perform best. Of the space leased in the second quarter, 60% was in Class-A buildings, and nine of the 10 largest transactions in the second quarter were within Class-A properties, Savills found. Class-A rents have risen 2% year over year to $27.52/SF.

“Meanwhile, medium and large size companies were reluctant to seek out new locales,” Savills said.

In the quarter’s top 10 lease deals, nine were renewals, with only Edward-Elmhurst Health executing a relocation, consolidating multiple offices and taking 190K SF at 4201 Winfield Road in Warrenville.

Exterior of Continental Towers

The office building amenities arms race seen in downtown Chicago is now being fought by suburban landlords, and Savills expects that to continue. Many suburban owners bought these properties at low cost in the past several years, and then began adding full-service gyms, coworking lounges and outdoor community spaces.

At Bannockburn Lakes in the North submarket, for example, GlenStar Properties began providing free Lyft rides to and from commuter rail stations for its tenants’ employees.

The buying spree of suburban Class-A properties has slowed, Savills added, with the only major suburban sale of the quarter being Group RMC’s $84M purchase from Blackstone of the Executive Towers West complex in Downers Grove.