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Midwest

Midwest

Chicago’s older buildings are reaping the rewards of the technology revolution as several in the central business district are undergoing renovations to house the growing number of high-tech companies choosing to make Chicago their home. Formerly known as the Lytton Building, 247 S. State St. is remodeling, rewiring and changing its name to the Chicago Information Technology Exchange. Soon to be known as the Lakeside Technology Center, the R.R. Donnelley Building also is changing its name to reflect a new image. In the suburbs, more than 1 million square feet of new construction were added to the market, causing vacancy to increase in spite of positive absorption. The East-West and North submarkets were especially active, with 696,429 square feet and 521,799 square feet of new product, respectively.

Although Detroit has seen suburban new construction begin to level off due to land scarcity,particularly in Auburn Hills, where there is huge demand,redevelopment in the central business district will make potential tenants take a closer look there. With the new Comerica Park, Ford Field, strong demand for space and $6 billion forecast for new projects, Detroit is expecting a construction boom. Activity remains strong in the suburban market as existing space, as well as new space, continues to be absorbed.

Market activity increased in the first quarter in both downtown and suburban South Bend.

In addition to activity from local office users, there is interest from new prospects entering the market looking for Class A and B office space.

Telecom firms looking for office space have become ubiquitous in downtown Cleveland. The city is so concerned about the possible loss of ground-floor retail in the city’s older office buildings that it has enacted legislation outlawing telecommunications equipment on the ground floors of buildings within downtown shopping districts. Meanwhile, in the Columbus office market, there is a continuation of more than 750,000 square feet of new suburban office development annually. Positive net absorption was more than 1.2 million square feet in the suburban market and 40,000 square feet in the central business district. Rental rates remain stable downtown, while a softening in rents has begun to occur in the suburban market

In Des Moines, the activity level remains high; however there is negative pressure on rates due to certain current and future vacancies. Build-to-suit activity is increasing. Allies Insurance will commence construction of 500,000-square-foot headquarters downtown in 2001.

St. Louis remains in the midst of a development boom with approximately two million square feet of office space under construction and more than four million square feet still on the drawing boards. Three major projects totaling more than 900,000 square feet will change the Clayton skyline, St. Louis’ premier office market. Clayton has not seen speculative construction in 15 years. Groundbreaking for the garage at Cupples Station is scheduled for May 25. This is the first phase of the Cupples Station office redevelopment, which will combine turn-of-the century warehouses with new construction to create a 440,000 square foot domed office development in the heart of downtown St. Louis.

Meanwhile, new construction slated for 2000 in Kansas City is down significantly from the past two years and it is unlikely that current planned development will add any new space that won’t be quickly absorbed. Over the next several months, the overall market will see decreases in vacancy, with rate increases in most submarkets as they continue to tighten.

Northeast

Boston’s office vacancy has reached an 18-year low, plummeting to 4.6%, and rents have spiked to record highs. There are no landlord concessions, and tenants literally must commit “today” if they hope to meet their space needs tomorrow. Little loosening is seen, as lending institutions remain cautious about funding new supply. Recently delivered buildings are nearly completely pre-leased before the moving vans back up to offload furniture. Overall, the 7.6 million square feet of speculative construction under way is already 53% pre-leased. Seven build-to-suit projects will satisfy another 1.4 million square feet of demand.

In Boston’s downtown, vacancy is only 2.1% and Class A rents have shot to $60-plus. Rehabs scheduled for the next eight to 12 months already are seeing commitments. In the suburbs, Cambridge is at full occupancy with vacancy at zero. Class A space is snapped up at rents in the mid-50s, up $10 during the quarter. New construction is already committed and, to top it off, a construction moratorium is in place. The situation for growing firms is critical, with suburban moves the only alternative.

In the suburbs, vacancy has also plunged and rents in Waltham have reached unprecedented levels, in the mid-40s. The robust economy continues its unabated expansion, generating record absorption in every submarket. Rents will continue to escalate with tenants increasingly encountering bidding wars for space. Demand is outstripping supply and unless one or the other of these important drivers changes, rents will continue to skyrocket.

Manhattan’s first-quarter absorption reached 4 million square feet, prolonging the rapid leasing velocity of the latter half of 1999, during which 10 million square feet were absorbed. The quarter featured 13 transactions involving more than 100,000 square feet each, as many large blocks of space were eagerly swallowed up, contributing to a decline in vacancies from 7.1% to 5.9%. For remaining blocks, the combination of low vacancy levels and strong demand has pushed overall direct asking rents up $3 to $48.39.

Out on Long Island, with high demand and continued shortage of space, especially Class A, new construction is pre-leasing at a brisk rate. Office and high-tech conversions also are growing. Because of these factors corporations will require greater lead time in planning their real estate needs. This strong and healthy market is expected to continue through 2000. Westchester County has completed its fourth consecutive quarter of positive net absorption, reducing availability to 18.2% from 22.1% a year ago, when it peaked as a result of major business restructuring. Long-vacant buildings in White Plains, renovated to meet demand, have begun to lease. While internal business growth is the primary force behind leasing, some businesses have leaped over the state line from neighboring Fairfield County, a trend that will continue. Availability in the White Plains central business district has dropped more than 6 percentage points from a year ago, and asking rates for class A space have increased 12% to $28.24. Despite the dramatic rise, class A space in White Plains still offers an average savings of about $5 from Stamford, and will continue to draw businesses with near-term expansion needs. Meanwhile, in Fairfield County, strength in leasing activity reduced availability by 1.1 percentage points from year-end, with particular strength in the eastern part of the county where larger space options were readily available through new construction and business restructuring. The cost for class A space in the east comes at $10 savings from the $31.66 cost in Stamford and $31.98 rate in the very tight central-county market. With very little class A space available countywide, the average rental rate for class B space has increased more than 6% from a year ago, to $21.66. Renovating and upgrading of class B buildings and, consequently, upward pressure on rents will continue as landlords attempt to compete for tenants and capitalize on the tight market.

While speculative construction and corporate consolidations moderated availability levels in New Jersey last year, by the first quarter the overall availability rate has fallen to 15%, as this space was being absorbed by corporations expanding their operations. By the first quarter, there were approximately 6 million square feet of new construction under way in the Garden State, as developers have sought to put a dent in the strong demand for space. Rental rates for class A space continue to trend higher, as buildings completed in the strongest markets have asking rents above $30.

Landlords in the greater Philadelphia office market remained in control in the first quarter; however, negotiating techniques with new tenants have become more of a “balancing act.” Leasing activity is strong. New construction activity for the suburban office market remains at more than 2 million square feet for the sixth consecutive quarter. Investors continue to look for opportunities with “upside” potential. Meanwhile, in Pittsburgh, a second wave of office construction is under way. Following a strong year of completions in 1999, approximately 700,000 square feet of new, speculative product broke ground in the Fringe and suburban submarkets during the first quarter.

Southeast

New construction starts have slowed in Orlando, while vacancy rises market-wide and rent concessions return to the market. Still, strong absorption numbers are calming developer fears of an overbuilt market. More than 55% of the 1 million square feet of new class-A office space in the central business district has been leased. In Tampa, SBC Communications Inc announced that it is establishing a presence and will hire 800 people over the next two years, an important addition to the strength and stability of the economy. Jacksonville’s overall market remained strong during the first quarter, with the only over-supply showing up in the flex market. Deerwood Park shows a vacancy rate of just 7% with only Koger’s 120,000-square-foot building under construction. Highwoods is anticipating breaking ground on the first new downtown building since 1989.

The Atlanta economy, boosted by high-tech business expansion and migration, created 112,000 jobs over a 12-month period ended in March. This economic growth fueled confidence in Atlanta’s office market, and there are more than 6.4 million square feet under construction. Of this amount, Class A space accounted for 5.5 million square feet, and the three submarkets with the largest amount of construction activity were Central Perimeter, North Fulton and Midtown. High-tech companies such as EarthLink and Yahoo leased more than 1 million square feet during the past year.

The total of 2.2 million square feet of office space absorbed in Atlanta during the first quarter was an increase of 1.5 million square feet from the fourth quarter of 1999. This absorption was split evenly between the urban submarkets of Downtown, Midtown and Buckhead and the suburbs. The submarket leaders in absorption were North Fulton and Downtown.

The overall vacancy rate for metro Atlanta increased slightly from 9.9% to 11.4%, but class A vacancy fell from 8.5% to 7.6%. The overall vacancy rate in the urban submarkets fell from 8.7% to 7.8%, and this reduction can be attributed in part to the redevelopment of older facilities near fiber-optic lines for growing high-tech companies.

In the Greenville-Spartanburg market, both the central business district and suburban vacancy rates continue to decrease as demand strengthens. Ford Motor Credit’s new suburban facility will be a 90,000-square-foot addition to Greenville’s growing list of corporate tenants.

In Richmond, Innsbrook remains the most desired suburban office location as demonstrated by high demand, less than 3% vacancy, and under-construction buildings that are substantially pre-leased. With the phenomenal growth of Capital One and solid growth of other companies, several established office parks in the northwest quadrant are now fully developed or nearly so. There continues to be an abundance of office users seeking to purchase small and mid-size office buildings; however, very little product is available in this category.

While Louisville continues to experience corporate downsizing, the excitement created by the city’s new high-tech corridor, eMainUSA, is expected to boost activity within the central business district. Class A rents remain high and the downtown market is clearly gaining momentum. Robust demand in the suburban market resulted in record-setting net absorption and continues to fuel development with 178,000 square feet completed during the first quarter of the year and more than 600,000 square feet slated for delivery during the next 18 months.

In Nashville, just more than 800,000 square feet was absorbed in the first quarter from five delivered office buildings. Existing Nashville companies expanded into the new spaces, while dot-com companies subleased the vacated space and alleviated a predicted glut, especially in the West End corridor. Overall, rental rates increased slightly from the end of 1999.

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