CHICAGO
Amid unequaled economic turbulence, natural disaster threats, slowing consumer spending as tax rebates play out and the anticipation of the president-elect’s upcoming policy changes, businesses collectively froze and waited for something to happen. For the metro Chicagoland area real estate market, the third quarter was more of the same at best.
The overall Chicago market saw a slight increase in the vacancy rate to 17.1%, up from 16.9% in the second quarter. The central business district saw a loss of occupied space of nearly 200,000 square feet in the third quarter, while the suburbs posted absorption as several new tenants occupied space there.
All 12 metropolitan areas of Illinois posted over-the-year unemployment rate increases. The metro Chicago area reported a 7.5% unemployment rate, which is 210 basis points higher than the rate one year earlier. The third quarter may be one of the most memorable, if not historic, three months in capital markets history.
Even though this financial market fallout will not have the same impact on the Chicagoland office market as it will in Manhattan, future vacancies and/or sublease availabilities will inevitably rise. Merrill Lynch & Co., American International Group Inc. (AIG), Lehman Brothers Holdings Inc. and Washington Mutual Inc. have a considerable presence in Chicago and in the near-term, these troubled companies may put large blocks of space up for sublease.
Despite the generally dismal economic outlook, there are signs that Chicago will continue to fare better than the national averages. Whether it is the highly-skilled labor force, prime central location, economic incentives or a combination of all three, new tenants continue to move into this market.
ATLANTA
Weakening economic fundamentals are eroding confidence among business leaders, many of whom have avoided committing to substantial blocks of new office space. Instead, many leaders are choosing to stay put in their current locations until credit markets recover and economic activity rebounds. Predictably, overall absorption has remained flat at 113,617 square feet year-to-date, and sublease space, a primary indicator of company downsizing, has been gradually rising to 5 million square feet as of the third quarter.
Despite these negative indicators, the Atlanta market remains fundamentally sound. Tenant growth and expansion has slowed, and despite the rise in sublease availability, there is no indication that companies are taking steps to substantially reduce owned or leased blocks of space. There is no exodus of companies from core submarkets. Tenants have been content to reduce costs until the economy stabilizes.
A large majority of sublease offerings are originating from class A suburban office environments. Companies that choose to downsize and place space back on the market are essentially attempting to cut occupancy costs, a rising trend.
Looking ahead, the greatest challenge is accurately forecasting the overall impact of uncertainty in the U.S. economy on metro Atlanta, the fastest growing metro region in the U.S. during the past 10 years. It is predicted metro Atlanta will lose 20,600 jobs by the end of 2008, a far cry from the 27,900 job additions originally forecast for the region. This is a reliable indicator of reduced office space demand, but because commercial real estate generally lags behind the broader economy, the effects of these losses may not be seen for months. A drop in overall demand will test the historically resilient submarkets of Buckhead and Midtown, both of which have new buildings under construction.
BOSTON
The credit crisis that has claimed some of America’s largest financial institutions could have a smaller impact on the Boston office market compared to prior downturns.
Some large financial institutions occupy Boston’s class A office space, but there are other industry sectors that make up a large portion of the Boston office market that are currently seeing a period of growth. These include: educational institutions, the life science and biotechnology industry and the healthcare industry. Bank of America Corp., one of the largest tenants in Boston, occupies a total of 1.3 million square feet at One Hundred Federal Street, One Federal Street, and One Financial Center. Adding to the presence of Bank of America in Boston is their recent acquisition of Merrill Lynch & Co., which occupies some 95,000 square feet in the state. When the deal is finalized, consolidations will inevitably occur.
The Downtown Boston office market will also face numerous challenges from other companies that are involved in the financial markets and banking.
Office demand remained strong in the area. Total absorption last quarter increased significantly to 1.2 million square feet, mainly due to several significant leases. By focusing solely on the recent quarterly absorption figures, one may have overlooked the recent dip in leasing activity in the Greater Boston office market. The high volume of deals signed in 2006 and 2007 helped to keep absorption numbers inflated in 2008, despite outward signs of a weakening economy. Rents in the Greater Boston market have begun to show signs of softening and have started to level off and flatten.
The third quarter saw absorption of 157,367 square feet in the central business district. The bulk of the increase occurred in the Financial District and offset the loss of tenants in the Back Bay. The inner suburbs had the greatest activity, specifically in the South Market, due to the recent opening of 3 Blackfan Circle Center for Life Sciences Boston. Third quarter saw 537,866 square feet of absorption because of this asset.
There has been little foreclosure activity in the Boston investment market. Commercial real estate loan defaults are reportedly be-
low 1%. However, savvy investors are trying to remain liquid as opportunities arise.
Analysis by Grubb & Ellis Co.
