Higher rents ahead
Tenants can expect fewer breaks as landlords gain edge
Attorney Steven Weiss, whose firm recently relocated, says landlords were reluctant to negotiate or to sweeten offers. Photo: Stephen J. Serio
Vacancies are dropping at downtown office buildings — good news for landlords but bad news for prospective tenants looking for breaks on rent.
The brighter times for landlords may be short-lived, however, as five new high-rises are set to open by late 2009. The almost 4.4 million square feet of additional office space from the new buildings will push vacancy rates to about 16%, from around 14% this year, according to a report by John Buck Co.'s Strategic Advisory Group.
Rents on premium office space are expected to climb about 6% this year to their highest level since 2002, the report by Buck's tenant-representation group shows.
Landlords welcome any good news in a market where vacancies remain high and rents are still below where they were five years ago.
"We were tired of getting our brains beat in," says C. J. Dempsey, vice-president of leasing for Chicago-based Equity Office Properties Trust, which owns seven office buildings downtown. "The tide has definitely turned."
Attorney Steven Weiss, chairman of business litigation firm Schopf & Weiss LLP, says landlords were reluctant to negotiate or sweeten offers while he was looking for a new location last year. The 22-lawyer firm moved in December from 312 W. Randolph St. to 1 S. Wacker Drive, where it is leasing an entire floor.
"Landlords felt things were moving in their direction over time, so they weren't quite as anxious to get deals done quickly," says Mr. Weiss, who led the search, which began in late 2005. "There wasn't as much flexibility as we expected."
However, most landlords were still offering money for interior improvements as well as six to 12 months of free rent, he says. Such perks, which became commonplace when the market soured for landlords in 2002, were even more generous a couple of years ago.
The office market's momentum and weakening demand for downtown condos prompted Prime Group Realty Trust, a Chicago-based real estate investment trust, to scrap plans to convert some floors at its 330 N. Wabash Ave. building to condos.
The building, formerly known as IBM Plaza, is losing its largest tenant, law firm Jenner & Block LLP, to one of the new buildings opening in 2009. Jenner is vacating about 20% of the building's total space. IBM vacated a similar amount of space in 2006.
Some investors are betting the Chicago office market will continue to improve. Sales of office towers last year eclipsed $5 billion, shattering the previous high of $3.3 billion set in 2005.
GE Asset Management Inc. was among the buyers last year, acquiring 181 W. Madison St. for $294 million, and now owns three office towers here — the most since GE entered the market in the 1980s, Managing Director Jerry Karr says.
The company had a banner year with its marquee Chicago property, Citigroup Center, at 500 W. Madison St., where GE signed new leases and renewed existing ones totaling 330,000 square feet — almost a quarter of the entire office space.
"We see Chicago as a major investment market," Mr. Karr says. "Has it been the place that has seen the most appreciation the last couple years? No. That's all the more reason I like Chicago. We believe that Chicago's turn is coming."
http://www.chicagobusiness.com/cgi-bin/mag/article.pl?article_id=27088&postDate=2007-01-13
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