Oh beautiful, for spacious offices: Expanding leases speak to market strength

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Here’s some exciting office market news before your July 4th long weekend. Both the Chicago CBD and suburbs finished Q2 with a flurry of deals. In fact, since Q3 2014, more than 60 percent of 20,000-plus square-foot leases in both submarkets have been expansions.
Suburban companies valuing back office support and parking

As the economy grows, the suburbs continue to be the prime locations for companies’ back office functions like call centers, accounting and tech support. Parking ratios remain a limiting factor in office densification, which means virtually all suburban firms are maintaining either a growing or stable real estate footprint. Recent expansions include a host of big brands (Verizon, Zurich, CDW), as well as Baxalta, Baxter’s pharmaceutical spinoff, taking 260,000 square feet in a complex, multi-step deal at 1200 Lakeside Drive in Bannockburn.

“Expanding tenants mean large blocks of Class A suburban space are a rarity, forcing growing office users to think creatively,” says JLL’s Ben Erskine, who helped represent Baxalta along with Ken Bodel and John Musgjerd. Bannockburn made sense for Baxalta, allowing the firm to remain in the North market, a pharmaceutical hub. Its new space is currently occupied by several tenants including Catamaran and Barilla, which JLL represented in strategic moves to other suburban locations.

With employment numbers and the housing market continuing to improve, expect a ramp-up in suburban expansions as companies grow their footprints to keep pace. “With its appealing economics and talent pool, the North market remains a perennial favorite among local Fortune 500 firms,” says JLL’s Dan McCarthy. Along with Henry Lee, he represented Barilla in its relocation to 885 Sunset Ridge Road in Northbrook.

CBD benefitting from tech and suburban relocations

Growing companies in the CBD have signed leases totaling over 2.3 million square feet since Q3 2014. Leases of note include New York-based coworking company WeWork taking 105,000 square feet at 20 W. Kinzie, backfilling space that will be vacated by Google when it relocates to 1K Fulton in the West Loop, and Avant leasing 82,700 square feet at 222 N. LaSalle.

Avant’s lease, as well as tenants like Uber and Gogo moving into 111 N. Canal, speak to tech and creative firms’ continued interest in Class B spaces. Lower rents in historic buildings or converted warehouses allow tenants to prioritize and spend more on their space’s unique interior build-out. However, as demand for this type of space intensifies, more and more Class B buildings are getting facelifts and rents are reaching new competitive levels.

The CBD’s Millenial-focused, tech-forward allure extends well beyond the usual Silicon Valley suspects. Infant formula manufacturer Mead Johnson recently signed a 75,000 square-foot lease at 444 W. Lake, relocating from its Glenview office in the North Suburbs. Other companies like McDonald’s, Venta Airwasher and Textura Corp. also took the plunge earlier this year and established a downtown presence.

As expansions cause Class A rents to continue to skyrocket (they’ve increased 9.2 percent since the end of 2011) and 2.5 million square feet and growing of Class C space is removed from the office market due to hotel and multifamily conversions, that upward and downward pressure may permanently change the face of the Trophy market and welcome formerly Class B stock.

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