Two roads are diverging in Chicago, as evidenced by first quarter’s mind-boggling 35.2 percent spread between Class A and Class B asking rents downtown. While the triennial property tax assessment pushed landlords of choice properties to raise rents to record highs, they’re controlling the sticker shock with substantial concession packages.
Tenant improvement allowances are up by an average of 33 percent in the CBD over the past five years, something “that’s really moving the needle for tenant decision,” JLL Managing Director of Research Christian Beaudoin recently told Crain’s Chicago Business.
Construction costs rose 3 percent last year, there’s more than 7 million square feet of product under construction and landlords are competing aggressively to land tenants. These factors are fueling tenant demand for TI dollars, which will be applied toward building out creative, highly amenitized spaces in configurations ranging from traditional to progressive (like GGP at River North Point).
While financial services and law firms are shedding excess second generation Class A space, those vacancies continue to be offset by suburban relocations (including McGraw-Hill and AdTalem Education), particularly to the West Loop. Leasing activity has already reached more than 45 percent of last year’s total volume, a roaring start to the year bolstered by the urban migration trend.
Class A also outperformed its peers in the Chicago suburbs, with 113,665 square feet of absorption and rents climbing to $26.20 per square foot. Vacancy has stabilized across the market, a positive sign supported by pharmaceutical wins in the North Lake submarket (Depomed’s new lease and Abbott Laboratories’ move-in) as well as major move-ins (American Academy of Dermatology, Batory Foods) in the O’Hare submarket, a perennial outperformer.
The biggest suburban opportunity remains the repositioning of major holes left by corporate occupiers that left for downtown. Landlords leveraging investment dollars to stay on the front-end of this shift are already seeing positive results, both in leasing velocity and municipal support for large scale redevelopment projects.
“There’s a reason that (the repositioning and backfilling) is happening. It’s not just to respond to downtown migration. It’s because there’s a want and a need,” JLL Analyst Lauren Tilmont explained in Crains’ Chicago Business.
The balance of 2018 may bring a trickle-down effect from broader economic activity. With construction costs trending up, we’re watching for signs of cost-push inflation due to peak pricing on labor and materials. Farther afield, the $50 billion of tariffs on China, in addition to the steel and aluminum tariffs, enacted by the United States could trigger even higher prices across the industry.