The pounding hangover that grips the suffering Chicago office market is growing more painful, if the latest real estate figures are an indication.
In fact, 1992 will be the worst year for the downtown office market in 17 years, or since CB Commercial Real Estate Group began keeping such statistics. The amount of empty space downtown increased by 638,000 square feet in the last year, according to CB Commercial numbers released Tuesday. And that poor leasing record drove office vacancies to 19.6 percent, also a high since 1975.
The number jumps even higher, to 21 percent, when the known amount of sublease space available-2.2 million square feet-is factored in.
Some of the city`s newer buildings have the biggest blocks of empty space. There are almost 5 million square feet of vacant offices in 15 buildings that have opened since 1990, CB said, the equivalent of all the office space in the Sears Tower and the Board of Trade combined.
The news was a little better in the suburbs, where 600,000 square feet of additional office space was filled. Still, that lowered suburban vacancies only slightly, to 19.2 percent from 19.4 percent a year ago.
”Although the market remains way out of balance, overall leasing activity during 1992 was better than projected,” said Harold Ulvestad, CB Commercial executive vice president.
”Despite corporate downsizing,” Ulvestad said, the amount of office space being leased downtown was actually up 1 million square feet earlier in 1992. But the number dropped significantly when the Sears Merchandise Group moved to Hoffman Estates, leaving 1.3 million square feet of space in Sears Tower.
Cushman & Wakefield Inc., also reporting figures Tuesday, said downtown vacancies stood at 21.8 percent, with more than 25 million square feet of office space available for lease or sublease. Because different real estate firms have different means of measuring the office supply, their numbers do not always coincide.
Cushman & Wakefield, for example, reported an increase in leased space downtown. That`s because it had accounted for the vacant Sears space in 1991 when the retailing giant announced it was moving. Sears did not leave all its space until this year.
The numbers are even more discouraging when put in absolute and not percentage terms, argues David Wilson, vice president and senior broker with Realsource Inc.
Wilson has drawn up a historical analysis of occupancies in the central business district, which showed that the vacancy in today`s market-more than 22 million square feet-is equal to almost 40 percent of the total inventory of office space in the city in 1980, when it was 57 million feet.
Coupled with a white-collar work force that is in cyclical decline, dampening office space demand for years to come, ”the cloud of substantial vacancies (may) linger for an extended period of time, perhaps into the next century,” Wilson said.
The Building Owners and Managers Association/Chicago, in its latest downtown office report, found occupancies dropping below 80 percent for the first time in that group`s survey history, dating to the Great Depression.
Occupancy stood at 79.9 percent, BOMA/Chicago said, down from 80.56 percent in the spring. Occupancies have dropped steadily from a high of 86.98 percent in the fall of 1988.
The 1987-88 period also marked the last time there was a decrease in total vacant space, to 12 million from 14 million feet, according to Wilson`s numbers.
But Llani O`Connor, BOMA/Chicago`s executive vice president, predicted that occupancies should start to rise now that no new buildings are under construction. The only project in the works, the rehabilitation of the Old State of Illinois Center, is guaranteed to be filled by government tenants.
”1992 signals the end of the occupancy slide,” O`Connor said.
”Improvements in the rate will now be dictated solely by demand, which will depend on an economic turnaround, economic development efforts and gaining control over government expenditures.”
But Ulvestad also cautioned that the numbers could still get worse. The wild card, he said, is the unknown amount of excess space, currently showing up as leased, that companies may want to shed but are holding given the current poor market.
At the end of the third quarter, the most recent data available for individual buildings, Frain Camins & Swartchild was reporting these vacancies: The Chicago Title and Trust Center, opened this fall, still had 700,000 of its 1 million square feet available; St. Clair Place, 633 St. Clair, had all but a small ground floor space of its 533,000 feet vacant; the USG Building at 222 W. Adams had 408,000 of its 926,000 feet unleased; and the 620,000-square-foot One North Franklin showed a vacancy of more than 500,000 square feet.
Landlords are reporting that few firms are in the space market, and those that are tend to be small.
”We`re not seeing that many new tenants in the market. We do have some proposals out to `ABC` law firms, two or three partners who want to leave other firms and are looking for space but won`t give their names,” said Gregory Van Schaack, director of marketing for Hines Interests Limited Partnership, developer of Three First National Plaza.
”Renewals are still our main focus. Everybody with leases expiring between now and the end of 1995 is theoretically in the market, trying to take advantage of the low rates,” he said.
According to Wilson, net rents in the Loop-rents which exclude taxes and operating expenses-have fallen from a peak of $24 per square foot in 1988 to about $7.50 today.
Those rents are even lower when considered as net effective rents, which factor in the value of concessions and construction allowances that landlords must routinely grant tenants. Net effective rents have fallen below $4 per foot, some analysts say, and in many cases the net effective rents are hitting zero.
Even at a seemingly foolproof location like 120 N. LaSalle St., directly across the street from City Hall, tenants have been hard to come by. Completed in 1991, the building has about 283,000 of its 394,000 feet vacant.
”We are doing deals, some with people who will pay a premium for this space although not as much of a premium as we would like,” said Joyce Strazzula, leasing director at Ahmanson Commercial Development Co.
”Maybe the big companies are laying off people, and we`re getting to see the smaller start-up firms that result when that happens. But they aren`t going far. Most of the people we see are coming from LaSalle Street itself or a two- to three-block radius,” she said.
A forecast by Landauer Associates says Chicago is at least positioned better than other battered cities in office market rebounds.
”Of Chicago, Philadelphia, Los Angeles, New York and Washington, D.C., Chicago may be the first to see a resurgence,” Landauer said.
But a similar forecast by Chicago-based Real Estate Research Corp. says Chicago lags behind other big cities, such as Washington, Atlanta, Denver and Houston, at least as far as commercial real estate investors are concerned.
”Of the major cities, Chicago was the last to curtail skyscraper production,” said James Gorman, executive vice president of Real Estate Research Corp., explaining the city`s mediocre 4.2 (on a scale of 10) rating from real estate professionals contacted in the survey.
”And it certainly doesn`t help that Sears and other companies are relocating to the suburbs, sending up vacancies in the already overbuilt Loop and North Michigan Avenue meccas,” Gorman said. ”Those are the primary reasons for its negative rating.”
