Office Market Overview

Chicago, IL office building space costs showed ascending increases during 2014, and could continue that way for a while. Sales in the downtown area totalled $3.66 billion; that is 13% above the total for all of 2013. This is the highest sales rate since the crash at the end of 2007.

Foreign buyers have benefitted sellers, yet the two priciest purchases in Chicago's history were both bought by a domestic company: River North. Continuing lower interest rates and higher asking prices on both coasts have brought many investors into the Chicago market. By the end of 2014 real estate spending will reach the third-highest in the city's history, over $4 billion. Office towers due to hit the market soon and a number of deals in progress are expected to propel 2015 with a strong start.

Vacancy rates have fallen to the lowest in 6 years at 13.8% convincing buyers to raise rents. Purchase of a 46-story building for $715 million made it the fourth-highest sale price and the second highest price per square foot ($604) in the city's history.

Rising construction costs and rental rates have brought building sales to record prices which are likely to continue over the next few years. Buyers are paying premium rates for vacant space. One tower located on Monroe Street sold for $58 million even though 80% of the space was vacant. The sellers made 32% above their purchase price after owning it for only two years.

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Foreign Investments

Foreign investors choose Chicago as their preferred destination for establishment in the U.S. They make higher returns here than in higher-priced areas like New York and San Francisco. Foreign companies have backed the current construction of two office towers. The Wanxiang Group from China is developing a 53-story tower in Riverside Plaza and north of that building a Canadian company, Ivanhoe Cambridge. is backing construction of a 52-story River Point tower.

Real estate is getting this attention from foreign investors because they have a lot of capital available and real estate brings higher returns than treasury bonds or money markets. Chicago based Hearn Co. sold one of their properties on W. Monroe and then purchased Three First National Plaza for $374.6 million, increasing their investments in the city.

Chicago Market Reports

According to Colliers International the U.S. industrial market will continue to be as strong in 2015 as it has been in 2014. This is due to the continued growth of economic and industrial fundamentals. Job creation grew at an annual rate of 4% in 2014. The U.S. was quite a bit stronger than had been expected with the economy adding 288,000 jobs in June 2014, which reduced the unemployment rate nationally to 6.1%. Industrial production rose at an annual rate of 5.5% for the second quarter of 2014.

Chicago ranked at the top as the most active market in the country for the first half of 2014. Various well-known investment groups were active buyers and sellers in terms of volume during the year. More speculative development and significant sales activity are likely as available inventory dwindles.

Higher rent levels justify new construction planned in most major markets. This is especially true with the continuation of low interest rates. Class A assets that are located near rail and intermodal services are especially prized. Fuel prices remain volatile, making intermodal and port concepts the most cost-effective means of shipping goods. This is the case from both the investor's and user's perspective. Larger distribution centers are locating near major transportation hubs.

Economic Overview

The Chicago-Joliet-Naperville Metropolitan Statistical Area (MSA) saw its unemployment rate improved to 7.4% in May of 2014, but that is still higher than the national average. Business services and professional positions continue to have the highest job growth, dominating Chicago's gains.

Increased desire for Class A space dominated the suburban market, showing no sign of decreasing. Class A space accounts for almost 70% of all leasing activity. With demand continuing to increase and new construction still down the pipeline, rents can only rise. AbbVie Inc. leased and moved into 558,859 square feet of space at Woodland Falls in the second quarter of 2014. Newell Rubbermaid took over 55,324 square feet on Lacey Road. Overall capacity in use still fell by 8.3% from 2013's rates. Asking price for rentals in the second quarter was $21.68 per square foot which was down from a previous high of $173.75 per square foot.

Outlook

As Chicago's economy improves the need for more commercial real estate will continue. Demand for Class A space should increase even more. However, with no new construction coming to market any time soon, tenants may have to accept Class B+ products. The suburban market will continue to grow as institutional investors' presence picks up over the next year.