Savills Studley Report Chicago CBD office sector Q3 2016

Savills Studley Research Chicago CBD

AVAILABILITY INCHES HIGHER

The overall availability rate in Downtown Chicago increased for the second quarter in a row, rising by 0.1 pp to 15.3%. The Class A availability rate jumped by 0.5 pp to 16.7%, spurred by quarter-on-quarter increases of 0.6 pp to 19.1% in the West Loop and 3.2 pp to 15.4% in the East Loop.

ASKING RENT CONTINUES ASCENT

Landlords have yet to feel the impact of rising availability directly. A fair amount of the space for lease is still occupied and generating income. Overall asking rent

increased for the sixth consecutive quarter and the ninth quarter out of the last ten, rising by 1.3% from $37.45 to $37.92. Class A asking rent jumped by 1.1% from $41.87 to $42.34. Asking rent for some space on upper floors in trophy buildings is priced in the mid-$50.00/sf range.

QUARTERLY LEASING DROPS

Quarterly leasing fell to 2.2 msf in the third quarter, a 25.6% decline from activity in the second quarter and the weakest tally since mid-year 2015. Tenants have leased 10.1 msf in the four most recent quarters, exceeding the long-term annual average of 8.9 msf by 14.0%.

“Slower employment growth, weaker

leasing and the looming delivery of

several trophy towers are contributing

factors in rising availability. Tenants

sense that their range of options –

including new product and sublet

supply – is starting to expand.”

Eric Feinberg, Senior Vice President

Market Highlights

SUMMARYMarket Highlights

02

Savills Studley Report | Chicago CBD

Leasing Slowing, Availability on the IncreaseLeasing activity has slowed a bit in 2016 from the pace set in 2014 and 2015. The moderation in demand can be attributed to several different factors. Many of the largest space requirements have been fulfilled. A few businesses are delaying space-use decisions due to concern about the economic outlook. There is no specific crisis threatening to derail the broader economy, but there are multiple causes for concern weighing on some firms. Other companies are delaying decisions and betting that there will be a spike in availability by late 2017 and in turn, a reduction in rents.

Available space has started to increase. Chicago currently has 11.5 msf of Class A space available for occupancy within the next 12 months – an increase of 12.4% from 10.2 msf a year ago. A fair amount of this space is sublease space. Tenants can pick from 4.5 msf of sublet space, nearly twice the 2.4 msf on the market two years ago. Availability is expected to push higher in 2017. Once the trophy towers begin to deliver early next year, and tenants transition to their new buildings, they will leave behind quality big blocks of space.

Slow but Steady Employment Growth

The moderation in leasing aligns with the relatively stable office-using employment growth in Chicago. Office-using employment in the Chicago region increased by only 0.7% in the last 18 months – about one-third of the national growth rate of 2.3%. Downtown has captured a bigger share of the office jobs added in Chicagoland, particularly as more suburban companies decide to decamp within the Loop. In September, Wilson Sporting Goods announced that it will move its headquarters and about 400 employees from O’Hare to Prudential Plaza (130 E. Randolph), signing a 12 year, 79,352-sf lease for the fifth and sixth floors. The sporting goods company is among several that are returning to their Downtown roots; Wilson started in 1914 in the River West neighborhood but moved to suburban River Grove in the 1950s.

Chicago has also captured a few relocations from other states. Duracell announced that it will move its corporate headquarters from Bethel, Connecticut to 11,000 sf at 181 W. Madison Street. SC Johnson, currently based in Racine, Wisconsin, plans to move 175 jobs to Chicago. During the summer SC Johnson acquired a small two-story, 14,798 sf building at 600 W. Washington Avenue. They also sublet 49,000 sf from CME Group

Source: Bureau of Labor Statistics

2007

2008

2009

2010 2011

2012

2013

2014

2015

2016

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

0.820.840.860.880.900.920.940.960.981.001.021.04Millions

Chicago Office Emp. Chicago - % Annual Change U.S. - % Annual Change

Office-Using Employment Trends

$53.85$49.26

$42.34$39.85

$33.12$32.49

$0

$10

$20

$30

$40

$50

$60

3Q162Q161Q164Q153Q15

($/sf) Rental Rate Trends

Trophy Buildings Class A Class B & C

Asking Rent Trends

16.7%

14.3%

16.7%

15.0%

14.0%

15.4%

10%

12%

14%

16%

18%

20%

3Q162Q161Q164Q153Q15

(%) Availability Rate Trends

Trophy Buildings Class A Class B & C

Availability Rate Trends

savills-studley.com/research 03

Q3 2016

Tenant Sq Feet Address Market AreaJPMorgan Chase & Co 189,000 10 S Dearborn St Central LoopConstellation Brands, Inc 131,218 131 S Dearborn St Central LoopWilson Sporting Goods Company 79,352 130 E Randolph St East LoopAlzheimer's Association 78,517 225 N Michigan Ave East LoopAmtrust Financial Services 68,445 233 N Michigan Ave East LoopMorgan Stanley 64,380 440 S LaSalle St Central LoopSprout Social 64,311 131 S Dearborn St Central LoopCassiday Schade LLP 57,056 222 W Adams St West LoopMotorola Solutions 53,708 500 W Monroe St West LoopSociete Generale Group 51,924 440 S LaSalle St Central LoopSum of Top 10 Leases 837,911 Sum of 3rd Qtr Leasing Activity 2.2 MSF

at 550 W. Washington Boulevard.

Development Finally Catching up With Job Growth

The current expansion cycle underway has benefitted Downtown much more so than suburban Chicago. This recovery is now in its sixth year and employers have added more than 130,000 office-using jobs across the region - more than double the roughly 60,000 jobs added in the brief recovery of 2004 to 2007. Employers added twice as many jobs in the last six years, but developers did not keep pace - only 4.6 msf of new office product has delivered in this period, about half the 8.4 msf constructed between 2004 and 2007. This will change; the region could add as much as 10.7 msf between 2016 and 2020 – the bulk of it Downtown.

The 2.4 msf delivering this winter is 77.9% pre-leased, although both River Point and 150 N. Riverside still have a handful of full floors to fill. New construction is already starting to have an impact. As the likes of Hyatt, William Blair, and McDermott Will & Emery relocate they will leave behind large blocks of space that total more than 1.0 msf when combined. Tenants will pay from the mid-$40/sf to mid $50/sf range for this space, but they will also capture impressive amenities, very efficiently configured space and second-to-none views of the Chicago River and Downtown skyline.

New Construction Spurring Amenities Race

The delivery of new buildings will be an eye-opener for many businesses as the latest in building technology, shared amenities and space layout becomes much more tangible. Tenant expectations will continue to mount. Landlords tasked with leasing space in existing buildings that have outdated layouts and amenities must bring their buildings up to par, find an anchor willing to fund some of the improvements or adjust rents. Given the record rent levels being achieved in the trophy towers, B+ and A- developers with a sub-$40.00 rent can take advantage of the widening differential.

Amenities can be a big differentiator – tenants looking at similar vintage properties in the same submarket are drawn to those that offer shared conference rooms, impressive lobbies, tricked out tenant lounges, bike rooms and changing areas. Willis Tower is among several buildings that is making substantial improvements. The owner, Blackstone Group, has invested

$150 million building an observation deck and enhancing its retail complex. A few landlords that spent extensively on capital improvements have seen some gains in occupancy. Others that still have big vacancies to fill are getting concerned as they edge closer to 2017 and see the prospect of rising availability rates.

Wave of Post-2018 Projects on the Horizon

Beyond the 2017 and 2018 deliveries, the next set of major transformative developments are in the planning stages. Most will not complete until after 2018 and any extended market correction could delay some of them until the next decade. This includes projects by Tishman Speyer and Hines sites as well as development rights for the James R. Thompson Center and Amtrak property near Union Station. Sterling Bay, a familiar developer in River North and Fulton Market, is now hoping to

make its first venture into West Loop trophy tower development. They have unveiled plans for a 985-foot-tall, 2.0 msf tower that would be connected to Union Station. Sterling is among several developers offering a proposal for the redevelopment of the 1.3-msf Union Station building. Amtrak issued a RFP for a master developer to construct as much as 3.0 msf of new buildings on land it owns around Chicago.

Looking ForwardAlthough 2017 or 2018 could eventually bring a reduction or at least stabilization in rents, tenants are unlikely to get any relief from rising construction costs and they could face further growth in taxes. Construction costs have jumped by 20% to 25% in the last 12 to 18 months. Some landlords are offsetting a portion of these increases via increased tenant improvement allowances. Property taxes add yet another wildcard particularly in light of the City of Chicago’s well-chronicled financial challenges.

Availability Rate Comparison Rental Rate Comparison

Major Transactions

$23.85

$23.73

$23.48

$24.18

$29.27

$32.56

$31.98

$42.71

$46.81

$40.01

$38.56

$38.39

$35.81

$30.12

$0 $5 $10 $15 $20 $25 $30 $35 $40 $45 $50

River North

West Loop

Central Loop

Chicago CBD

North MichiganAve

East Loop

Far WestLoop/Fulton

Market*Sublet Direct

$/sf

7.2%

9.6%

12.0%

14.6%

15.0%

15.3%

18.6%

0% 5% 10% 15% 20%

Far WestLoop/Fulton…

North Michigan Ave

River North

East Loop

Central Loop

Chicago CBD

West Loop

Sublet Direct

* Far West Loop/Fulton Market represents 2 sublet buildings in 3Q16 data

Savills Studley Report | Chicago CBD

04

Map Submarket Total

SF(1000's)

AnnualLeasingVolume

Annual Net Absorption

ThisQuarter

%Change

fromLast Qtr.

YearAgo

ThisQuarter

ppChange

fromLast Qtr. (1)

YearAgo

ThisQuarter

%Change

fromLast Qtr.

YearAgo

West Loop 47,333 3,777 1,231 9,251 4.1% 7,863 18.6% 0.7% 16.6% $41.27 0.0% $39.33West Loop - Class A 31,970 2,818 751 6,547 3.4% 5,176 19.1% 0.6% 16.2% $44.23 -0.3% $41.32Far West Loop/Fulton Market 3,634 243 405 262 -25.7% 341 7.2% -2.5% 9.4% $30.25 0.7% $30.00Far West Loop/Fulton Market - Class A 689 0 401 5 -91.9% 35 0.7% -8.2% N/A N/A N/A $47.25

166 0 $26 61Central Loop 45,238 1,951 342 6,778 -1.2% 7,144 15.0% -0.2% 15.8% $33.98 0.9% $33.69Central Loop - Class A 15,061 646 385 2,281 -3.7% 2,413 15.1% -0.6% 16.0% $37.58 2.7% $38.07East Loop 22,339 1,181 533 3,257 4.6% 3,398 14.6% 0.6% 15.2% $35.73 -0.2% $35.08East Loop - Class A 8,116 284 220 1,248 26.4% 959 15.4% 3.2% 11.8% $38.95 -1.9% $37.46North Michigan Avenue 10,884 497 284 1,041 -17.9% 1,336 9.6% -2.1% 12.3% $34.57 1.1% $33.64North Michigan Avenue - Class A 4,677 188 178 460 -9.9% 609 9.8% -1.1% 13.0% $37.67 0.0% $37.32River North 15,388 1,386 242 1,848 2.1% 2,246 12.0% 0.2% 14.6% $40.26 2.5% $37.97River North - Class A 5,868 274 -24 930 8.7% 1,018 15.8% 1.3% 17.3% $44.17 3.5% $40.70

Chicago CBD Total 147,122 10,139 3,037 22,437 0.7% 22,328 15.3% 0.1% 15.4% $37.92 1.3% $36.23Chicago CBD Total - Class A 68,687 5,624 1,911 11,471 3.2% 10,210 16.7% 0.5% 15.4% $42.34 1.1% $39.85

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Leasing Activity AvailableSF

AvailabilityRate

Asking RentsPer SF

@SavillsStudleywww.savills-studley.com

Please contact us for further information

(1) Percentage point change for availability rates. Unless otherwise noted, all rents quoted throughout this report are average asking gross (full service) rents psf. Statistics are calculated using both direct and sublease information. Short-term sublet spaces (terms under two years) were excluded.

The information in this report is obtained from sources deemed reliable, but no representation is made as to the accuracy thereof. Statistics compiled with the support of The CoStar Group. Copyright © 2016 Savills Studley

Savills Studley191 North Wacker DriveSuite 2700Chicago, IL 60606(312) 595-2900

Chicago Region Co-HeadsRobert Sevim, EVP - rsevim@savills-studley.comEric Feinberg, SVP - efeinberg@savills-studley.comRick Schuham, EVP - rschuham@savills-studley.com

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1. West Loop2. Far West Loop/Fulton Market3. Central Loop4. East Loop5. North Michigan Avenue6. River North