CHICAGO CBD OFFICE INVESTMENT PROPERTIES GROUP SECOND QUARTER NEWSLETTER 216 HOT TOPICS Capital markets remain a focus with 14 assets either under contract or sold totaling $2.6 billion, which includes the sale of the 2.5 million sq. ft. Old Main Post Office. Beam Suntory and McDonalds are the latest suburban companies to execute leases and will be moving their Chicago operation downtown. Overall direct vacancy has decreased by 15 bps year-over-year, ending Q2 216 at 1.7%. Direct Vacancy 1.7% Asking Rate $7.4 Net Absorption 47,65 SF Under Construction,75,58 SF *Arrows indicate change from previous quarter. MARKET OVERVIEW The Central Business District (CBD) office market ended this quarter with a large absorption gain, continuing to lower the overall direct vacancy. Due to the surplus of sublease space on the market, average asking gross rents declined slightly. The urban migration trend continued in Q2 216 with Beam Suntory signing a sublease for 1,8 sq. ft. at 222 W Merchandise Mart Plaza. Also, McDonalds has committed to relocating their Oak Brook headquarters to the 145 W Randolph St in the Fulton Market / Far West Loop submarket. Q2 216 was very active in terms of tenant movement. For example, Accreditation Council for Graduate Medical Education (ACGME), occupied 88,696 sq. ft. at 41 N Michigan Avenue in relocation from 515 N State Street. Also, Alvarez & Marsal, a management consulting firm, moved in to its space at 54 W Madison, occupying 41,957 sq. ft. Finally, Axis Specialty occupied 28,69 sq. ft. at 111 S Wacker Drive in a relocation from W Madison Street. The direct vacancy rate in the CBD declined for the sixth consecutive quarter, decreasing by bps from Q1 216, down to 1.7%. River North continues to be the tightest submarket, with Class A direct vacancy at.1%, a 6 bps decrease quarter-over-quarter. The leasing activity increased in Q2 216 from the previous quarter, with Publicis and Winston & Strawn, LLP renewing their leases at 5 W Wacker Drive. Publicis renewed and restructured its footprint at the Leo Burnett Building to 642,545 sq. ft. for another seven-years and Winston & Strawn, LLP renewed its lease for 257,67 sq. ft. Also, Cars.com committed to 158,197 sq. ft. at S Riverside Plaza, and will relocate from 175 W Jackson. Average asking gross rents have eased in Q2 216 even as the demand remains strong and supply tightens. Overall average asking gross rents have increased by.7% year-over-year, ending Q2 216 at $7.4 per sq. ft. Although the sales volume for downtown institutional office investment sales may not reach the peak seen last year, healthy activity continued into the first half of 216. Year-to-date eight properties have traded totaling $1. billion with another six properties under contract for $1. billion. The largest sale in terms of size and scale was the 2.5 million sq. ft. Old Main Post Office. 1K Fulton was another notable trade during the quarter. The sale of the fully redeveloped and leased former cold storage warehouse was watched closely by the investment community and garnered significant global interest. The building s long term lease to a large tech company coupled with its location in the burgeoning Fulton Market district drove the cap rate down to 4.5%, an all-time low for a multitenant office building in Chicago. Currently there are four properties being marketed totaling $2. billion. Due to the significant transaction volume over the past 4 years, and the relatively limited amount of assets that haven not traded since 29, investors may find only sporadic opportunities remaining to acquire high-quality, competitive office product. The overall CBD available blocks of space continue to increase, up 1.2% (by count) year-over-year, primarily due to the increase of sublease space, an ongoing trend in the Chicago metro area. Corporate mergers, acquisitions activity and overall uncertainty of the global economy are all contributing to the uptick in available sublease office spaces. Capital Markets Investment Properties, Office Visit our Investment Properties Group listing site at www.cbre.com/investmentproperties 216 CBRE, Inc. All Rights Reserved
MARKET VIEW CHICAGO DOWNTOWN OFFICE MARKET HISTORICAL NET ABSORPTION VS. DIRECT VACANCY RATE Figure 1: Historical Net Absorption vs Direct Net Absorption (MSF) 2 1 (1) (2) Direct (%) 18 16 14 1 () 26 27 28 29 21 211 2 21 214 215 216 Q1 Q2 Q Q4 Total Annual Net Absorption (L) Direct (R) 8 Source: CBRE Research, Q2 216. DIRECT VACANCY/GROSS WEIGHTED ASKING RATE Vacancy (%) 16 15 14 1 11 Gross Asking Rate (R) Direct Vacancy (L) Asking Rate ($/SF) 8 6 4 2 1 211 2 21 214 215 216 YTD Source: CBRE Research, Q2 216.
2Q 216 KEY MARKET STATISTICS Figure 5: Chicago Downtown Statistics Submarket Rentable Building Area Direct Vacant Direct (%) Sublease (%) Total (%)* Q2 216 Net Absorption 216 Net Absorption Under Construction **** Gross Asking Lease Rates ($//Yr) Central Loop 5,818,728,47,297 9. 1. 1.6 (16,66) 21,64-4.5 Class A 1,24,96 861,79 8.6 1.7 1.2 (1,522) 9,968-42. Class B 19,75,18 1,65,84 8.7 1.1 9.7 2,295 164,92-2.9 Class C 6,718,654 82,78.4 1.2 1.6 (17,19) 5,494-28.25 East Loop 22,885,618,8,927 1..5 1.8 44,549 194,85-5.25 Class A 5,68,26 47,8 7.6.1 7.7 8,24 169,82-4.6 Class B 11,422,225 1,924,775 16.9.5 17.4 67,862 2,98-5.9 Class C 6,95,157 76,769 11.6.8.4 (1,67) 1,5-29.5 Fulton/West** 2,261,594 166,821 7.4. 1.7 79,19 99,46 266,1 27.6 Class A 55,51. 1.8 1.8 5,25 5,25 266,1 NA Class B 17, 5, 2.9. 2.9 9,947 9,947-24. Class C 1,55,81 161,821 1.4 1.1 11.5 4,167 54,74 27.68 NMA*** 11,219,679 1,45,977.9 1.1 14. 11,789 181,891-7.1 Class A 4,248,228 78,257 18.4 1.2 19.6 72,24 66,92-4.19 Class B 6,76,872 615,46 9.6 1.1 1.8 14,11 85,18 -.46 Class C 594,579 55,74 9.. 9. 24,58 29,941 -.11 River North 11,2,728 1,57,922 9.4.7 1.1 (4,769) (4,52) - 8.4 Class A 2,476,544 76,66.1..1 14,656 14,656-56.68 Class B 6,576,977 79,152.1.9 1. (42,15) (1,48) - 9.64 Class C 2,249,27 188,11 8.4.9 9.2 (1,2) (8,225) - 27.26 West Loop 44,17,677 4,61,524 1.4 1.1 11.5 17,2 275,567,18,946 4.16 Class A 21,728,976 2,2,584 9. 1. 1.6 1, 291,79,18,946 44.5 Class B 19,662,596 2,477,195.6.9 1.5 6,581 (5,15) - 7.7 Class C 2,782,15 1,745 4.1.5 4.5,22 19,2-27.2 Total CBD 7,662,24 1,675,468 1.7 1. 11.7 47,65 87,651,75,58 7.4 Class A 44,82,4 4,149,26 9. 1. 1.6 258,84 617,762,75,58 4.29 Class B 6,286,811 7,469,8 11.8.9.7 88,591 118,229-5.7 Class C 19,992,78 2,56,897 1..9 11.2 (69) 11,66-28.61 TOP LEASE TRANSACTIONS Size (SF) Tenant Address 642,545 Publicis Groupe 5 W. Wacker Dr. 257,67 Winston & Strawn, LLP 5 W. Wacker Dr. 158,197 Cars.com S. Riverside Plz. 1,8 Beam Suntory 222 W. Merchandise Mart Plz. 51,547 Glassdoor, Inc. 1 W. Fulton St.
MARKET VIEW CHICAGO DOWNTOWN OFFICE MARKET OUTLOOK The pre-leasing of new construction in the CBD continues to be strong ending the quarter at 68% leased. Glassdoor, Inc. signed a lease at, 1 W.Fulton Street, bringing the pre-leased square footage of the new development up to 49%. The tenants that have committed to the new construction are primarily located within the CBD. As the new construction delivery dates are approaching and sublease space has increased 4 bps from the end of 215, there are some concerns this will lead to a surplus in supply of available space, putting downward pressure on rents and hindering absorption. However, if the CBD continues to attract large out of market tenants, the office market will continue to see positive growth. UNEMPLOYMENT According to the U.S. Department of Labor s Not Seasonally Adjusted statistics, the May 216 Illinois Unemployment Rate decreased bps from March to 5.6% (preliminary ). Nationally, the unemployment rate was 5.1% in June, adding 287, jobs to the economy. Employment in transportation and utilities, financial activities, and educational and health services sectors experienced large gains during Q2 216 throughout the State of Illinois. Furthermore, the Chicago metropolitan area unemployment statistics reported a preliminary unemployment rate of 5.5%, down 11 bps since March. The number of employed Chicago (city) residents increased by 16,819 year-over-year. Major sectors that grew were the education, health, leisure and hospitality industries. Figure 9: Unemployment-Not Seasonally Adjusted Unemployment Rate (%) Chicago Illinois National 9 6 44. 42. 4. 8. 6. 4. 2.. Unemployment Q4 214 Q1 215 Q2 215 Q 215 Q4 215 Q1 216 Q2 216 Gross Weighted Asking Rates Asking Rent ($/SF) Total CBD Class A Class B 211 2 21 214 215 216 YTD 7 6 5 4 2 1 CBD Historical Office Sales Volume Billions ($) # Blocks 5 1 75 5 25 Total Dollars Under Contract (L) Total Dollars Sold (L) # of Properties (R) 21 211 2 21 214 215 216 YTD Class A Class B Class C # of Properties Chicago Total Available Big Blocks 2,-49, SF 5,-99,999 SF 1, SF + 5 25 2 15 1 5
SUBMARKET MAP CHICAGO CBD OFFICE INVESTMENT PROPERTIES GROUP As an urban property specialist focusing on the Downtown office market John Slivka assist investors with the disposition and acquisition of investment properties in the City of Chicago. John is a member of the CBRE, Inc. Investment Properties group, a nationwide affiliation of CBRE professionals who concentrate on servicing middle and private client investors. Mr. Slivka has provided brokerage services, valuations, financial analyses, and other real estate consulting services for various types of investment grade commercial properties located across the United States. John has completed projects on behalf of institutional investors and lenders, commercial banks, law firms, individual investors, multi-national corporations, and various other clients. In June 2, Mr. Slivka received the MAI designation from the Appraisal Institute. John Slivka First Vice President T: +1 297 76 john.slivka@cbre.com The Investment Properties Group exists to help middle and private capital market investors achieve maximum value in the acquisition and sale of their assets. Let us know your specific acquisition criteria so that we may designate your requirement in our database. RESPECT Treat everyone with dignity, value their contributions, and help one another to succeed. INTEGRITY Uphold the highest ethical standards in our business practices. SERVICE Dedicate ourselves to making a meaningful impact with our clients and in our communities. EXCELLENCE Aspire to be the best in everything we do and drive for continuous improvement. 216 CBRE, Inc. We obtained the information above from sources we believe to be reliable. However, we have not verified its accuracy and make no guarantee, warranty or representation about it. It is submitted subject to the possibility of errors, omissions, change of price, rental or other conditions, prior sale, lease or financing, or withdrawal without notice. We include projections, opinions, assumptions or estimates for example only, and they may not represent current or future performance of the property. You and your tax and legal advisors should conduct your own investigation of the property and transaction. 216 CBRE, Inc. All Rights Reserved