Fourth Quarter 2017 Office Market Report Chicago CBD Market Facts 4.7% Chicago s unemployment rate trended downward. As of November 2017, the unemployment rate stood at 4.7%. 31,678 jobs The metro Chicago area added 31,678 jobs year-over-year an increase of 0.8%. 2.6 MSF There are 12 buildings currently under construction within the CBD, totaling 2.6msf. 7,997 SF The average deal size during the fourth quarter was 7,997 sf. 2.5 MSF There was 2.5 msf leased during the fourth quarter, which remained relatively unchanged from last quarter. Economic Overview Chicago s economic climate continued to see improvement throughout the fourth quarter of 2017. The metropolitan area added 31,678 jobs as of November up 0.8% year-over-year. This job growth pushed the unemployment rate down to 4.7% from 5.2% last year. Kenosha and Cook Counties recorded the largest employment growth in the greater Chicagoland area. The super sectors that witnessed the highest year-over-year growth in employment were financial services, information, and construction up 4.0%, 1.8%, and 1.1% respectively. Chicago continued to see significant growth within technology related-industries. Google has announced that it is looking at Chicago as well as several other CBD s across the country to potentially add upwards of 1,000 new jobs. The tech giant already houses around 800 employees at 1K Fulton within the River West submarket, if Chicago is chosen they would need to expand their square footage (sf ). Chicago is poised for a major revamp of its infrastructure system. The Chicago Transit Authority (CTA) has announced plans to renovate the northern portions of both the Red and Purple Lines. This project will decrease travel times and increase trains per hour, which will likely increase ridership to and from the CBD. The $2.1 billion project will be partially funded by the US Department of Transportation, which will provide $1.1 billion. The project will generate upwards of 6,000 construction-related jobs and is expected to commence in late 2018. avisonyoung.com page 1
Chicago CBD Fourth Quarter 2017 Office Market Report Office Market Overview Vacancy Rate (%) The CBD saw vacancy trend downward during the fourth quarter by 40 basis points (bps) to 11.0%. Class A vacancy recorded a similar change with vacancy posted at 12.7%. Class B vacancy remained relatively unchanged when compared to last quarter. River West witnessed the most significant drop in vacancy down 270 bps to 14.0% due to strong demand for class A product, which saw vacancy drop 460 bps to 26.4%. Leasing activity remained strong throughout 2017, with 10.3 msf leased. The West Loop accounted for 43% of the space leased, totaling 4.4 msf. Strong leasing over the past four quarters has pushed net absorption up 74.6% year-over-year to 970,918 sf. Construction activity remains strong across the CBD. There are currently 12 properties under construction which total 2.6 msf. Of this space, only 43.5% is preleased. Two properties broke ground during the fourth quarter. Both 1201 W Lake St and 450 N Morgan St are located within the River West submarket and will add 141,431 sf and 50,000 sf respectively. Asking rental rates remained relatively unchanged as of the fourth quarter, averaging $28.09 psf. Chicago s CBD has seen an influx of co-working spaces. Currently there are 130 coworking, incubator, and accelerator locations throughout the Chicago metropolitan area, with 81 located within the CBD. Two notable providers include WeWork and Level Office, which have 10 locations combined, with WeWork being one of the largest occupiers of space in the Chicago market. We're likely to see more of these locations throughout 2018 as users are finding the model increasingly convenient. With an increase in new product expected to be delivered throughout 2018, the number of investors seeking to place capital in older class A and B products with value-add potential should increase. This is due to class A rental rates skyrocketing, especially within newer buildings in high-demand submarkets. CBD landlords continue to have the upper hand in lease negations; however, this is likely to subside slightly as new space is delivered. Many developers and landlords are attempting to attract and maintain tenants by becoming more creative with building amenities, an example being Sterling Bay s redevelopment of 311 W Monroe which will include a bowling alley. The market should continue to see capital pouring into the renovations of older product, especially within submarkets that have not seen any new developments. 12.5 12 11.5 11 10.5 10 9.5 2014 Q4 2015 Q4 2016 Q4 2017 Q4 Office Base Rent Overall $29.00 $28.00 $27.00 $26.00 $25.00 $24.00 $23.00 $22.00 2014 Q4 2015 Q4 2016 Q4 2017 Q4 Total (SF) 1,600k 1,400k 1,200k 1,000k 800k 600k 400k 200k 0 2014 Q4 2015 Q4 2016 Q4 2017 Q4-200k -400k vs. Vacancy (%) 1,600k 1,400k 1,200k 1,000k 800k 600k 400k 200k 0-200k 2014 Q4 2015 Q4 2016 Q4 2017 Q4 13.5 13 12.5 12 11.5 11 10.5 10 9.5 9-400k SF Total Vacant % Total 8.5 avisonyoung.com page 2
Chicago CBD Fourth Quarter 2017 Office Market Report CBD Construction & Deliveries Q4 Under Construction [20,000+ SF Projects] Market Building Class NRA Delivery Date Developer Major Tenants % Leased** West Loop 151 N Franklin St A 807,355 Q2-2018 The John Buck Company CNA Crp, Hinshaw & Culbertson 53% River West 1045 W Randolph St A 608,000 Q2-2018 Sterling Bay McDonalds Corporation 92% West Loop 625 W Adams St A 434,931 Q2-2018 White Oak Realty Partners N/A 0% River West 210 N Carpenter St A 203,589 Q3-2018 Sterling Bay Leopardo, Revolution Marketing 22% River West 1201 W Lake St A 141,431 Q4-2018 McCaffery Interests Inc N/A 8% River West 1220 W Van Buren St B 110,000 Q2-2019 The Missner Group N/A 0% River West 905 W Fulton St A 88,000 Q3-2018 Thor Properties N/A 0% West Loop 811 W Fulton St A 63,909 Q2-2018 Shapack Partners N/A 0% River West 816-820 W Fulton St A 63,519 Q2-2018 Thor Properties N/A 0% River North 412 N Wells St A 56,000 Q1-2018 Centrum Properties N/A 100% River West 450 N Morgan St 50,000 Q3-2018 MAB Capital Management N/A 18% River West 939 W Fulton St A 49,957 Q2-2018 Madison Capital Vital Proteins 100% 2018 2,566,691 2019 110,000 Total 2,676,691 Select Proposed Properties Market Building Class NRA Ground Break Developer Tenants/Comments % Leased** West Loop 130 N Franklin St A 1,198,227 Q2-2018 Tishman Speyer N/A 2% West Loop 110 N Wacker Dr A 1,350,000 Q1-2018 2,548,227 Riverside Investment & Development Company Bank of America 40% avisonyoung.com page 3
Chicago CBD Fourth Quarter 2017 Office Market Report Chicago CBD Submarket Snapshot Q4 A look at basic metrics in each downtown submarket Submarket (SF) Direct Available Space (SF) Sublet Available Space (SF) Total Available (SF) Overall Vacancy Vacancy Rate Class A Class B Leasing Activity (SF) Net Absorption (SF) CBD 175,405,365 17,950,983 1,371,327 19,322,310 11.0% 12.7% 9.7% 2,585,804 567,973 $32.30 $41.23 $31.37 West Loop 54,558,319 6,432,626 584,310 7,016,936 12.9% 13.8% 10.9% 1,460,731 387,092 $38.57 $44.21 $35.26 Central Loop 47,755,481 4,721,889 317,655 5,039,544 10.6% 11.6% 9.6% 392,868-70,531 $35.12 $40.72 $33.02 East Loop 28,120,152 3,116,992 203,617 3,320,609 11.8% 12.0% 13.3% 382,366 61,689 $31.74 $37.93 $30.59 River North 18,465,641 1,196,298 121,257 1,317,555 7.1% 5.7% 8.1% 138,847 33,769 $31.46 $50.29 $32.08 North Michigan Ave 16,553,140 1,412,111 97,730 1,509,841 9.1% 13.7% 5.7% 99,951 15,838 $33.47 $39.47 $31.23 River West 6,186,451 818,987 44,987 863,914 14.0% 26.4% 13.0% 106,379 152,863 $31.57 $40.78 $39.58 South Loop 3,766,181 252,080 1,831 253,911 6.7% None 7.2% 4,662-12,747 $24.65 N/A $25.38 Overall Avg Class A Class B CBD Submarket Map RIVER NORTH NORTH MICHIGAN RIVER WEST WEST LOOP CENTRAL LOOP EAST LOOP SOUTH LOOP avisonyoung.com page 4
West Loop West Loop The West Loop submarket ended 2017 on a positive note. Containing 54 msf, the submarket saw vacancy drop 60 bps to 12.9%. Class A vacancy also saw a decrease of 60 bps to 13.8%. Leasing activity remained strong throughout 2017 with 4.4 msf having been leased, 1.4 msf of which occurred during the fourth quarter. This prompted net absorption to jump during the fourth quarter to 387,092 sf, bringing the total sf absorbed in 2017 to 817,366 sf. This was the highest recorded annual net absorption since 2011. Overall rental rates have remained relatively unchanged, but continue to be some of the highest within the CBD. There was significant leasing activity throughout the fourth quarter with 103 leases signed. The average deal size was recorded at 14,400 sf. Notable lease transactions include Fifth Third Bank renewing their 143,734-sf lease at 222 S Riverside Plz. This was the second significant renewal to have occurred at the property after ownership completed major renovations. BP Products North America has renewed their 215,851-sf space at the CME Center. Facebook, Inc has expanded into an additional 83,093 sf at 191 N Wacker Dr, bringing their total building footprint to 98,515 sf. Peapod will be migrating downtown and leaving its longtime suburban Skokie headquarters. They have leased 52,827 sf at 300 S Riverside Plz and will be bringing all 180 employees downtown. The submarket has seen substantial new construction over the last 18 months. There have been two buildings delivered which total 2.3 msf, both being class A Trophy towers with a combined 78.6% occupancy rate. Additionally, there are three buildings under construction which total 1.3 msf. Two of the properties are 0% leased. The third, 151 N Franklin, is a 807,355-sf project being developed by John Buck and is currently 53.7% leased to CNA and Hinshaw & Culbertson. 54,558,319 SF 6,432,626 SF 584,310 SF 7,016,936 SF 12.9% 1,460,731 SF 387,092 SF $38.57 avisonyoung.com page 5
Central Loop Central Loop The Central Loop is comprised of 47 msf and has seen significant activity throughout 2017. Vacancy has remained relatively unchanged from last quarter and is sitting at 10.6%. Class A vacancy has recorded a moderate 30 bps uptick to 11.6%, while Class B vacancy decreased by 30 bps to 6.6%. There was a total of 1.6 msf leased during 2017, with 392,868 sf of space leased during the fourth quarter. Despite strong leasing activity, net absorption was negative 260,062 sf. This is due to an influx of available space up 5.4% year-over-year to 5,039,544 sf. There were 58 leases signed during the fourth quarter with the average deal size of 6,773 sf. Notable lease transactions include Sprout Social, Inc having signed a 64,311-sf expansion, bringing their total footprint at 131 S Dearborn St to 128,622 sf. Quantitative Risk Management Inc has signed a 17,697-sf expansion at 181 W Madison St, bringing their total building footprint to 97,091 sf. The Central Loop submarket is poised for its first new building since 2008. The proposed 224,300-sf development located at 145 S Wells sf has received its first construction permit from the City and construction is excpected to commence in early 2018. On the site of a demolished parking garage, developer Thomas Roszak Architecture hopes to construct a boutique office building which will include parking, retail space and an extensive rooftop amenity floor. 47,755,481 SF 4,721,889 SF 317,655 SF 5,039,544 SF 10.6% 392,868 SF The Central Loop submarket awaits its first new building since 2008. The proposed 224,300-sf development will be located at 145 S Wells. -70,531 SF $35.12 avisonyoung.com page 6
East Loop East Loop Totaling 28 msf of office space, the East Loop has remained consistently active throughout 2017. Vacancy shifted downward across all asset classes. Overall vacancy decreased to 11.8% down 40 bps from last quarter. There was 1.5 msf of space leased during 2017, with 382,366 sf leased during the fourth quarter. Net absorption for the year was recorded at 111,669 sf. There were 51 leases signed during the fourth quarter with average deal size of 7,723 sf. Notable lease transactions include Chicago Tribune s parent company, Tronc, signing a 138,561-sf lease at 130 E Randolph St. This marks the end of an era; the company will be vacating its longtime headquarters at the iconic Tribune Tower within the North Michigan Ave submarket. Combined Insurance Company of America has renewed their 99,204-sf lease at 111 E Wacker Dr. The Illinois Department of Public Health has renewed their 23,589-sf lease at 122 S Michigan Ave. Several properties within the East Loop will be undergoing major renovations to attract and maintain tenants, most notably 333 S Wabash Ave. The building was purchased by developer John Buck in early 2016 as part of a sale-leaseback with CNA insurance, who will be vacating once their new West Loop tower is complete. John Buck has stated that once the building is vacant it will undergo a major renovation. 404,719 sf of the space has already been leased to Northern Trust, which will likely occupy the space by mid-2020. The largest lease signed during the fourth quarter was inked by Tronc, the Chicago Tribune s parent company, for 138,561 sf at 130 E Randolph. 28,120,152 SF 3,116,992 SF 203,617 SF 3,320,609 SF 11.8% 382,366 SF 61,689 SF $31.74 avisonyoung.com page 7
River North River North The River North submarket contains 18.4 msf and remains one of the most active submarkets within the CBD. There was 1 msf of space leased throughout 2017, which drove vacancy down to 7.1% during the fourth quarter. Leasing activity remained active throughout the fourth quarter, with 42 leases totaling 138,847 sf. The majority of these leases were on the smaller size, the largest being only 10,150 sf and the average size being 3,257sf. The most notable lease signed during the fourth quarter was Simple Mills' inking of a 10,009-sf lease at 435 N LaSalle St. The market continues to lure technology-related users. KBS Growth & Income REIT purchased 213 W Institute Pl from Ameritus in what marked the largest sale transaction during the fourth quarter. The 155,454-sf loft office building sold for $43.5 million, or $279 psf, and was 94.4% leased at the time of sale. There was one property under construction during the fourth quarter. 412 N Wells, developed by Centrum Partners, is an eight-story, 56,000 sf, class A development with expected completion during the first quarter of 2018. The building is 100% leased to RXBAR, which will move its 40-plus employees into the building upon completion. The health food producer is expected to expand within the building. 18,465,641 SF 1,196,298 SF 121,257 SF 1,317,555 SF 7.1% 138,847 SF KBS Growth & Income REIT purchased 213 W Institute Pl for $43.5 million, proving that major institutional owners see repurposed loft office buildings as viable investments. 33,769 SF $31.46 avisonyoung.com page 8
North Michigan Avenue North Michigan Avenue The North Michigan Avenue submarket contains 16.6 msf of office space, much of it located along the famed Michigan Avenue retail corridor. The vacancy rate shifted slightly downward, recorded at 9.1% during the fourth quarter. Leasing activity slowed during the quarter, with 21 leases signed for a total of 99,951 sf, bringing the total sf leased in 2017 to 1 msf. The average space leased during the fourth quarter was 4,733 sf. Net absorption spiked to 15,838 sf during the fourth quarter, prompting the total space absorbed in 2017 to jump to 114,348 sf. The largest lease signed during the fourth quarter was Glencoe Capital Holdings' 12,293-sf sublease at 515 N State St. Outcome Health has decided to void their 385,050-sf lease at 515 N State St amid fraud allegations, leaving the 664,158-sf building 36.6% vacant once again. The most notable investment sale transaction to have occurred during the fourth quarter was the sale of 401 N Michigan Ave. The 752,404-sf, class A property traded for $360 million or $475 psf to Walton Street Capital. The sale was contingent on the completion of Apple s new flagship store located on the property s plaza. Zeller Realty Group was the seller of the property which at the time of sale was 90.6% leased. 16,553,140 SF 1,412,111 SF 97,730 SF 1,509,841 SF 9.1% 99,951 SF Zeller Realty has finalized the sale of 401 N Michigan Ave to Walton Street Capital for $360 million. 15,838 SF $33.47 avisonyoung.com page 9
River West River West The ever-popular River West submarket continues to record significant growth and activity. Despite 426,272 sf of new product delivered throughout 2017, vacancy recorded a sharp drop from last quarter down 270 bps to 14.0%. Leasing activity remained strong throughout the fourth quarter, with 14 lease transactions signed for a total of 106,379 sf. The average deal size was 6,914 sf. Net absorption spiked to 152,863 sf during the fourth quarter, driving total year-end net absorption to 254,697 sf. Demand within the River West submarket remains strong. Notable lease transactions include Vital Proteins 37,149-sf lease at 939 W Fulton Market. The property is currently under construction and will cap out at 49,957 sf. The company has also signed a 10,000-sf short term lease at 1201 W. Washington Blvd while they await their larger space to be completed. Construction activity shows no signs of slowing. There are currently nine properties under construction which total 1.3 msf, 52% of this space is preleased. These developments include Sterling Bay s 1045 W Randolph St and 210 N Carpenter St, which will add a combined 811,589 sf. McCaffery Interests has broken ground on 1201 W Lake St, a 141,431-sf class A office building with an anticipated year-end 2018 delivery date. WeWork s Fulton Market building, located at 210 N Green St, is under contract to be sold. The 90,000-sf building is 100% occupied by the co-working giant. The seller, which is a joint venture between AJ Capital Partners and Shapack Partners, is under contract with private investor Randy Rissman. Both development and demand should continue throughout 2018. 6,186,451 SF 818,987 SF 44,927 SF 863,914 SF 14.0% 106,379 SF 152,863 SF $31.57 avisonyoung.com page 10
South Loop South Loop The South Loop contains 3.8 msf of office space. Vacancy has remained relatively unchanged when compared to previous quarters, currently sitting at 6.7% as of the fourth quarter. Leasing activity throughout 2017 has recorded a 77% uptick when compared to 2016 up from 32,796 sf to 58,220 sf of total leasing activity. There are currently only three spaces available that can accommodate tenants seeking upwards of 25,000 sf. The submarket lacks class A buildings and is more suitable for smaller tenants. The trend of no new office developments seems to mesh with development being predominantly multi-family and retail focused. Office development could be sparked due to a 62-acre development site being offered up as a possibility for Amazon s HQ2. This land site is currently owned by Related Midwest. If this site is chosen, this could ignite further activity within the South Loop and prompt positive submarket fundamentals. 3,766,181 SF 252,080 SF 1,831 SF 253,911 SF 6.7% Office development could be sparked by a 62-acre development owned by Related Midwest that is being considered to Amazon s HQ2. 4,662 SF -12,747 SF $24.65 avisonyoung.com page 11
Chicago CBD Fourth Quarter 2017 Office Market Report CBD Notable Q4 Leases Tenant Address/Name Submarket Size (SF) Type Fifth Thrid Bank 222 S Riveside Plz West Loop 143,734 Renewal Tribune 130 E Randolph St East Loop 131,419 New BP Products North America 10-30 S Wacker Dr West Loop 117,812 Renewal Combined Insurance Company of America 111 E. WackerDr East Loop 99,204 Renewal BP Products North America 10 S Wacker Dr West Loop 98,039 Renewal Facebook 191 N Wacker Dr West Loop 83,093 New CBD Notable Q4 Investment Sales Address/Name Size (SF) Buyer Seller Sales Price PSF 231 S LaSalle St 1,055,926 Beacon Capital Partners The 601W Companies $162,000,000 $153.42 120 N LaSalle St 390,769 Lincoln Property Company Prudential Financial $107,000,000 $273.82 500 N Michigan Ave 324,027 Schapira Group The Macerich Company $86,350,000 $266.49 150 N Wacker Dr 246,613 Primavera Family American Realty Advisors $79,946,000 $324.18 213 W Institute Pl 155,454 KBS Growth & Income REIT Ameritus $43,500,000 $279.83 CBD Large Contiguous Blocks [Class A with over 100,000 SF] Submarket Building Address Class Building NRA Contiguous Space Space Type West Loop 625 W Adams St A 434,931 432,709 Under Construction North Michigan Avenue 515 N State St A 664,158 331,583 Existing East Loop 200 E Randolph St A 2,737,902 324,780 Existing Central Loop 21 S Clark St A 1,904,229 297,000 Existing Central Loop 203 N LaSalle St A 750,000 277,349 Existing West Loop 151 N Franklin St A 807,355 257,016 Under Construction West Loop 71 S Wacker Dr A 1,490,825 215,447 Existing West Loop 300 S Riverside Plz A 1,048,357 206,411 Existing East Loop 233 N Michigan Ave A 1,174,371 178,931 Existing Central Loop 222 N LaSalle St A 1,034,532 164,926 Existing West Loop 222 W Adams St A 943,433 160,614 Existing West Loop 550 W Jackson Blvd A 406,041 144,207 Existing West Loop 500 W Madison St A 1,448,095 141,404 Existing Central Loop 175 W Jackson Blvd A 1,452,390 137,111 Existing West Loop 30 S Wacker Dr A 1,200,000 129,216 Existing River West 1201 W Lake St A 141,431 128,993 Under Construction West Loop 123 N Wacker Dr A 540,621 121,428 Existing West Loop 227 W Monroe St A 1,571,000 120,317 Existing River West 210 N Carpenter St A 203,589 117,270 Under Construction West Loop 111 S Wacker Dr A 1,213,322 112,052 Existing Central Loop 1 S Dearborn St A 828,538 106,624 Existing Central Loop 180 N LaSalle St A 781,670 101,885 Existing Trends to Watch 2018 Property Taxes With the passing of the new tax bill, property owners will continue to benefit. Which should prompt further investment in commercial real estate. Co-Working Space Chicago s CBD has seen an influx of co-working spaces. Currently there are 81 co-working, incubator, and accelerator locations within the CBD. This will likely grow throughout 2018. Value-Add Investment With an increase in new product expected to be delivered throughout 2018, investors seeking to place capital in older class A and B products with value-add potential should increase. avisonyoung.com page 12
For more information, please contact: Kathleen Cavanaugh Research Manager 312.940.6266 kathleen.cavanaugh@avisonyoung.com Greg Rogalla Senior Research Analyst 847.637.0704 gregory.rogalla@avisonyoung.com Avison Young Chicago One South Wacker Drive, Ste. 3000 Chicago, Illinois, 60606 www.avisonyoung.com avisonyoung.com 2018 Avison Young Chicago. All rights reserved. E. & O.E.: The information contained herein was obtained from sources which we deem reliable and, while thought to be correct, is not guaranteed by Avison Young Chicago, Inc.