Local Sublease Glut Worse Than Most Markets

CHICAGO-Sublease space is going for as low as 70 cents on the dollar here, as the market is second only to New York City in the square footage being made available by tenants. Grubb & Ellis reports the 7.7 million sf of sublease space is the largest since the firm began tracking it in 1983.

Another disturbing first-quarter trend for office property owners was the overall rise in the vacancy rate from 7.9% in 2000 to 11.7%. The 378-basis point jump was surpassed only in San Francisco–by a single basis point–and Boston, where a 409-bps climb was recorded.

With 4.7 million sf in the suburbs and three million sf Downtown, the overall market has about 500,000 fewer sf of sublease space than New York. With the exception of those trying to find a sublessor, it’s definitely a tenant’s market, according to Grubb & Ellis, even while the average class A rent rose slightly to $33.03 per sf.

“It is common for a company taking sublease space to pay as little as 70 to 75 cents on the dollar, allowing some class B tenants to move into class A buildings,” according to the report. “An added advantage from the tenant’s perspective is that its credit quality typically receives much less scrutiny in a sublease deal than a direct lease deal.”

With new construction representing 4.3% of the market’s total inventory, the local pipeline is in line with the national average, Grubb & Ellis notes. However, the firm warns, “a further expansion of speculative development could put immense downward pressure on rental rates.”

That warning is particularly ominous for the suburbs, where only 16% of the 4 million sf of office space under development is pre-leased. Meanwhile, 64% of the 4.3 million sf of office space under construction Downtown is pre-leased.