Second Quarter 2016 Office Market Report

Chicago

Market Facts

5.5% Chicago’s unemployment rate remained relatively flat year-over-year.

$361.5 M There was $361.5M venture capital invested within Chicago area

1.7% The metro Chicago area added over 61,500 jobs year-over-year.

16,200 jobs The most active industry in the Chicagoland area during the first quarter of 2016 was the leisure and hospitality sector

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Economic Overview Chicago’s diverse economy continued to grow moderately throughout the second quarter of 2016. The metropolitan area added more than 61,000 jobs as of May 2016—up 1.3% year-over-year. The strong job market kept unemployment relatively unchanged over the same period—recorded at 5.5%. The supersectors that recorded the highest year-over-year growth in employment were leisure and hospitality; professional and business services; and trade, transportation and utilities sectors— witnessing increases of 250 bps, 160 bps, and 140 bps respectively. The manufacturing sector saw minimal growth. According to World Business Chicago, there were 693 corporate expansions within the Chicagoland area in 2015, up 11.1% from 2014. This compelled Site Selection Magazine to list Chicago as a “Top Metro” in the United States. Notable expansions within the market include Amazon, which plans to add 2,000 full-time jobs at their new I-80 East corridor warehouse. McDonalds has stated that it will

move its corporate headquarters from suburban Oak Brook to the West Loop. The Chicago housing market saw moderate increases in sale prices. As of May there have been 11,600 home sales—up 12% from May 2015. Median sale prices rose 7% over the same period. Rents across the city are expected to rise considerably with the proposed tax increase. Looking forward, home sales in certain suburban areas are expected to pick up throughout 2016 as home prices in the city of Chicago keep rising.

Office Market Overview The downtown Chicago office market finished the second quarter of 2016 with increased demand. A shortage of highquality space across the CBD remains an issue for some tenants, stimulating increasingly competitive rental rates. This has caused slight shift in market conditions favoring landlords over users. Landlords across the market continued to pour capital into building improvements avisonyoung.com

Chicago

Second Quarter 2016 Office Market Report

Historical Vacancy Rates 12.0%

10.0%

8.0%

2011 2012 2013 2014 2015

2Q 2016

Asking Rents $34.00 $33.00 $32.00 $31.00 $30.00 $29.00

2011 2012 2013 2014 2015

2Q 2016

Historical Net Absorption 1,500,000 1,000,000 500,000 0 (500,000)

2011 2012 2013 2014 2015 YTD 2016

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such as adding tenant amenities. Demand remains strong in both the West and Central Loop submarkets. However, many tenants are no longer focused solely on preferred submarkets, and instead are looking at options in alternative areas, which are often more cost effective or provide distinctive lifestyle advantages. This trend is likely to continue for the foreseeable future.

2,000 employees. Glassdoor signed a 51,000 sf lease with the intention of hiring 250 people over the next several years. Their building is also being developed by Sterling Bay. With several large tenants actively looking in the market and a healthy deal pipeline expected to continue, activity should remain strong through the remainder of 2016.

Absorption & Demand

Vacancy & Availability

The CBD continued to record healthy leasing activity through the second quarter of 2016. Most submarkets saw a moderate increase in demand, prompting overall absorption to remain relatively unchanged when compared to the second quarter of 2015. This is partly due to a record amount of sublease space coming online—up 83.6% since mid-2015. The absorption of class A product within the East Loop and River East submarkets recorded the highest in the CBD. The West Loop remains one of the most popular submarkets; demand remained much the same when compared to recent quarters. The River North submarket witnessed great momentum through the first half of 2016. The North Michigan Avenue submarket continued to trail the rest of the CBD. With four straight quarters of negative absorption.

Vacancy within the CBD witnessed a dramatic downward shift year-overyear—down 90 bps to 11.3%. Class A vacancy dipped 190 bps over the same period—posted at 9.5%. Class B product witnessed a minor uptick in vacancy. The West Loop submarket continued to see a surge of activity, with class A vacancy dropping 1.2% in the last 12 months. Following four quarters of tightening vacancy, the East Loop saw a 160 bps year-over-year drop in overall vacancy to 11.9%. Class A and B vacancies both recorded moderate dips during the quarter—recorded at 12.5% and 11.9% respectively. The Central Loop saw little change with vacancy remaining at 8.5% throughout the first half of 2016. The popular River West submarket saw substantial activity during the second quarter. Vacancy dropped to 12.5%, with class A vacancy significantly lower— down to 4.6%.

Leasing activity remained strong during the second quarter with over 2.1 msf leased, slightly below the 2.3 msf posted this time last year. Notable leases inked during the first quarter included Leo Burnett Worldwide renewing its 642,000 sf at 35 W. Wacker. Suburban based McDonald’s Corporation inked a 486,000 sf lease to move its headquarters to the River West submarket. Its new facility is being developed by Sterling Bay and once completed will house the corporation’s

The North Michigan Avenue submarket has witnessed a moderate increase in demand throughout the past several quarters. Vacancy was recorded at 11.2%. Class A vacancy recorded an 80 bps drop from the first quarter of 2015, currently posted at 13.1%. The River North and South Loop submarkets vacancy rates continued to trend downward. Looking forward, Chicago should continue to see declining vacancy rates within select submarkets. avisonyoung.com

Chicago

Second Quarter 2016 Office Market Report

Rental Rates

Construction

Investment

Asking rental rates have continued to trend upward, rising consistently over the past several quarters— averaging $33.06 psf during the second quarter of 2016. Class A rents shifted upward for the fourth straight quarter—up 2.5% year-overyear to $34.79 psf. Class B rental rates remained relatively unchanged during the past several quarters. The West Loop, Central Loop, and River North submarkets continued to have the highest asking rents within the market, especially for class A product which saw an uptick over last quarter. The River West submarket saw rental rates spike 14% year-overyear—up to $30.29 psf. Class A rates within the market are as high as $40.00 psf. Rental rates have become more competitive, especially in submarkets where demand is high. This has caused a shift in market conditions favoring landlords over users.

With no new product added since 2009, the Chicago CBD has seen an influx of projects currently under construction. The five projects, which total 3.8 msf, are located within the West Loop and River West submarkets. The first of two projects to have recently broken ground is a 432,000-sf speculative project located at 625 West Adams. As a rare occurrence of speculative development, 625 West Adams verifies developer/ investor commitment to the market. The second, 1330 W Fulton St, is a 287,000 sf development within the River West submarket. The property is being developed by Sterling Bay and is 47% preleased to Glassdoor and Skender Construction Company. Construction continued on the three remaining trophy office towers. 150 N. Riverside will add 1,229,064 sf and is now 79.9% preleased. River Point will add 1,073,100 sf and is 72.9% preleased. CAN Center will add 807,130 and is 46.7% preleased.

Investment in CBD office product remained relatively unchanged throughout the second quarter of 2016. Cap rates have remained relatively consistent, averaging 7.1%. Overall, sale prices are on the rise. On a per-square-foot basis, pricing saw a moderate decrease when compared to previous quarters— currently averaging at $222 psf. The most notable second quarter investment sales transaction was the sale of The Sullivan Center. The 942,000-sf class A building, traded for $267 million, or $283 psf when Madison Capital purchased the property from Elad Canada Operations. 440 S LaSalle traded for $191 million, or $186 psf when the CIM Group purchased the property from TIER REIT. Investor demand for office product shows no signs of losing steam, and prices should increase through the remainder of 2016.

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Chicago

Second Quarter 2016 Office Market Report

Office Market Snapshot Chicago’s CBD continued to tighten throughout the second quarter of 2016. Demand across the Chicago office market remains high sending absorption up and vacancy down. Market Inventory

Vacancy Rate

Net Absorption

Construction Pipeline

Average Asking Rate

163,572,010 SF

11.3%

-441,412 SF

7,540,712 SF

$33.06 SF

CBD Office Vacancy and Direct Net Absorption 1,000,000

12.0%

800,000

11.5%

600,000

11.0%

400,000

10.5%

200,000

10.0% 9.5%

-200,000

9.0%

3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16

0

Net Absorption

Submarket

Total RBA (SF)

Vacancy

Direct Available Space (SF)

Sublet Available Space (SF)

Total

Class A

Class B

Vacancy Rate

Leasing Activity (SF)

Net Absorption (SF)

Average Asking Rent Overall Avg

Class A

Class B

CBD

163,572,010

14,545,687

1,422,979

11.3%

9.5%

11.9%

2,186,763

-441,412

$33.06

$34.79

$30.20

West Loop

50,311,108

4,264,284

632,121

9.8%

9.3%

11.6%

493,404

-114,429

$38.09

$39.74

$27.10

East Loop

26,798,081

3,113,779

101,503

11.9%

12.5%

11.9%

263,646

-4,859

$30.07

$30.94

$29.42

Central Loop

46,766,306

3,562,508

399,822

8.5%

7.8%

9.4%

885,555

-373,564

$31.33

$31.27

$31.56

North Michigan Ave

16,264,696

1,651,629

176,523

11.2%

13.1%

9.6%

232,904

47,440

$25..34

$26.92

$27.17

River North

14,443,828

912,488

82,575

6.9%

3.9%

5.5%

227,728

140,486

$33.61

$38.99

$36.01

South Loop

3,638,922

403,426

0

11.1%

N/A

10.7%

0

0

$23.54

N/A

$22.00

River West

5,349,069

637,573

30,435

12.5%

4.6%

15.8%

83,526

30,704

$30.29

$42.00

$30.25

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Chicago

Second Quarter 2016 Office Market Report

Top Lease Tenant

Address/Name

Submarket

Size (SF)

Type

35 W Wacker Dr

Central Loop

642,545

Renewal

1045 W Randolph St

River West

486,400

New

The Mart

River North

112,803

Renewal/Expansion

American Dental Association Bldg

North Michigan Ave

68,082

New

1330 W Fulton St

River West

51,500

New

175 W Jackson Blvd

Central Loop

41,370

Renewal

Leo Burnett Worldwide, Inc. McDonalds Corporation Beam, Inc Ann & Robert H. Lurie Children’s Hospital Glassdoor Regional Transportation Authority

Top Investment Sales Address/Name

Size (SF)

Buyer

Seller

Sales Price

The Sullivan Center

942,330

Madison Capital

Elad Canada Operations Inc.

$267,000,000

1,041,150

CIM Group LP

TIER REIT, Inc.

$191,000,000

487,590

Rampante Realty Partners, LLC

Anvan Realty & Management Company

$68,100,000

440 S. LaSalle St 401 S State St

Under Construction Address

Developer

Submarket

RBA (SF)

Preleased (%)

150 N Riverside Dr

Riverside Investment & Development

West Loop

1,229,064

79.9%

444 W Lake St - River Point

Hines

West Loop

1,073,100

72.9%

151 N Franklin St-CAN Center

John Buck Company

West Loop

807,130

46.7%

625 W Adams St

White Oak Realty Partners, LLC

West Loop

443,645

0.7%

1330 W Fulton St - Fulton West

Sterling Bay

River West

287,928

47.7%

Trends to Watch Population Growth: Census data shows that the Chicago area population remained relatively flat over the past several years. Employment: Moderate second quarter growth prompted employment to see a slight uptick year-over-year. Active Markets: West Loop, River West, and Central Loop Market Drivers: Professional and Business Services, Technology, and Education and

For more information, please contact:

avisonyoung.com © 2016 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.

Greg Rogalla Research Analyst 847.637.0704 [email protected] Michelle Chen Research Analyst 312.940.6261 [email protected]

avisonyoung.com © 2016 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.