The total amount of direct vacant space in the MB Real Estate (MBRE) Index increased by just 14,000 square feet in the past three months, causing its direct vacancy rate to rise slightly to 10.7 percent. This marks the second consecutive quarter in which occupancy remained virtually unchanged. The direct vacancy rate was 10.5 percent one year ago in MBRE Index buildings, which suggests that demand has leveled off for the CBD’s 30 newest buildings.
MBRE Index direct vacancy stable, spread narrows
While direct vacancy has stabilized in the MBRE Index, the overall CBD experienced 457,000 square feet of positive net absorption in the fourth quarter of 2011. This caused the CBD’s direct vacancy rate to drop 30 basis points to 15.4 percent. The spread between the MBRE Index and CBD direct vacancy rates fell to 4.7 percent, which is the lowest level seen since September 2010. This was the result of significant positive absorption within Class B and older Class A buildings. The MBRE Index continues to be a leading indicator of the overall market. While the bulk of positive absorption in the CBD was concentrated in MBRE Index buildings from mid-2010 to mid-2011, Class B and older Class A buildings have outperformed the rest of the market from mid-2011 through the beginning of this year.
Amount of direct available large blocks falls, but available sublease space surges
In March 2011 there were 15 blocks of direct, available space greater than 50,000 square feet within MBRE Index buildings. Today, only 11 of such blocks are available. Notable transactions removing large blocks from the market include Marsh taking 120,000 square feet at 540 West Madison and McKinsey leasing 105,000 square feet at 300 East Randolph. While the number of direct, large blocks has fallen within the MBRE Index, total direct availability has been relatively constant the past six months.
However, the amount of available sublease space in MBRE Index buildings has risen dramatically, with a net increase of 179,000 square feet over the past three months. Included in this increase are four large blocks among three tenants. Citadel is marketing 128,622 square feet on the 7th and 8th floors and 64,125 square feet on the 10th floor at 131 South Dearborn. Merrill Lynch is seeking a subtenant for 70,765 square feet at 1 North Wacker. Hostway Corporation, whose lease runs through mid-2023, is marketing 52,660 square feet of office and colocation space at 100 North Riverside. The addition of large sublease blocks impacts the market because these spaces are typically rented at a discount and apply downward pressure on all rental rates.
The MBRE Index total vacancy rate, which includes available sublease space, is currently 12.5 percent, which is up from 12.0 percent one year ago. On the other hand, the total vacancy rate of the entire CBD has fallen 120 basis points to 17.6 percent since last year. This further demonstrates that the flight-to-quality trend has continued to filter down throughout the overall market.