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Anticipated Short Hiccup Turns into Major Crisis says Jones Lang LaSalle’s Chicago Skyline Review

Credit on both sides of transaction is going to be critical to getting deals done in 2009

CHICAGO, February 23, 2009 – According to Jones Lang LaSalle’s 2009 Chicago Skyline Review, the pendulum swung swiftly from landlord-favorable conditions to a tenant-friendly market during 2008 due to corporate contractions and decreased demand atop a weak economy.  As conditions seek stabilization in 2009, Jones Lang LaSalle anticipates vacancy rates in Class A and B properties in the downtown office market to reach 15 percent. 
Actual statistics from 2008 reveal positive demand, elevated asking rates and minimal development on the year; however, an underlying shift is evident as sublease space steadily increased throughout 2008 and three assets totaling 3.6 million square feet of Trophy space are expected to be delivered during 2009.  The three assets, coupled with the two 2008 deliveries totaling 665,000 square feet of space are 78 percent preleased.  The proposed development at 444 West Lake, which is 60 percent preleased, is now in question due to financing.
As the credit markets have deteriorated it has become increasingly difficult for even strong credit borrowers to obtain project financing.  In mid-2007, the new development at 155 North Wacker obtained  financing with a mere 17 percent of the project preleased; however, in today’s environment a new development such as the Hines’ project at 444 West Lake with trophy tenant commitments is having difficulty navigating the new era of construction financing.
“What we thought was going to be a challenge in the U.S. capital markets has turned into a global crisis; however, we expect Chicago to fare better than most markets due to its diverse economy,” said Steve Stratton, Midwest Managing Director, Jones Lang LaSalle.  “We will see flexibility and a flight to quality as Class A space will be available at a discounted rate.  However, credit on both the landlord and tenant side is going to be critical to getting deals done in 2009.” 
While the market is expected to see an uptick in renewals, many are expected to be short-term transactions as some users are holding back on making long-term real estate decisions until further clarity on their business evolves.  Additionally, concessions are on the rise with free rent being one of the most valuable choices; however, tenant improvement capital is more difficult to secure due to financing restrictions.
“The commercial real estate market is cyclical,” said Steve Smith, Managing Director, Jones Lang LaSalle.  “It took approximately four years to recover from the last downturn, and since then we’ve seen rental rates reach new peaks.  Currently, we are advising our landlord clients to put increased focus on tenant retention.” 
Most development preleasing is from Class A assets, therefore the market will not see large blocks of Class B space that needs to be backfilled.  Additionally, many historic buildings may be converted to student housing as the demand for this type of product has outpaced the supply with the number of colleges and universities in Chicago’s CBD growing significantly.  Thus, less desirable space will be taken off the market.
Chicago’s investment activity has seen one of the steepest declines ever recorded with sales dropping from $5.1 billion in 2007 to $1.1 billion in 2008, an 80 percent decline and the lowest activity since 1996.  Additionally, 11 major office properties with an approximate value of $2.5 billion were put up for sale during the year, but did not trade.  This is most likely due to the ripple effects of the severe shortage of debt capital caused by the CMBS market collapse.  Distressed asset sales are the only transactions expected to close in 2009. 
“This coming year will be a time for Chicago to get back to fundamentals,” said Rena Christofidis, Midwest Research Director, Jones Lang LaSalle.  “Once the latest development in the pipeline comes to fruition, we can expect a lull in development for a few years.  This will enable the market to recover more quickly.”
Christofidis added, “The Obama Administration’s stimulus package should infuse some much-needed confidence into the economy which will positively affect the commercial real estate sector.”
President Obama’s stimulus package, which was signed into law, is expected to infiltrate into the economy in the second half of 2009.  While this won’t immediately have a direct impact on the commercial real estate industry, it is expected to infuse consumer spending in the second half of 2009 and create some residual growth in the commercial real estate sector in 2010.
About the Jones Lang LaSalle Skyline Report
Published yearly, the Jones Lang LaSalle Skyline Report analyzes 52 Class A buildings in downtown Chicago – core office buildings that truly move the market.  For further information or to receive a copy of the Jones Lang LaSalle Chicago Skyline please send an email to
About Jones Lang LaSalle
Jones Lang LaSalle (NYSE:JLL) is a financial and professional services firm specializing in real estate. The firm offers integrated services delivered by expert teams worldwide to clients seeking increased value by owning, occupying or investing in real estate. With 2008 global revenue of $2.7 billion, Jones Lang LaSalle serves clients in 60 countries from 750 locations worldwide, including 180 corporate offices.  The firm is an industry leader in property and corporate facility management services, with a portfolio of approximately 1.3 billion square feet worldwide. LaSalle Investment Management, the company’s investment management business, is one of the world’s largest and most diverse in real estate with more than $46 billion of assets under management. For further information, please visit our Web site,