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Flight to quality and value in O'Hare office market

Over the last several years, Class A space in markets like O'Hare has been readily available to tenants. With that availability, we've experienced a flight to quality — tenants taking advantage of the opportunity to move up to newer, more modern Class A buildings, without necessarily paying a substantial premium for space.

Some of the buildings or complexes that benefitted from this flight to quality have included Triangle Plaza and O'Hare Plaza I & II.

Today, however, we've continued to witness a subtle market shift as some of the best Class A spaces have been absorbed. While certain elements of quality will always be important to tenants, we are now seeing a flight to value, where Class B buildings that offer top-line amenities, great accessibility and strong visibility are in a position to capitalize because they represent a strategic and viable alternative for tenants looking for corporate and regional headquarters space as well as satellite offices.

Numbers tell stories

In the O'Hare market, the Class A vacancy rate is 12.3 percent, its lowest mark in years. In contrast, the Class B vacancy rate is significantly higher, by well over half, at 20.7 percent. Yet to demonstrate the flight to value trend, absorption of space is occurring at a greater level in Class B space. In the second quarter, 208,300 square feet of Class B space was absorbed compared to 64,100 square feet of Class A space.

As leasing activity and space absorption has occurred, and the vacancy rates have fallen, there has been upward pressure on rents #8212; to $32 per square foot gross, including taxes and operating expenses. While value isn't determined by price alone, the rental rate for Class B space is 30 percent less at $21 per square foot gross.

In the eye of the beholder

There is a universe of O'Hare market tenants, like any market, that seeks to be at #8220;main and main,#8221; and in a trophy property that may offer the newest construction and the ultimate level of finishes and amenities. With that profile comes a certain premium. But because they may be Fortune 500 firms, or companies that value a higher profile, they will pay that price.

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