Chicago Commercial Real Estate Market Braces For Slowdown

November 20, 2008 11:45 a.m. EST

Chicago, IL (AHN) - When Chicago's residential sector suffered a slump, its commercial real estate sector was relatively not affected by the down turn. But it will not be for long.

According to Jones Lang LaSalle, downtown office vacancies in Chicago could go up by 50 percent over the 24 months. It will be the result of consolidation and downsizing of banks and investment firms which take up 12 million square feet of office space. It will hike the downtown vacancy rate to 18 percent in 2010 from the current 12 percent.

Rena Christofidis, research director of Jones Lang LaSalle for the Midwest, said, quoted by the Chicago Tribune, "Vacancy, obviously, will rise, not only in the financial sector but many sectors... We have companies that are seriously considering if they need all the space they have."

The rise in vacancy rates will likely be accompanied by a drop in rents by 15 to 20 percent over the next 12 months.

Companies which have been hit hard by the financial crisis such as Merrill Lynch, Lehman Brothers and Bear Stearns, hold about 1.3 million square feet of office space in Chicago. These companies are the prime candidates to reduce their office space requirements in the coming months due to downsizing.

Meanwhile, a report by real estate company Zillow for the third quarter said almost 40 percent of homeowners with properties in the Chicago metropolitan area who bought units at the peak of the 2006 housing market now owe more than the value of their homes. It is the result of home values dipping by 8.5 percent for Q3 in the Chicago metropolitan region to $237,504.

The Q3 decline in home prices was worse than the Q2 decrease which was at 7.3 percent.