Saturday, July 28, 2007

Subprime pain spreads into office market

Subprime pain spreads into office market
As business volume plunges for real estate firms hurt by the housing slump, they and companies that service them are abandoning office space and leaving landlords and surrounding communities suffering
By Susan Diesenhouse
Copyright © 2007, Chicago Tribune
July 28, 2007

The scrupulously groomed office buildings that blanket Schaumburg, the economic engine for Chicago's northwest suburbs, boast abundant amenities such as parking, views, cafes and health clubs. But behind the gleaming glass and manicured lawns one critical element is becoming increasingly scarce: tenants.

Signaling the seepage of residential real estate woes into the office market and perhaps other economic sectors, many housing-related businesses that for years have buoyed this slice of suburban offices have been giving back space they leased, industry experts said.

"The downturn in the residential sector has spilled over into the commercial side as the mortgage lenders, title companies, real estate and mortgage brokers shut down or downsize," said Doug Shehan, a senior director at Cushman & Wakefield Illinois Inc.

Over the past several months the contraction of these firms has kept vacancy rates high, rents modest and building sales uncertain, he said.

"It's changed the landscape of the suburban markets dramatically," Shehan said. "Now, what will be the next industry to absorb the space?"

With job growth slowing in the metropolitan region, the answer might be a long time coming.

Clearly, the contagion of the housing sector's ailments -- defaults on home loans, Wall Street losses on real estate-backed securities and the tightening debt market -- is to be expected because capital markets are interconnected, said Mark "Sam" Davis, senior managing director of real estate for Northbrook-based Allstate Corp.

"The biggest source of capital for real estate now comes from Wall Street, with the same hedge funds that invested in subprime mortgages also investing in commercial property," he explained. As a result, turmoil in the housing and debt markets has led "to the most volatile period we've seen in commercial real estate since the tech bust of 2001."

How much this will hurt Main Street is another big question.

"If enough companies vacate offices and put people out of work, the problem moves from a technical to a fundamental one for the regional or national economy," Davis said.

In Schaumburg, well-located, high-quality office buildings, enhanced by hotels and ample retail space, have created a diversified economy that will help it weather the storm, said Christopher Huff, the community's development director.

"We're the downtown for 19 suburbs, and our business climate is pretty well balanced, but there will be space available," he said.

Indeed, by midyear this 25 million-square-foot submarket, which also includes Rolling Meadows, Itasca and Hoffman Estates, had at least 19 percent of its offices vacant.

About 1 million square feet was put back on the market in the first six months of the year by real estate-related businesses, including Argent Mortgage Co. LLC, a division of the large subprime lender ACC Capital Holdings; and WMC Mortgage, a unit of General Electric Capital Corp.

The space give-backs reflect the contraction of several real estate-related companies in the Schaumburg area and elsewhere. So far this year Schaumburg-area firms have laid off at least 1,500 employees, according to state records.

Throughout metropolitan Chicago, job growth fell 27.5 percent for the 12-month period that ended in May, to 44,200 jobs from 61,000 a year earlier, according to research done for the Tribune by the Federal Reserve Bank of Chicago.

But the pain is not restricted to companies in real estate. Businesses that provide their technology, accounting and marketing also might be feeling the pinch, said Faith Ramsour, Cushman's research director.

"Business service companies are signing fewer, smaller deals than in the past," she said.

This mix of dynamics will eventually lower office sale prices. "Buildings may sell, but not for the prices anticipated," said Joseph Stevens, a leasing broker for Transwestern Commercial Services LLC.

Meanwhile, as fewer people buy lunch at noon or shop after work near suburban office buildings, the community as a whole could suffer.

"The ripple effect could be very deleterious because no other industry is growing enough to fill the space," said Geoffrey Hewings, an economics professor and regional job market expert at the University of Illinois.

For Schaumburg, which raises substantial revenue from local retail sales and Cook County property tax receipts, "this could be a great loss, and it still has to provide public services like police and lighting," Hewings explained.

Already, the problem is all too real for suburban landlords, especially those who borrowed heavily to buy buildings that were supposed to be filled with rent-paying tenants. "It's never a good thing for a landlord," said Michael Newman, president of Golub & Co., which in late 2004 bought the well-leased Meadows Corporate Center in Rolling Meadows.

Still lushly landscaped, its parking lot in recent weeks has become a sea of empty spots since anchor tenant Argent vacated 230,000 of its 270,000 square feet.

"We're trying to figure out what to do," Newman said. "We'll look at it from a legal, or hopefully, a business standpoint."


Graphic/Map: Suburban properties emptying out Turmoil in the real estate industry has contributed to high vacancies in many suburban office properties.

PROPERTIES VACANT (SQ. FT.) TOTAL (SQ. FT.) 1600 McConnor Pky. 167,679 (55.9%) 300,034 Windy Point II
2550 W. Golf Rd. 230,836 (85.5%) 270,000 Meadows Corporate Ctr. East Tower
1701 Golf Rd. 190,785 (67.8%) 281,528 Continental Towers II
1100 E. Woodfield Rd. 138,016 (57.3%) 240,880 Two Woodfield Lake
1 Pierce Pl. 197,925 (37.7%) 525,422
Note: Vacancy figures include space left by real estate-related companies and others. Source: CoStar Group Inc. Chicago Tribune/Max Rust and Phil Geib -See microfilm for complete graphic
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