This is a lot of office/production space that will not get used.
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High-tech corridor shakeout
Tellabs dumps I-88 space; sublease glut looming
July 02, 2001
By Steve Daniels
Once a booming corporate center, Illinois' high-tech corridor along Interstate 88 is producing an undesirable commodity — vacant office space.
Lisle-based Tellabs Inc. has become the Chicago area's latest high-tech power to dump space on the office market, subleasing all the room it rents — some 300,000 square feet — in the western suburbs. The company, which saw its stock plummet 24% nearly two weeks ago after warning that second-quarter earnings would be well below analysts' estimates, confirms it will exit seven buildings it's leasing by early next year.
There's more trouble ahead for the East-West Corridor. Real estate brokers anticipate that Lucent Technologies Inc., the ailing New Jersey-based telecom equipment company, will sublease much of the 1 million square feet it leases in the same real estate submarket as Tellabs. Roughly 1,000 of the 10,000 job cuts at Lucent are coming from its Chicago-area offices.
Meanwhile, few companies are looking for new offices, leaving the shrinking corporate stalwarts like Tellabs and Schaumburg-based Motorola Inc., which has put more than 500,000 square feet on the market in the northwest suburbs, competing with owners of new buildings for a sharply reduced base of potential tenants.
Sign of things to come
"(Tellabs) is a harbinger for other (high-tech) companies," says Fred Schuler, a managing principal in Chicago for Texas-based real estate services firm Staubach Co. "What's going to happen with Lucent? It's almost like a relentless tide.
"The full effect might not be felt for a year," he adds. "But this will set in motion some dramatically better deals for tenants."
Communities in the western half of the East-West Corridor are feeling the high-tech blues more than those in the eastern half of DuPage County around Oak Brook.
The three largest buildings Tellabs is leaving are in Lisle and Warrenville, where it leased more than 130,000 square feet in the sprawling Cantera office park just last year when its growth projections were strong. Other buildings the company is exiting are in Bolingbrook and Schaumburg.
Tellabs plans to consolidate its entire west suburban workforce in the new 900,000-square-foot headquarters it's building in Naperville. "We're doing everything we can to take the right steps to realign our business," a spokeswoman says.
Says Warrenville Mayor Vivian Lund, "Definitely, these big companies doing this retrenching is going to have an effect on the whole region. It has to."
But, she adds, "What we've been experiencing for the last several years is such rapid growth. We're so far ahead of schedule at Cantera. It doesn't do us much harm to slow down a little now."
As for Lucent, many of the buildings it leases are in Naperville and Downers Grove. Like Tellabs, Lucent is expected to move much of its remaining Chicago-area workforce into large new offices it's constructed in Lisle and Naperville. But the company hasn't yet announced its local real estate plans.
While the western suburbs are feeling the tech giants' pain, some of their smaller competitors are benefiting. For example, over the last six months, Lisle-based systems management consultancy Intrinsic Technologies LLC, which is staffing up, has seen a large number of Lucent refugees apply for jobs, says managing partner Mike Gersten.
Last year, "our only holdback was available resources," he says. "There's an awful lot of personnel on the street, which helps us a lot."
Mr. Gersten's company aside, the retrenchment of the giants wouldn't hurt as much if there were more companies growing in their stead. But real estate brokers, who four months ago thought tenants would return to the market by midyear, now don't believe leasing demand will improve before yearend.
"The problem with this market is not as much a supply imbalance as it is a lack of demand," says Jeffrey Barrett, managing director with real estate services firm CB Richard Ellis Inc. in Schaumburg. "We haven't seen any visible signs of a pickup in demand. . . . Everyone's sentiments are that it will improve come next year. This is just corporate America putting the brakes on any capital spending. And those decisions are often made on a calendar-year basis."
The large number of corporate users dumping space hasn't resulted in significantly reduced rental rates for tenants. By and large, owners of new buildings are standing pat, waiting for the tenants to return rather than cutting rents, real estate industry representatives say.
Ceding some ground
But there are some subtle shifts. There are more offers of free rent for a defined period of time. Landlords are agreeing to shoulder more tenant improvement costs. And tenants are winning the option to cancel their leases earlier in their lease terms, brokers say.
If rents are to come down, retrenching corporations that are subleasing likely will lead the way. For now, even sublessors largely are offering market rents.
"They need to lose a few more deals before they really start getting aggressive," says Steve Kling, senior vice-president of the office services group at Grubb & Ellis Co. in Rosemont.
©2001 by Crain Communications Inc. |
