Despite the slow pace of development over the past few years, the Chicago office market is buoyed by several new deals that are expected to spur construction of new, long-term projects. There are also signs of a turnaround in leasing, which would mark an improvement in the double-digit vacancy rate.

The mega-merger of United Airlines and Continental Airlines was approved on Sept. 17, and the new, consolidated company headquarters will be near United's existing base in Chicago's downtown, promising more jobs and office demand.

A Chicago development firm, Fogelson Properties, planned to erect a multi-use project south of downtown on 23 acres formerly promised to the Olympics. However, Chicago lost its bid for the 2016 Summer Olympics. The development would include 3,000 hotel rooms plus residential units and retail space, but would be anchored by an office tower of 70 stories with 1.5 million sq. ft. The Fogelson project is expected to take a decade or more to come to fruition.

There are hints of improving office fundamentals in downtown Chicago, known to locals as the Loop. It houses 137 million sq. ft. of offices, compared with more than 96 million sq. ft. in the suburbs. Positive space absorption occurred downtown in the second quarter for the first time in two years.

Sublease space has dropped by 20% since the end of last year to just 3.4 million sq. ft. That is the lowest sublease total since the end of 2008. The direct vacancy rate in the 30 newest downtown towers — those considered most likely to be coveted by buyers — stands at 11.5%, down from 12.2% earlier this year, according to MB Real Estate Index. Older buildings may take longer to recover occupancy.

Although there is currently no new construction under way downtown, the market could soon be ready to support another high-rise. “The trophy buildings are all pretty well leased in Chicago, and it won't be long before another new building gets launched,” says Todd Lippman, vice chairman of CB Richard Ellis Group.

A new high-rise could be built by late 2013, when a number of leases will expire in the Loop, says Lippman. He estimates the market would support up to an 800,000 sq. ft., 40-story high-rise. “Anything bigger than that you couldn't get financed. Any new building would have to be at least 50% pre-leased, which is going to be the biggest challenge.”