The choice of office location in the greater Chicago area depends on the employer’s priorities. The suburban office market remains strong, offering lower rental rates and proximity to O’Hare airport, as well as to executives’ homes. For companies like high-tech enterprises that need to attract a certain workforce demographic to help them grow their businesses, the search is on for skilled young professionals.
Members of generations X and Y prefer urban lifestyles, and are taking their talents to jobs in the cities. IREJ spoke with Chris Wood, DTZ executive vice president and managing director of the company’s brokerage business in Chicago, in order to get an overview of the downtown real estate market in Chicago from an executive with expertise in that market.
“Chicago’s CBD is benefitting from a search for talent,” Wood said. “Many companies, competing with one another for employees with the right skill sets, are moving from the suburbs to the city and generating demand for urban commercial real estate,” Wood added. “Almost three million square feet of office leases signed in Chicago since 2008 have represented companies like Google, United Airlines, BP, and Goco Wireless that have moved, in whole or in part, from the suburbs to downtown.”
Downtown Chicago’s future looks bright because the city is seeing an increase in urban residential development, and offers the amenities prized by workers who came of age in the late ‘90s and 2000s. Only the city can offer excellent mass transportation; only the city provides a 24-hour social environment. And everyone wants to live closer to their workplaces, to save time and avoid congested commutes.
“More and more people want to enjoy this advantage,” noted Wood. “ Although Chicago’s CBD is still in recovering, and hasn’t returned to its pre-2008 crash economy, downtown Chicago has a vacancy rate now that is nearly as low as 13 percent, and that’s a positive sign.”
New development is also reviving, another favorable sign that investors are starting to have faith that the considerable investment that is required to build new buildings will bring returns. That can happen only when an adequate number of prospective tenants exist and a certain level of rents is achievable.
“We are seeing a tremendous amount of activity in the capital markets—more than $3.5 billion of activity year to date in 2014—and that contributes to driving up rental rates,” Wood observed. “From DTZ’s own recent research, we have learned that when new buyers acquire buildings in downtown Chicago, they’re buying at significantly higher prices than just a few years ago.
“Typically, these new owners raise rents to improve the returns on their investments,” he continued. “We found that when a building sells in downtown Chicago, the new owner will increase rents by 15 to 16 percent, an average of approximately a three dollar per square foot rise in quoted rental rates for a recently traded, Class A building.”
However, negotiating dynamics are asset-specific. With ample space still available downtown, tenants looking for 20,000 square feet or less of a traditional, drop-ceilinged office space environment won’t feel the squeeze. But, for example, “if you’re a 50,000 to 100,000 square foot tenant in today’s market looking for high rise view space, the list of available options today is much shorter than it was two or three years ago, and provide landlords with better negotiating leverage for a suitable space,” Wood said, “Technology-oriented space is in high demand, and some of the most desirable buildings in today’s market are loft buildings with technology and power infrastructure that can support the IT demands of growing companies.”
Technology, insurance and healthcare consulting companies have contributed to lowering the vacancy rate; certain submarkets with tech-friendly buildings, such as Chicago’s River North, have gotten tighter. In response, Wood observed, “Landlords of traditional, glass and steel buildings in the central, west and east Loop, are trying to attract technology companies to their buildings by creating loft-like environments. They’re painting the floors, leaving the ceilings exposed, and installing unique lighting.”
Such spaces are designed to accommodate new and different open-plan office configurations that are oriented toward teamwork, and incorporate the brighter colors that are in vogue for tech environments. “Ultimately,” added Wood, “these owners are betting that technology environments inside traditional office buildings will attract these high growth tenants.”
But the new, open-office configurations, which favor collaborative spaces and require fewer private offices, are not helping the office market absorb vacant space. The more dense the space, the less space is required, which results in smaller leases. “The general trend in corporate America of condensing a company’s footprint brings greater efficiency and supports teamwork, but also count on smaller metrics for square feet per individual,” Wood said. “The pre-recession office typically allotted 250 square feet per person. Today, we’re seeing tighter metrics of approximately 150-180 square feet per person. Leasing activity among tenants that relocate often involves leasing less square footage.”
He explained that new, shared spaces that use work stations or laptops that hook into shared, cloud-style digital storage systems, and don’t vary space allotment according to employee rank, can get by with much less space per employee. Today’s hottest trends, such as hoteling (reservation-based, unassigned shared seating in the workspace) and benching (flexible, workbench-style office components that can be configured for collaboration), can bring the metric down to as little as 100 square feet per worker. That footprint compression, Wood pointed out, can slow down the recovery of the office market and slow rental rate growth.
Which types of businesses are lining up for office space in Chicago’s CBD? Wood notes that, apart from tech companies, landlords are seeing healthcare and consulting firms driving growth. Many law firms are headquartered in downtown Chicago, but when law firms move, they typically seek smaller, more efficient space than their previous lease commitments. “Although we’re seeing a lot of leasing velocity, it isn’t translating into a lot of net absorption for the legal profession, one of the traditional drivers of the leasing market in Chicago,” Wood said.
The coming year, Wood predicts, will continue the trend toward positive absorption in the office market, as buildings under construction will not be ready for occupancy until 2017. “Major tenants, such as leading law firms McDermott Will & Emery or DLA Piper, or big investment banking firms like William Blair, won’t vacate their existing premises and move to new developments until the first quarter of 2017,” he concluded.