Without question, the office market has been affected by the COVID-19 health crisis this year. But as a real estate broker who handles office leasing and management in the suburbs, I can attest that we are hearing from more companies interested in exploring office options in the suburbs, where there is less density, more space and typically more access to the outdoors, all of which can be achieved at a lower cost. In fact, I believe the virus will accelerate a quiet regeneration that’s been happening in many suburban office submarkets since about 2018.
Looking at suburban Chicago office data for the first 60 days of the third quarter, here are some early observations:
• Compared to the first two months of the second quarter of 2020, when stay-at-home orders clamped down most activity, the leasing activity in the first two months of the third quarter of 2020 was up by over 30 percent when considering direct leasing and subleases.
• Year-to-date, new suburban office leasing activity is actually up 54.3 percent compared to 2019 figures in the O’Hare submarket; the North Suburban submarket is only down 5.5 percent year-to-date.
• At just over 275,000 square feet, the East-West Corridor submarket led this leasing activity among suburban submarkets, with the Northwest Suburban submarket not far behind at just over 200,000 square feet during the first 60 days of the third quarter.
• While early third quarter activity has picked up from the previous quarter, this new leasing activity is still down one-third as compared to the same time period of 2019.
Despite the lure of the CBD, suburban office didn’t die
In recent years, news of the Chicagoland office world has focused on major corporations like McDonald’s moving from the suburbs to Chicago’s various downtown submarkets in order to attract young talent living in the urban core. Fulton Market west of the Loop has blossomed; the Old Main Post Office of the South Loop has been completely renovated after languishing for over a decade.
But that doesn’t mean suburbs turned into ghost towns. Generation X has been raising families in suburbs for years. Millennials started migrating to the suburbs a few years ago to gain more space for their growing families and access to quality neighborhood schools. In recent months, data shows COVID-19 may have accelerated this trend, with existing suburban home sales soaring. Growth in train communities along the Metra lines in such towns as Elmhurst and Hinsdale has been especially robust. As a result, office investors seeking value and the “next big thing” also have been more active in the suburbs.
In all, there was $1.4 billion in suburban Chicago office sale transactions in 2018 and more than $1 billion in refinance deals in 2019. Renovated Class A space was especially popular with investors and tenants, with upgraded offices and amenities considered crucial for attracting and retaining younger employees who might otherwise be drawn to jobs in new urban offices in downtown Chicago.
Companies assessing space needs are taking a fresh look at the suburbs
With COVID-19 causing many employers to rethink what employees will want in order to feel productive and safe at the office—and more people leaving the dense urban core for the roomier suburbs—we anticipate the recent regeneration in suburban office will only accelerate.
We’re fielding calls from brokers and companies assessing their space needs and exploring their options–e.g., a “hub and spoke model,” consisting of a central office downtown and smaller offices in the suburbs; temporary or short-term flexible spaces in the suburbs closer to many of their employees or larger available spaces in move-in condition for firms making longer term decisions for their workforce which no longer wants to take public transportation or deal with 50-floor elevator migrations.
They are still most interested in well-located Class A space, whether in recently developed or significantly renovated buildings that have become available in the past few years. Indoor amenities continue to be of interest, but we’re also getting questioned about access to outdoor space in a green campus-like setting, adaptability of space for social distancing, and ample parking lots for those who want to avoid public transportation.
A by-product of suburban offerings appreciated by employers is the financial savings that may come with suburban offices compared to downtown properties. In many cases, downtown projects previously allowed companies to compress more occupants into smaller spaces, thus helping to justify the higher per-square-foot costs. Post-COVID-19, however, social distancing will be a challenge in dense, urban office spaces and the lure of suburban space will be more attractive.
Suburban options available to companies now
For companies considering a move to the suburbs, whether for a new headquarters, satellite or flexible offices, there are some options to consider.
Short-term lease. A business not yet sure of its future plans may consider a short-term lease. There are abundant “make-ready” spaces in all suburban submarkets that allow for quick move-ins and very flexible lease terms. Some of these are even available with the latest workstations and furnishings suitable for a COVID-19-appropriate environment.
“Blank canvas”/customizable white box. Chicago’s suburbs abound with second-generation office buildings that have been significantly renovated for new demands. As such, companies seeking space can elect a building with enhanced infrastructure and an opportunity for improvements that can be customized to the tenant, much like a build-to-suit, but without the cost of ground-up construction.
Golf Tower in Rolling Meadows, Illinois, a northwest suburb of Chicago, is an example of this. It’s a 280,000-square-foot office complex located near I-90 and I-290 that offers a “blank canvas” for tenants—ownership will develop amenities to suit specific needs, including state-of-the-art air filtration systems, antimicrobial surfaces and door hardware or touchless elevators. This property also offers the very rarely available 7B tax incentive package, resulting in significant tax advantage for 12 years, including a guaranteed 60 percent discount for the first 10 years. This mid-rise building offers large, efficient floorplates for easy social distancing, and beautiful forest preserve views.
1980s and 1990s office buildings renovated to Class A. Especially popular with investors in recent years, multi-tenanted buildings from the ‘80s and ‘90s have sufficiently modern features including energy efficient windows, ADA accessibility and often higher ceilings than their predecessors, making them ideal candidates for a renovation.
An example of this subset includes 26TWENTYFIVE Butterfield in Oak Brook, Illinois, where NAI Hiffman recently completed six transactions. It’s a three-story, 214,767-square-foot building located on 10 park-like acres and has upgraded common areas, a deli, a fitness center and outdoor space with a lounge area and on-site property management. Suites are still available ranging in size from 600 to 22,000 square feet.
Single story. We believe that single-story office may emerge as one of the hottest commodities in office, particularly if the COVID-19 virus lingers. Single-story office properties generally offer private entrances, easy access to outdoor space and no elevators. One example is Concourse Chicago, a 12-building single-story office property near O’Hare with Class A amenities and lush landscaping. Another is 1250 Barclay Boulevard in Buffalo Grove, Illinois, a 30,340-square-foot, single-story office space with four sides of windows, eight to 10 conference rooms and 176 parking spaces. Both of these properties provide self-contained units, with no shared service areas such as common hallways, restrooms or HVAC systems.
While I don’t know what the future holds in terms of the coronavirus, I do believe companies will continue to require office space as working from home full-time is not an ideal solution for most employees or every organization. What may change is where the office is located, its design and the flexibility of utilization by its employees. If the trend of recent years accelerates, companies will pursue what’s available near their workforce in the suburbs and find a rich supply of updated space that fits their needs today and for many years to come.
About the author
Jason Wurtz is an Executive Vice President with NAI Hiffman Office Services. He leads a team of real estate professionals representing owners and users in the acquisition, disposition and leasing of commercial real estate. Wurtz has worked nationally with his team for corporate users such as Midas and World Kitchen, and has a specialty focus in Chicago’s North & Northwest Suburban Office Markets. He currently represents multiple private and institutional property owners such as KBS, Bentall Kennedy, Sperry Equities and Guardian Life in the leasing and marketing of their suburban office assets.