If there’s anything that Chicago area commercial real estate professionals have learned in the last 18 months, it’s that the market does adapt quickly to external pressures. And abrupt shifts in trends or volatility in the marketplace can oftentimes present unique opportunities. Such is the case in the suburban office market, which has the attention of brokers, developers and corporate tenant clients as we continue to collectively navigate the unknowns and challenges presented by the ongoing pandemic.
Nearly 75 professionals gathered on the morning of Thursday, September 23 at the Bell Works redevelopment of the former Ameritech campus in Hoffman Estates to discuss various topics related the suburban office market for the 6th Annual State of Suburban Office Conference. Once a single-tenant occupier, the campus, reimagined by Somerset Development, will feature rows of ground floor retail with office suites on the above levels. Refreshed for today’s needs, the Bell Works site is expected to draw more attention from businesses who are taking a second or third look at a new office presence in the Chicago suburbs.
There will be a flight to quality
The event’s first panel featured Andy Bartucci, Senior Vice President with Foresight Realty Partners; Ken Gold, Vice President of Acquisitions & Development for Somerset Development; Andrea Van Gelder, International Director for JLL; and Steve Kling, Principal at Colliers. The discussion was moderated by Kevin Kramer, Director of Economic Development for the Village of Hoffman Estates.
What are some of the biggest changes the suburban office market has witnessed in the last two years? One of the most noticeable differences is the focus of short-term transactions, said Van Gelder, highlighting the desire of many companies to either downsize their office capacity, seek shorter-term lease deals, or both. However, the flood of government assistance has caused the market to hold in a “static state,” with artificial stability, said Bartucci of the trillions spent through PPP loans, forbearance arrangements, and eviction moratoriums.
With the major shifts in demographics, between Boomer-age professionals reaching retirement, Millennials moving the suburbs, and Gen Z’ers just starting off in their careers, there are a lot of variables to consider when planning for future office space. “[Millennials] started looking into the suburbs before COVID, but the pandemic threw gas on the fire,” said Kling. “It’s a shift that employers really have to keep their eyes on, because it’s real.”
But with so much space available and bargaining power on the side of tenants, there has been a noticeable “flight to quality,” Van Gelder said, where some office tenants are moving into better spaces with newer amenities and prime locations because they can. And there’s more leverage to seek shorter-term leases or try a “hub and spoke” model where a company could have a number of small office spaces throughout the greater Chicagoland region.
Ken Gold of Somerset Development says that it’s these Class A and Trophy Class office buildings that will fill up first and ultimately prevail in this market. “New York is similar to Chicago where the offices aren’t filled and big office leases aren’t being signed, but we have signed a lot of leases at Bell Works in New Jersey,” he said of the company’s first major corporate campus overhaul, the old Bell Labs building in Holmdel, New Jersey. “We signed a 20,000-square-foot lease for a major company. There’s a flight to quality — you need higher end facilities, but companies are still figuring out what they need.”
Repurposing existing office structures for today’s needs
The second panel, which focused on design and construction trends in the current office market featured Roger Heerema, Principal at Wright Heerema Architects; Mike Harvey, VP and Director of Operations for ML Group Design & Development; Paola Zamudio, Creative Director & Lead Designer of Bell Works for Somerset Development; Floyd Anderson, Principal at Wight & Company; and Dirk Lohan, Partner of Lohan Architecture LLC.
So, how does one go about reimagining and repurposing a corporate campus like the one in Hoffman Estates that was previously occupied by Ameritech (and then later, AT&T)? The design of the structure, with its long, open corridors that connect to a central atrium space just so happens to be ripe for such a transformation, said architect Dirk Lohan, who was the building’s original lead architect and designer.
“One of the amazing things that I realized and observed as this project proceeds is how wonderful and appropriate the original design was for the new purposes,” said Lohan. “One of the aspects is the three-story high, skylit — I like to call them, ‘streets.'”
Lohan recalled discussions with the-then chairman of Ameritech about the design and how he pushed for the open space and natural lighting for the building. While the business leader did not initially agree with the design language, the heads at Ameritech did ultimately concede to Lohan’s recommendations. Additionally, Lohan discussed his strong belief in having the surrounding landscape be pleasant to look at and not be dominated by parking lots.
“For a vibrant city, you need to have a space or area that is recognizable as what the community wants and for gathering,” said Floyd Anderson, Principal with Wight & Company, comparing the building’s floor plan and layout to that of a city or town. “The concept of a Metroburb really mapped out well in a building like this and there are other buildings like this around the country and I think it’d work well.”
But quality of construction materials matters too, said Zamudio. Despite the supply chain constraints and high cost of materials, Zamudio believes that it’s best to wait it out and do it right the first time. “We are in a hurry, but good design takes good materials and takes time,” she said. “I’d rather have something that is sustainable and good quality and last a long time.”
Making sense of the moment and numbers
The conference wrapped up with a third panel featuring John Homsher, SVP at Colliers; Jim Postweiler, Executive Managing Director with Newmark; and Don Wenig, Founding Member of Blackacre Advisors LLC. The panel was moderated by Dan Deuter, Executive Managing Director with Cushman & Wakefield.
As in all cycles, there will be panic selling and buying, said Wenig, but those who are looking to cash out in a time of turmoil need to be more strategic in decision-making. “Most of the time if an owner asks, ‘Should I sell right now?,’ our reaction is ‘Probably not.'” The reason being, Wenig explained, is that leases and revenue have a big impact on property evaluations. Some owners would be best served focusing their efforts on signing leases and filling space before going to market.
But there is still a tremendous amount of money out there for investment, said Homsher, and buyers are certainly discerning. “Downtown occupancy is very low: around 25-30%,” Homsher said. “But in the suburbs, it’s probably more like in the 50% range. So I think we have a better story to sell to investors [in the suburbs] than the downtown community.”
In this moment when the office market is witnessing a major fluctuation, who is buying these assets? “High net-worth individuals and private equity buyers,” said Homsher. “It’s not institutional buyers. They’re not looking at Illinois; they’re looking at the southeast and southwest.”
This is where the flight to quality matters from a portfolio perspective and ability to compete in a challenging marketplace, said Postweiler. “For the groups who are showing up to the offices we’re selling, it’s family offices, and that’s fine because there’s real money out there for it,” he explained. “But the outlook for office, especially on the institutional side, they’re looking at the national landscape and paying attention to markets like the Carolinas, Austin, Atlanta or Nashville.”
He adds that the Chicago area is a bit more touchy for institutional buyers, but there is still a path forward. “When considering Chicago, if you pull a report, it doesn’t look good. If you’re an out of town buyer, you ask, ‘Why do I want to go there?’ You really have to go past that to understand what’s coming next and this gets back to having the best in class properties in the market. We’ve been in these declines before and this is how people make a lot of money — it takes fortitude to do that and someone with capital.”
This article also appears in the October 2021 issue of Illinois Real Estate Journal.