When the Healthcare Information and Management Systems Society (HIMSS) was exploring options for a new downtown office space, the organization found itself in a unique position to get what would otherwise have been unheard of terms and pricing on a sublease at 350 North Orleans.
The favorable tenant terms — namely steep discounts and concessions — are largely thanks to the pandemic and the effects that it has had on the downtown office market.
“If you’re representing a company or tenant that’s willing to stay for the long term, the world is your oyster,” says Avison Young tenant broker Chad Bermingham, who represented HIMSS on the sublease deal. “I’ve never experienced anything like this; the calls, the emails and the unsolicited proposals. For a company or tenant with a lease expiring, this is a fantastic time to get a deal.”
Because the rent was well below market rate, HIMSS ended up taking more space than they needed, Bermingham says of the 30,000-square-foot sublease deal. Not only does the organization have room to grow, but they’re locked in for the long haul. When the deal was announced in March, it was notable for being one of the largest downtown subleases in recent months.
“HIMSS was able to occupy a space that had never been occupied before, with brand new furniture, all new AV equipment wired and ready to go, and they can move in tomorrow,” Berhmingham says of the deal. “And there are a lot of other sublease spaces out there like this.”
Bermingham, who started his career in 1999 during the Dot-com Bubble, has witnessed the peaks and valleys that come from economic booms and busts, but says that this time it’s different.
“This is the most tenant-friendly market that we have ever seen,” Bermingham says. “Last time we were anywhere like this was the Great Recession, but there wasn’t this much sublease space on the market then — there just wasn’t as much empty space back then.”
And no doubt, with recent estimates hovering around 6 million square feet, there still remains a tremendous amount of sublease space in downtown Chicago on the market. Bermingham highlights major discounts on sublease space being offered by large companies like Uber or Groupon in buildings that have been recently built-out with great amenities and furnishings.
But while the sheer amount of available office space continues to make headlines, there are a few conditions to keep in mind that can make the massive sublease numbers seem artificially inflated, Corby Marx of Colliers suggests. For instance, while there’s nearly 6 million square feet of sublease space available, only a fraction of it is actually vacant.
And with so many businesses reassessing their current office space needs, a lot of companies who have sublease space on the market may ultimately just be fishing for a bite.
“More than half of the subleases on the market are still occupied,” says Marx of the situation. “So, how serious are those sublandlords that are marketing their sublease?”
There are a few different scenarios that may play out in the next few months with regards to the current sublease market, Marx predicts. Some sublandlords might pull their space back off the market as more workers return back to the office, ultimately deciding that they do in fact need the space. Others may watch the market conditions improve and decide that they don’t want to “give away” the space, Marx suggests, at a steep discount.
“Of this 6 million square feet, what’s real? We don’t know,” Marx says. “I think it’s far less than the record setting amount that we have on the market. So the sublease market number is going to come back to earth much faster than the rest of the market.”
Regardless of what’s real or imagined, the amount of sublease space means that there’s going to be stiff competition among traditional office landlords and sublandlords until the pendulum swings back in the other direction. For some clients, Marx says that he doesn’t even look at direct space until exhausting the sublease market first.
However, those who looking to get a deal on sublease space have to strike while the iron is hot.
“If tenants only have a year left on their lease, all of these subleases are a great option. But it gets trickier for those with 3-4 years left,” Bermingham says of the current market. “It’s going to be a very interesting year no matter what.”
Bermingham predicts that we could see the market shift back towards landlords’ favor in the next 12 months as more expiring leases come due and companies have no choice but to make a decision on office space.
Marx says that we should be looking at years, not quarters, for the office market to return to pre-pandemic levels of activity and prices. The big issue is that companies are re-assessing their office needs, but the expectation is that many may ultimately choose to downsize, adding even more space to an already flooded market.
“We have an unprecedented amount of tenancy that is past, current, and future all hitting at the same time and when you look at it in relative terms for an industry that has been dead for 9 months, it feels even more so now and that’s creating optimism,” Marx says. “The question is what is that optimism really going to produce?”
This article appears in the April 2021 issue of Illinois Real Estate Journal