As Chicago emerges from the COVID-19 pandemic, the future of the office market remains a question mark. Will employees want to return to the office? Will hybrid working—partly remote, partly in the office—dramatically shrink corporate footprints? Will companies return and re-energize Chicago’s quiet downtown streets?
In a recent SIOR Chicago Fireside Chat, SIOR Chicago Chapter Secretary Peter Billmeyer, SIOR, co-Founder and Managing Principal of Bespoke Commercial Real Estate, discussed the Chicago office landscape with Matt Pistorio, President and Founder at Madison Rose and Principal of R2 Real Estate.
The following are highlights of their discussion.
Peter Billmeyer: Through agency leasing firm Madison Rose, Matt Pistorio oversees nearly 11 million square of office space in greater Chicago. What are you seeing on the landlord side?
Matt Pistorio: We are inspired by what we are seeing right now. In November of 2020, we got 20 inquiries for about 7 million square feet of office. In December 2020, 21 inquiries; in January, 53 inquiries; February, 71 inquiries. In March 2020, we got 73 inquiries averaging about 13,000 square feet, totaling about 950,000 square feet.
Pent-up demand is more than we expected. Requirements range from 5,000 to 50,000 square feet, mostly from a mixed group of private companies. These companies don’t have to go through the trials and tribulations from an HR standpoint of “how do we get everybody back to the office?” The larger blue-chip companies are really struggling with that. The 100,000- to 300,000-square-foot users will be sitting on the sidelines until fall.
We’re seeing what we call “Black Friday shoppers” who want the deals. When you have 5.5 million square feet of sublease space and 15.5 million square feet of direct vacancy in the market, and within that direct vacancy about 1.5 million square feet of spec space, you’re seeing price compression on the built-out space.
Billmeyer: What is driving the surge?
Pistorio: People are seeing friends go back to the office. It’s nice to be downtown, the weather’s getting nicer, and restaurants are opening up again. There’s FOMO (fear of missing out) among employees who are sick of working at home. They’re recognizing what they’ve missed.
Decisionmakers also have FOMO: how long are these great deals going to last? Great sublease spaces are already built out and there are great spec spaces built to compete with subleases, all with similar finishes and similar square footage per person. There’s no way to differentiate between sublease and direct space except pricing. Tenant reps like yourself are pitting direct spaces against sublease spaces.
It’s a race to the bottom from the landlord side. Most are holding base rents. Beneficial occupancy and abatements are where you’re seeing great deals.
A lot of owners recognize that the market hasn’t bottomed yet. Landlords right now are getting deals that are 20% to 50% better than where the bottom is going to be. Deals beget deals and, as more tenants enter the market, those owners that didn’t want to drop rates or give concessions are going to have to drop their rates even more.
Billmeyer: We’ve heard a lot of talk about downsizing in the market. Are you seeing downsizing?
Pistorio: Some of the companies that put their space on the sublease market are now taking it back up. That’s one thing to watch. In terms of tenants downsizing, we’re seeing tenants taking more square feet per person than they have over the past 10 years. We were at the 130- to 150-square-feet per person range previously, but, right before the pandemic, we were starting to build spec suites at 175- to 185-square-feet per person.
The really dense open-seating plan became popular after the last recession, to save space and money. At first, everyone bought it. Now, remote working or “bifurcated” working is a way to go to hoteling, to save space… but that’s going to go away pretty quickly. It will have a little bit of an effect, but not the massive effect being predicted six months ago.
Billmeyer: What about the paradigm shift that everyone was predicting? Our view at Bespoke is that 20% or 30% will work at home permanently, in back-office functions that don’t require collaboration.
Pistorio: I don’t see a lot of the companies that you represent going to hoteling. A lot of these massive companies all over the country with workplace strategy folks and full-time real estate teams trying to figure this out and probably over-complicate it. The companies you represent are going into spaces built out two years ago.
Also, the pent-up demand and FOMO is real. At one building, we have two expansions—one for 25,000 square and one for 20,000 square feet, and another tenant down the street for 20,000 square feet—three tenants expanding right as we are moving out of the pandemic. They’re doubling or tripling in size. To me, it says companies put things on pause [last summer] and now they need space again. Those are things rippling under the surface that people aren’t necessarily paying attention to.
Billmeyer: With such a large stake in Chicago on the landlord side, how much of a threat is suburban relocation?
Pistorio: Initially, a lot of us thought more tenants would be looking out to the ‘burbs, hubs and spokes. I’m not a huge believer. I think cities will come back stronger and better than ever.
What’s so great about Chicago downtown is that it is a one-square-mile area. You walk six blocks and you run into a friend. The city is so equipped to feed us what we need and get people back together, like the bars, the river walk, the lake—all the great things about Chicago that have been forgotten over the last year. Over time, we’ll see more migration to downtown as people see how much they missed it, but it won’t happen for a while. Our buildings will be a lot fuller come fall.
— Adam Marshall, SIOR, 2021 SIOR Chicago Chapter President, Senior Vice President, Newmark