IllinoisOffice Time to change the office sector’s hierarchical class system Jonathan Berger August 26, 2020 Share on Facebook Share on Twitter Share on LinkedIn Share via email It’s time to change the hierarchical class system that exists in the office markets across the U.S., including Chicago and the suburbs. For decades, commercial real estate brokers, developers, investors and, to a lesser extent, tenants have designated office buildings according to a Class system. Depending on a number of variables, buildings are considered Class A, Class B or Class C. The newer the building, the better its location and the greater the mix of on-site amenities, the higher in class the building is categorized. According to Costar, the inventory of 3,128 office buildings in the Chicago metro area totals 284.7 million square feet, including downtown and suburban properties. Of that total, 470 buildings totaling 157.0 million square feet are considered to be Class A properties. Not one is a single-story building. Some would argue there has been a bias against single-story office properties. Single story buildings by definition aren’t included in the A classification. After all, they don’t typically have extensive amenities such as a fitness center, shared conference rooms and co-working spaces. Further, the perception is that these buildings are where back offices and local businesses are located—certainly not satellite offices of Fortune 500 firms. Some might say that the hierarchical building class system generally has served the market well, until today. The fundamental shift is that tenants increasingly are looking for an experience that is both first class and safe. And there is a distinction between a Class A experience and a first-class experience. In today’s changing work environment there is increased life safety and security that comes with the lack of a common lobby, shared elevators and public restrooms. As the owner of Concourse Chicago, a 165,000-square-foot office complex in the O’Hare office market, I understand it may be an almost unwinnable battle to have a single-story building (complex) classified as Class A by Costar and a vast majority of commercial brokers. The more compelling argument, with a great potential to be victorious, is that a single-story office building can more easily achieve the status of first class by the overall experience and value it provides to those who matter most, its tenants. Concourse Chicago, along with our other single-story properties, seeks to provide a first-class experience and compete directly with the neighboring Class A, multi-story buildings. For example, at Concourse Chicago, there are 12 buildings spread across seven acres, with plenty of green spaces which have been populated with picnic tables, fire pits, public art and even an outdoor conference room. Additionally, the property offers its tenants free use of multiple conference rooms and co-working spaces, a fitness center with private showers, a shared bicycle program and a complimentary coffee bar. Another element that generally works against single-story office buildings is the perception that they are old and outdated. Yet it is clearly possible, with planning and an appropriate investment, to replicate some of the experiential offerings found in Class A, multi-story buildings. And what is commonly overlooked by tenants and brokers is that single-story office buildings are located in the same markets and even on the same block as Class A buildings. Single-story buildings share the same area amenities as Class A such as the same access to shopping centers and restaurants, access to the same expressways and public transportation but at a price that can be 20 to 40 percent lower than Class A competitors. In addition to emulating those amenities, single-story office buildings, like Concourse Chicago, are able to offer a number of other unique features that tenants find beneficial and Class A, multi-story buildings can’t provide. We call these features the SAFE experience. Safety: As we navigate through the COVID-19 pandemic and beyond, there is an increased awareness of the significant risk and inconvenience that comes with a person having to navigate through common lobby, shared elevators and shared public restrooms. In addition to not sharing public spaces, it is a distinct health and safety advantage to have private and exclusive 24/7 control over the heating, cooling and ventilation systems (a safety and control feature that Class A, multi-story office buildings are not able to replicate). Finally, the private entry to each suite provides quick, easy and direct access from the well-lit, open-air parking lots to tenants’ suites. Simply put, single-story properties offer tenants a safer and easier way to social distance and go back to the office (and have more control within the office). Affordability: Single-story properties such as Concourse Chicago (at a rental rate of $27 to $30 per square foot gross) are more affordable than Class A office buildings such as Presidents Plaza (at a rental rate of $45 to $50 per square foot gross and located directly across the street from Concourse Chicago). Features: Single story buildings typically offer tenants several unique features that multi-story buildings cannot offer such as operating windows, internal skylights, private bathrooms and solar panels (for those tenants interested in reducing their carbon footprint and their monthly utility costs). Often, they also offer walkability and access to green space right out the front door—something even more important today. Efficiency: In a typical Class A or Class B office building there is a common area loss factor that averages 10 to 20 percent. The common areas include lobby and amenity space, common corridors, public restrooms, elevators and stairways. In contrast, in a complex such as Concourse Chicago the loss factor at 3 percent is only a fraction of Class A buildings. These characteristics often don’t even make the list of Class A amenities. As companies look to offer a safer experience for their employees while wanting to have more control and flexible options within their office space, a single-story office environment is getting a brand new look from companies. COVID-19, like 9/11, will significantly change the office market landscape along with the perception and value of the single-story experience. As it does, it may help to change the hierarchical class system that exists. In many cases, the first-class experience provided at upgraded, single-story properties like Concourse Chicago is every bit, if not more, the experience tenants now desire. That first-class experience is available more economically, and more safely, than ever before in a first-class, single-story property and not a Class A building. About the author Jonathan Berger is the Founder of Berger Asset Management.