Recently, the Chicago Chapter of The Society of Industrial and Office Realtors (SIOR) hosted its Speaker Series luncheon “Repositioning and Flight to Quality in Chicago” at Gibsons Restaurant in Rosemont, Illinois.
I was pleased to host a candid discussion with commercial real estate (CRE) industry experts Drew Nieman, EVP of Riverside Investment and Development Company; Mark Gunderson, an EVP for Stream Realty Partners; and Matt Pistorio, founder of Madison Rose, about the state of the Chicago office market and where it is headed. There was one point that all panelists could agree on—creativity and adaptability are critical as office landlords position their properties for success in extremely challenging times.
When I opened the discussion and pointedly asked each panelist about their specific challenges, Nieman—from his perspective as a developer—expressed his disappointment with the current state of Chicago and its political leadership. He highlighted the difficulty in attracting investments and developing office buildings in the city. Nieman stressed the need for unity and cooperation among everyone involved. “You just have to be up to the fight and get in there during times like these, but given all that, I still think Chicago is a good place to be,” he said.
The changing landscape: adaptive re-use and boutique buildings reign
Pistorio emphasized the importance of being able to pivot and adapt to changing market conditions, particularly in the face of declining demand for traditional office space. He noted that adaptive reuse projects have been performing well, despite not offering the same level of returns as other investments.
He also highlighted the flight to quality, where tenants are seeking smaller, more unique buildings that offer highly personalized amenities and ground-floor retail. Pistorio’s investment philosophy centers on finding value in class C and B buildings, which are being transformed into high-quality, brand-new spaces that meet tenants’ needs.
Switching gears, Gunderson shared his observations on the changes affecting deal velocity. Although he has not had many opportunities for ground-up development, he has extensive experience in leasing and working with institutional owners of highly amenitized office buildings. Despite the competitive landscape, with every deal being a “dog fight”, he emphasized the importance of resilience in the face of prolonged negotiations.
Gunderson also noted that tenants are carefully evaluating their options and making multiple visits before committing to a lease, highlighting the need for landlords to create spaces that meet the changing demands of the market. “It is important to not only have a good product with good amenities, but you have to touch all the bases.”
Pistorio found value in second-generation space, noting, “The way people purchase and lease space has evolved significantly. I’ve seen a shift towards second-generation space leases. This approach has proven successful as it offers better returns and eliminates the need for owners to invest significant capital into renovations,” he said.
Is social distancing still a factor?
Nieman shared his insights on impacts of COVID-19 on the office market, highlighting new developments in Denver and Charlotte that prioritize safety and social distancing. “These properties feature private balconies and terraces, creating a more residential feel that caters to employees’ changing needs,” he said. However, Nieman cautioned that the market could shift again, emphasizing the importance of being able to adapt and change gears to meet evolving demands.
Nieman also noted that companies are always thinking about ways to attract and retain employees and are looking for ways to make traveling to the office more enticing than staying home.
Overall, the SIOR Speaker Series luncheon provided valuable insights into the current state of the office market and where it is headed. No doubt, many challenges lie ahead as Chicago landlords struggle to fill their properties and contend with the billions in loans coming due. Despite this, our discussion struck a tone of optimism, and I’m looking forward to having a front seat during Chicago’s latest office market evolution.