Guest post by Rob Maxwell, CompStak
While Chicago’s burgeoning start-up scene is filling headlines in seemingly every major business publication, tales of Chicago’s commercial real estate malaise can no doubt be found on subsequent pages. If it’s true that the Third Coast is about to become the next innovation hub, the commercial real estate sector is probably wondering which submarkets are poised for success and when they can expect to reap the benefits.
In order to track data that is specific to startups, a general name for companies that can differ in size and industry, we used information from Built In Chicago, a community devoted to tracking Chicago-area startups. Using the Built in Chicago startup map, we can see just where these companies are leasing and what kind of effect we can hope to see on the submarket, both now and in the future.
Where in Chicagoland?
As one might expect, startups favor Chicago over the suburbs. In fact, almost 90% of the startups in the sample lease space inside the city limits because they want to be attractive to potential employees and benefit from the availability of creative office space popular with startups.
But what’s interesting is where in the city those startups are located. The trend has usually been characterized as a battle between the loop and the suburbs. However, a full 40 percent of startups lease space in the River North and North Chicago submarkets, close to residential neighborhoods such as Logan Square and Lincoln Park popular with younger professionals.
The River North submarket houses more than four times the number of startups one would expect to find there. The submarket accounts for about 5 percent of the total Chicago-area office inventory but 21 percent of startups reside there. In comparison, while the North Michigan Avenue is home to about 10 percent of Chicago’s office space, fewer than 3 percent of the startups are located in the submarket.
It’s no coincidence that both North Chicago and River North are also popular residential destinations. Companies closer in proximity to neighborhoods populated with younger workers seem to have an undeniable advantage over companies in less hip areas. Google recognized this and is moving from its 20 year-old, 1 million-square-foot campus in Libertyville for offices under 600,000 square feet in the 80 year-old Merchandise Mart in River North.
What Do You Mean by “Hip?”
To all the Napervillians wondering what River North has that the West Suburbs don’t, the answer may be surprising; suburban buildings may be too new and too nice. The generalization of startups in ancient, open-plan buildings appears to be spot-on. Buildings with startups are, on average, 26 years older than the typical Chicago office building. When you look at it by submarket, River North and North Chicago again fit the profile the best.
Class-A buildings, the ones with opulent lobbies and ostentatious facades, don’t appear to appeal to startups the way they appeal to investment banks. The typical startup building, with hardwood floors and exposed brick, tends to be categorized as a class-C building, if it’s given a class at all.
Again, River North and North Chicago lead the way in startup-friendly inventory. A good example of this type of space is 311 West Superior in River North. The 100-plus year-old, class-C building doesn’t have the awe-inspiring lobby of a loop office building but it does have creative loft space with exposed brick. Its proximity to the brown and purple El makes for an easy commute from Lincoln Park but not necessarily from the West Suburbs. Startups such as Whittl and Evolve Creative lease space in the building. The property has good company in the area too: shared office space provider MicroOffice leases 320 West Ohio right down the street and just purchased the startup-friendly 405 West Superior. All buildings are within a two-minute walk of each other.
If You Build It…
Despite the growth in startups, these companies haven’t led to the rent explosion seen in startup hubs around the Bay Area and Manhattan. However, this discrepancy shouldn’t be too worrying for Chicago investors; real estate is a lagging indicator and employment growth can take years to yield significant rent increases.
Midtown South, the preferred area of Manhattan for tech startups (it also has older buildings and more class-C space) can give the Chicago market an idea of just how long it may take for startups to move the needle on rents. New York City’s tech employment began outpacing the rest of the United States in 2009, yet Midtown South didn’t post two consecutive quarters of rent growth greater than Midtown until the end of 2010. Since then, Midtown South’s rent growth has outpaced its neighbor’s by a stunning 6-to-1 ratio, with a higher growth rate for seven of the past 11 quarters.
Currently, tech job growth in Chicago’s Cook County doesn’t even crack the top-25 counties nationally. But with a new startup being created at a rate faster than one-a-day, don’t expect this parity to last for long. Rents in River North and North Chicago have already been growing at a rate greater than the CBD for every quarter in 2013 and River North boosts the lowest vacancy rate in Chicago, at 10.4 percent compared to 14.9 percent for the CBD.
As Chicago’s tech scene heats up, it appears its effect on commercial real estate may be spotty and uneven not to mention delayed. Regardless, those with the right buildings (old and low-key) in the right neighborhoods (trendy and urban) stand to benefit while the suburbs and the loop will have to wait for the industry (or its workers) to mature.
Rob Maxwell is a researcher with CompStak, a real estate analysis firm based in New York City. You can reach him at 646-926-6707.