Posts Tagged ‘commercial real estate blog’

The 2016 Top Ten Events in Downtown Chicago Commercial Real Estate

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With all of the other craziness that happened in 2016, it may be easy to forget some of the major events that occurred in commercial real estate. While not quite as frenzied as 2015, Downtown Chicago commercial real estate has remained quite active as the market continues to churn out deals at a healthy pace. Vacancy rates are historically low in some sectors, rental rates continue to climb, and sales keep closing at mind boggling numbers.

Now that we’re at the end of the 2016 saga, I decided to take a look back at the top 10 commercial real estate highlights from the past year:

10. Sustained Strength in the Leasing Market.
The beat went on in 2016, as vacancy continued to decline and rental rates increased. Downtown vacancy rate is currently hovering around 11%, which is historically low. River North continues to be the market with the most demand, but the West Loop/Fulton Market and Central Loop districts are close behind. Even the East Loop had a big year with several significant leases executed, highlighted by Wilson Sporting Goods’ planned relocation to the Prudential Building.

9. Co-Working Spaces Kept (Co)Working.
The co-working craze has not slowed down, as WeWork and various competitors continue to occupy large amounts of space throughout the Loop. While WeWork seems to be tapping the breaks on expansion, many of their facilities are operating close to full occupancy and commanding healthy rents from not only individual practitioners, but larger corporations as well. Other co-working facilities making their presence known in Chicago this year include Assemble, Make Offices and Serendipity Labs.

8. Advances in Public Transportation.
At long last, the Loop Link bus service and the related Union Station Transit Center are fully operational and reducing travel times between the East Loop and commuter train stations. Construction of the Washington/Wabash “L” superstation is nearly complete and plans are actively being discussed for the remodel and redevelopment of Union Station, which incidentally might also include the creation of a two million square foot office tower.

7. The Lucas Museum Debacle.
Chicago missed out on a singular opportunity to land a key tourist and cultural attraction when the Friends of the Park blocked the city’s attempt to provide George Lucas with 17 acres of lakefront property between Soldier Field and McCormick Place to construct a museum. In addition to the negative economic impact of losing the bid, it is also a blow to the ongoing efforts to develop an entertainment and retail district in the nearby Motor Row corridor of the South Loop.

6. The Great Migration.
A considerable number of firms continued to abandon their suburban office campuses and relocate downtown in order to take advantage of the more diverse and talented labor pool. Corporations such as McDonald’s (more on them later), Beam Suntory, Wilson Sporting Goods, SC Johnson, and STATS have all signed noteworthy leases in 2016.

5. Shiny New Developments.
The imminent opening of new skyscrapers at 444 West Lake and 150 North Riverside–along with various sized towers under construction at 151 North Franklin, 625 West Adams, in Fulton Market and the Old Post Office redevelopment–will collectively be the first true test of market strength in several years. The rapid pace in which these new buildings are leasing up demonstrates how pent up the demand has been for new development. However, there is still a substantial amount of new supply that remains unaccounted for. While the relocations from suburban markets and other cities will help with absorption, there are now many more options for tenants to choose from which could potentially give them the upper hand once again.

4. The Amazing, Ongoing Transformation of Fulton Market.
There is no sector of the city with more activity than Fulton Market. Between the planned office buildings, hotels, entertainment venues, retail, restaurants and residential developments, it is hard to keep track of everything going on. No less than 43 developments are either underway or in the planning stages and there are no signs of this juggernaut slowing down. Sterling Bay continues to lead the charge but other local and national developers and investors such as Shapack Partners, R2, Madison Capital and Thor Equities have all gotten into the game as well. National retailers such as Anthropologie and Free People are also beginning to plant their roots.

3. The Sale of Tribune Tower.
After years of speculation, Tribune Media announced plans to sell the iconic Tribune Tower for $240 million to developer CIM Group. The rumor is that the landmark building will be redeveloped into a combination hotel, residential, and retail building. As a result of the sale, Tribune Media inked a 61,000 square foot lease at 303 East Wacker Drive.

2. The Sale of the Old Post Office.
Following a countless number of failed attempts, 601W Companies acquired the cumbersome Old Post Office and put forth a sensible redevelopment plan modeled after their successful renovation of the Starrett-Lehigh Building in Manhattan. The project–which will ultimately add office space, a rooftop park, and a river walk–has been approved by the City of Chicago and work is now underway.

1. McDonald’s Relocation to Fulton Market.
In arguably the most momentous transaction in decades, McDonald’s solidified Fulton Market’s long term importance in the future of downtown Chicago real estate when it announced plans to relocate from Oak Brook to the site formerly occupied by Harpo Studios, to be known as 1045 West Randolph. Their lease for 567,000 square feet is due to begin in 2018. A direct result of this transaction is Sterling Bay’s plan to construct a 360,000 square foot property at 210 North Carpenter, which is being eyed to accommodate several suppliers who regularly do business with McDonalds.

So there you have it; what a fascinating year it has been. Now we have to wonder: What is in store for 2017? In my next blog, I’ll let you know what I think will happen and take a look back on how last year’s predictions fared.

Stick To What You Know…Or Else Pay The Price

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As the saying goes, “stick to what you know best”. Especially now with Google at our fingertips, it can be incredibly empowering to do a quick search and instantly discover an abundance of new information. However, watching a YouTube video on how to replace a head gasket in your car does not make you a mechanic and entering your symptoms into WebMD does not automatically make you qualified to diagnose a medical condition or perform surgery. The same is true with finding office space.

While anyone can go online and pull up listings, there is so much more to the process in which only an experienced and knowledgeable real estate professional can provide guidance. Tenants who endeavor to conduct the search on their own often run into difficulties caused by mistaken assumptions.

Here are seven of the most common speculations I have witnessed firsthand, along with a few complimentary suggestions:

1) The quoted rental rate is all inclusive. Most people outside of the real estate industry do not know the difference between gross rents and net rents. I recently showed space to a prospect at a Class C building in my portfolio who boasted that he could get a cheaper deal at the Willis Tower as compared to this “dump of a building.” Little did he know, the rents at the Willis Tower (and most Class A and B buildings) are quoted on a net basis and do not include real estate taxes and operating expenses. Gross leases already factor these items into the rate. It is important to find out what other extra charges are included above and beyond the rent, such as heating, air conditioning, electricity and janitorial.

2) Heat and Air Conditioning is available 24/7. Most Loop buildings control the temperature and turn the systems on and off at a certain time each day. Often, Sundays have no service at all. After hours service is available, but at an additional charge which can sometimes be rather pricey. Conversely, many smaller sized buildings do offer tenants 24/7 use and control of heat and air conditioning, but at the tenant’s sole cost and expense. It is imperative to find this out during the site selection process and not after a lease is executed.

3) I can access my space anytime without restriction. While most buildings provide 24/7 access, it is not always as simple as walking right through the door and into your suite. Some properties lock off their lobbies to the outside public at night and on weekends/ holidays and limit access unless you have a key fob or make prior arrangements with the designated security company. If you are a business who sees clients during non-business hours, it is vital that you learn the building’s access policies in advance.

4) Phone and internet wires are already in the space, so it is plug and play. This might be the most common assumption made in error. More often than not, the low voltage wiring will need to be updated or at least modified, in order to get tenants exactly what they need. Before signing a lease, always have a qualified wiring contractor inspect the premises and determine what can be reused and what needs to be replaced. Next, find out exactly what the upgrade will cost. Having to spend thousands of dollars on rewiring could be the difference in choosing one space over another. As a related point, be certain to learn all of the phone and internet providers in the building beforehand, especially if you have an existing service contract that cannot be broken.

5) Alterations can be made to my space without restriction. Most leases spell out in very specific terms the exact procedure that tenants have to follow in order to make changes to their space. Nominal cosmetic alterations are typically fine, but if construction plans are more detailed and involve mechanical systems, the building will be heavily involved. Both your desired contractor and the plans that are drawn by an architect will have to be approved by the landlord; permits may also be required. There are often review and supervision fees involved, so make sure you have a good handle on these before moving forward if future changes are a possibility.

6) When vacating, anything can be left behind without recourse. If you are planning on leaving furniture or other items behind when you move out, do not expect to receive your entire security deposit back. Some, or all, could be used towards properly disposing of the items so the landlord can begin to prepare the premises for the next tenant.

7) The space can be sublet to anyone of my choosing. While the vast majority of leases do permit subleasing or assigning to another user, there are rules that must be followed. Landlords will usually have specific criteria in which they can approve or reject a proposed subtenant. Additionally, fees often need to be paid for a landlord’s attorney to review sublease documents. Know these fees in advance so you can plan accordingly.

It is impossible to plan for everything, but having a qualified and experienced team of real estate advisors on your side while searching for space will limit the chances of falling into the pitfalls listed above. If you determine and clearly communicate your needs and expectations in advance, life will be so much easier moving forward. Be an expert in your own field. Leave the rest to those in the know.

Only the Shadow Knows

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Not a day goes by without someone asking me the question, how is the leasing market?

The short, easy answer: it’s a matter of perspective.

Presently, it is quite good if you are a landlord. There is as much activity as I can ever remember and rents are at all time highs. The rapid expansion of tech businesses, rise of co-working space, continued suburban migration downtown and a generally strong economy have contributed substantially to this growth.

Determining whether it is a tenant or a landlord market is relatively simple. However, that question is often followed up with another, more difficult question: how much longer will this last? If I possessed superhuman powers to see into the future, I would be in Las Vegas right now, sliding large stacks of blue, green, and black chips across a green felt poker table.

While I work on those superhuman powers, the best thing I can do to predict how long this market will last is to look at past trends and signs of change.

One telltale sign of what might lie ahead is the concept of shadow space. Shadow space is defined as blocks of currently leased space that will be vacated upon lease expiration and are actively being marketed. The speed in which shadow space leases is a genuine indicator of market strength. If it leases quickly, that is a sign of the landlord market being here to stay but if the spaces sit empty for a while, it is an indicator that we are returning to equilibrium or potentially shifting back to a tenant market.

Currently, there are approximately 6 million square feet of shadow space on the market in downtown Chicago. 333 South Wabash takes the title for the most shadow space with 759,000 square feet, due to CNA’s planned relocation to 151 North Franklin in 2018 where they will be downsizing to 275,000 square feet.

Trailing Big Red is The Franklin complex at 222 West Adams/227 West Monroe, which will have 442,000 square feet of shadow space in play when McDermott, Will & Emory head to 444 West Lake and William Blair to 150 North Riverside. Hyatt is heading there as well, leaving their namesake tower at 71 South Wacker after only 12 years.

Though the spaces being vacated are spectacular in their own right, the truth is that it is difficult to compete with new construction. The new space is often more efficiently designed, thereby enabling tenants to lease less square footage and in the process, save money.

Because of companies like CNA and William Blair that take part in the “out with the old and in with the new” school of thought, old buildings, even with their added shiny amenity packages, are often left behind for new development: the factor most responsible for creating shadow space.

For example, two of the office towers presently under construction, 444 West Lake and 150 North Riverside, are coming out of the ground nearly 80% occupied with tenants relocating from A class buildings nearby.

Collectively, these new towers demonstrate the strength of the market and how much pent up demand there has been for new buildings; so much demand that while multiple towers are still on their way up, developers are actively pushing several other sites for new buildings. As more are built, shadow space will continue to increase and tenants may see the market turn in their favor.

Future deal terms negotiated by many tenants will be directly influenced by the speed in which the shadow space leases, as will owners deciding whether or not to sell, and developers determining whether or not to proceed with new construction. And so the cycle goes.

There’s the long answer.

My prediction for what’s to come? All I know is that it promises to be a wild ride as we witness the latest chapter in downtown Chicago real estate.