January 2010

Chicago’s East-West Corridor Offers Opportunities for Tenants in 2010

By Jim Adler and Garrett Schultz, NAI Hiffman
If you’re like most companies, you are glad 2009 is over. Nearly all sectors of business felt the burdens of this recession including law firms, accounting, IT & consulting firms, medical practices & related services, the list goes on. For many companies, 2009 was simply the year to hunker down and make tough choices, be fiscally conservative and “get the house in order”. As unemployment in Chicago topped 11% this year, it comes as no surprise that the overall vacancy rate for suburban office properties climbed to an astounding 22.5%. In the East-West Corridor, vacancy has climbed to a similarly dismal rate of 21.95% – matching the high-water mark of the past 10 years set back in 2003. The cold realities many landlords faced in 2009 included anemic prospect lists, tenants not expanding or even renewing their leases, and others asking for rent relief.  News of large leases or new tenants in the marketplace was virtually nonexistent.  And news of landlords losing their office assets or “giving back the keys” to their lenders became commonplace.  Suffice it to say they, too, are glad 2009 is over.                                                                                                                       

The Year Ahead

So what’s in store for the office market in 2010? For landlords, no doubt most will continue to compete fiercely for new tenants and retain existing ones at returns far less than what they or their investors originally hoped to achieve.  Significant tenant improvement allowances will likely not be offered, as the availability of capital is limited more so than it was during the last recovery cycle. Rent abatement and low rent structures, however, will remain prevalent as landlords compete to attract tenants. Most landlords will continue to be far more concerned about maintaining occupancy than achieving high rates. And for many owners of office buildings, 2010 will continue to be about survival.

For tenants in office buildings in the East-West Corridor, 2010 might be the perfect time to capitalize on the depressed real estate market to reduce occupancy costs.  For the near term, new leases will continue to be structured with very favorable terms for tenants, as high vacancies for landlords translates to low rents and big concessions for occupants.  For those lucky tenants with leases expiring in 2010, they can achieve immediate savings either by relocating to a comparable property or renewing at their current location. Some tenants will have the opportunity to “trade-up”, or move to a higher quality building at prices comparable to lower class buildings with fewer amenities.

Taking Advantage of the Market

If you are a tenant with a lease that does not expire until 2011, 2012 or beyond, you might still be able to take advantage of today’s marketplace.  In fact, even with multiple years of lease term remaining, tenants sometimes have the ability to realign their lease terms to better suit their changing businesses.  More often than not, tenants need more or less space at a time that does not coincide with their lease expiration. 

First and foremost, it is imperative to review the lease with an experienced broker to identify termination options, renewal options, and other clauses that may provide flexibility.  Nearly all lease transactions completed in Chicagoland are done with a tenant broker acting on the tenant’s behalf.

Secondly, it is critical to gain a clear understanding of your company’s unique functions and space requirements. Many tenants today are facing a surplus of office space and finding the remedy by relocating to a more efficient footprint within their building or another building within the landlord’s portfolio.  

The third key to lease renegotiations is to understand your landlord’s wants and needs.  Every building owner is in a different position.  Some have a low cost basis in the building and have the ability to spend dollars on tenant improvements.  Others may be positioning the building for sale and are willing to provide rent relief today in exchange for a longer lease term. A good broker will provide you an understanding of your landlord’s objectives, while also identifying competitive landlords in the marketplace, what their positions are, and what options are available to you given your specific building and situation.

Optimism Beyond 2010?

This time around, the economy and office market seem to be on parallel paths. Many companies are saying the worst is behind them and they can see light at the end of the tunnel. The expectation among many is that the recession is over and the recovery will begin in 2010. There are even a few tenants in the marketplace today (particularly in the education field) that are leasing extra space for future growth.

Despite all the doom and gloom of 2009, some landlords are also optimistic about the future of the marketplace. For starters, a few large leases were recently announced in the East-West Corridor (e.g. Dover, Devry, and Nicor) and there is rumor of more to come during the first quarter of 2010. The arrival of new tenants to the marketplace and existing tenants considering expansion plans indicates that the vacancy rate will probably peak this year, if it has not already. With development of new office properties on hold for the time being, the office market will officially make the inevitable turn towards recovery in 2010.

After a turbulent 2009 filled with caution and uncertainty, 2010 promises to be much more active, as tenants take advantage of great market opportunities in the early stages of the economic recovery.

Jim Adler (jadler@hiffman.com) and Garrett Schultz (gschultz@hiffman.com) are brokers with the Office Services Group with NAI Hiffman, and specialize in landlord and tenant representation in the East-West Corridor of the Chicago market.

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