2018 Will See Higher Vacancies and New Neighborhoods

All eyes are on vacancies as we head into the new year, as these rates are predicted to continue their increase through 2018. There are a number of factors contributing to this trend, including the emergence of several new properties downtown as well as a few new neighborhoods being developed. Here is a look at some of the trendy topics to pay attention to in the next year.

Rising Interest Rates

The commercial real estate industry will continue to experience an uptick in interest rates, which will make property purchases more expensive. As a result of the higher interest rates, combined with a high volume of buildings trading hands in 2016 & 2017, we can expect to see a decrease of building investment sales and purchases. The rush of corporations moving to downtown Chicago has driven vacancy rates down in recent years. However, we are starting to see the trend towards increased vacancy due to several large new developments coming online.

Trending Areas

Chicago’s reputation as a place to relocate to is growing with the impressive list of large corporations that have already moved downtown and the many more that are in the process of relocating to the city. We are expecting River North and River West to remain in the spotlight. Since there are so many big name businesses located there, many companies want to be in the same area, despite the inflated prices in the hot areas. In 2018, more and more businesses will turn their attention to the budding neighborhoods along the Chicago River, such as Goose Island and the Clybourn Corridor, thanks to several large developments planned by R2 Companies, Riverside Investment & Development and Sterling Bay.

Office Trends

The famously popular trend of an open office with bench-style seating will continue to grow in 2018. However, companies already using this layout have begun to realize its shortcomings. While this office design does increase collaboration, it fails to offer workers a space to concentrate or enjoy privacy which lowers productivity and workplace satisfaction. Employees need offices to concentrate and breakout rooms for privacy to focus on their work.

More and more companies are offering an option to work remotely or with flex hours, as this lowers the number of staff in the office. When fewer employees work in a physical office, the business can reduce square footage and positively impact their bottom line. However, similar to the open-office design, employers are discovering that this rising trend of remote workers and flex hours reduces productivity, lowers collaboration and erodes company culture. Eventually, corporations are reaching the conclusion that having their employees present in a well-designed office space is the most ideal option.

There are a few predictions we can expect to see in 2018: as interest rates rise, the number of  investment purchases will fall; a more tenant-friendly market will emerge due to rising vacancy rates; and office trends will continue to change and adapt as companies find the formula with the best results. At a glance, 2018 has a healthy outlook for Chicago’s commercial real estate market, and as always, it should have its fair share of surprises.

November Networking Events

The November Executives Breakfast and Luncheon provided an opportunity for local c-level executives to forge valuable connections with other Chicago business owners. We are happy to see local entrepreneurs embracing these events as valuable networking experiences in a relaxed and casual environment. Thanks to all who attended!

If you’re interested in attending future TAG events, please email Bill Himmelstein at Bill@TagCommercialBroker.com.


TAG Executives Breakfast Guest List

Lauane Addis, Stahl Cowen Crowley Addis LLC

Richard Bergman, Senior Vice President, Bergman Wealth Management Group

Joseph Brocato, Gozdecki, Del Giudice, Americus, Farkas & Brocato LLP

Steve Brown, CEO, Stratego Partners

Morrie Elstein, VP of Business Development, Cendrowski Corporate Advisors

Matt Gibbs, Co-Founder, UpShow TV

Josh Golden, Founder, Table XI

Jeff Hirner, Founder & COO, One North Interactive

Rhonda Jensen, President, Jensen Litigation Solutions

Lisa Kalous, Residential Consultant, Lisa Kalous Group

Stephen Lane, Managing Partner, Law Offices of Lane & Lane, LLC.

Mark Meyer, President, ICI Staffing/E&M Development

Christopher Miller, Managing Partner, Kelley Kronenberg

Mark Nadolski, Producer & Founder, VES Creative

Dave Norris, Chief Operating Officer, RedRidge Finance Group

Dan Regan, Attorney

Chris Rentner, Founder & CEO, Akouba, Inc.

Ron Repking, CEO, Sriracha

Mark Rice, CEO, Energy Connection

Aalap Shah, Co-Founder, SoMe Connect

Sapan Shah, CEO, Flagship

Hal Tezcan, Startup Port

Tony Wilkens, Owner, AEWilkens Holdings

Will Wright, Managing Partner, Dunmore Capital Partners

Nicholas Zagotta, Roberts McGivney Zagotta

TAG Executives Luncheon Guest List

Stuart Baum, President, LargePond Marketing

Laurel Bellows, Managing Partner, Bellows Law Group

Karen Burmeister, MXOtech

Irwin Cohen, CEO, Affiliated Financial Specialists

Maryann Czarnota, Partner, Abrix Group

Melanie DeCaprio, President, New Sky Strategies

Morrie Elstein, Vice President, Cendrowski Corporate Advisors  

Bill Himmelstein, CEO, Tenant Advisory Group

Jeff Hirner, Founder & COO, One North Interactive

Sandy Marsico, Principal, Sandstorm Design

Margaret Pagel, Vice President of Sales & Marketing, 8th Light

Dan Porcaro, CEO, PSM Partners

Ashish Rangnekar, CEO & Co-Founder, BenchPrep

Mark Rice, CEO, Energy Connection

Kim Robinson, President, Frontline

Jonathan Rothstein, Senior Vice President, MB Financial Bank

John Ruh, Founder, John M. Ruh & Associates

Lindsey Simon, Founder & CEO, Simon Compliance

Joanna Sobran, CEO, MXOtech

Don Tarkington, Managing Partner, Novak & Macey

Megan Wessels, CEO & Connector Extraordinaire, Powerful Partners

Mastering the Lease Negotiation

The lease negotiation has the potential to provide several, lucrative concessions and rights for the tenant, as long as they are requested and properly defined. What most tenants don’t realize is that most landlord’s are sitting on a pile of money that is available to be allocated towards the incoming tenant in the form of lower rent, free rent, tenant improvement dollars or a combination of the aforementioned concessions. How that money is distributed is determined by the terms stipulated in the lease.

Many believe stronger financials will equate to a more expensive deal. However, the lease revolves around the landlord’s risk of the tenant. A company with a strong financial history represents less risk, which means the landlord will offer better terms to entice the potential tenant. The lease negotiation process is similar to how a bank assigns a loan- the terms are based on the amount of risk. Since the landlord is investing in the tenant, the landlord will often spend money upfront to secure a tenant with the highest probability that they’ll pay rent throughout the entirety of the lease. (If a business goes bankrupt mid-lease, the landlord has the potential to lose a significant amount of money.)

Where many inexperienced commercial real estate negotiators miss opportunities in the lease is by not building in provisions for flexibility. This becomes a critical factor for rapidly growing businesses that often take on far more space than necessary to account for projected growth. While it is smart to plan ahead, at Tenant Advisory Group, we recommend you take on the space you need today with a moderate amount of excess room for planned growth. The reason being is that the office is often the second largest expense of a company. Paying for space that is not being used will unnecessarily burden the financial statements and inhibit a business’ ability to grow. Building in flexibility through rights of first refusal or rights of first offer is a far more effective and economical way to foster a company’s growth. Rights of first refusal and rights of first offer create the opportunity for a business to expand at a future time, if and when necessary.

An extremely valuable piece of negotiation leverage is the right to terminate. This assures a growing business can leave a small space, and move into a larger one when the timing is right. How it works is it provides an opportunity to renegotiate the lease while setting a cap on the rental rate. It can extend the terms of the lease to keep the rent lower than the market rates, and if the market prices drop, you can leverage it to lower rent. Another great piece of leverage is the right to renew, though to be most effective it must stipulates cap on how high the rental rate will be at renewal. Similar to the right to terminate, it allows the company to renegotiate the rent down and prohibits the landlord from renegotiating the terms back in their favor.

In order to obtain the largest concession package, demonstrate strong financial security; request a right of first refusal and/or right of first offer, a right to renew and the right to terminate. When combined, these facets of the lease will significantly improve the quality of life for a business while reducing the strain on the company’s financials.

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