Chicago’s Downtown Residential Market Remains Strong in 2017


Glamorous downtown Chicago is bustling with the impressive influx of top corporations moving into downtown. However, apartment buildings are beginning to feel the effects of over-saturation and landlords are having a tough time renting their downtown spaces. With more buildings coming online in 2017, the increase in supply should cause rents to deflate as vacancy rates rise.

The Dance of Supply and Demand

There is an inverse correlation between rent prices and vacancy rates — as vacancy rates increase, rents decrease. This relationship remains consistent as a higher supply means more options for potential renters. When the market is saturated with choices, then landlords cannot leverage a limited supply for higher rents. The simple economics of supply and demand will continuously cause a rise and fall of rent as new apartment buildings are brought online.

New Apartment Buildings in 2017

Rent in Logan Square is jumping up to nearly $2.50 per square foot. Unfortunately for renters, that is low compared to some downtown apartments that reach $3.03 per square foot. Thankfully, capitalism is working for the renter, and developers will complete roughly 12,600 apartments spanning across 2016 and through 2018, according to Crain’s Chicago. The new rush of available spaces coming online will pump the brakes on the rapidly inflating rent prices. The grip landlords currently have over rent prices may soon loosen in order to fill units when the inevitable flood of open spaces hits the market in the near future.

Enter the Tenant-Friendly Era

As time marches forward, so do rent prices. For nearly seven years straight tenants have experienced rent hikes. New corporations moving to Chicago means many of their employees will relocate closer to their jobs, further increasing competition for open spots. However, the timing works out well with the large amount of apartments opening up over the next few years, which means rent prices are unlikely to see a significant rise for a while.

Chicago’s real estate market is moving along at a healthy rate. While prices are inflating faster than renters would like, new apartment buildings are coming to the rescue and will relieve the rapidly rising rent. With the market potentially flipping to a tenant-friendly one, the upcoming years will be an excellent time to seek a place to live in historic downtown Chicago.

Regardless of whether rent continues to rise, owning for long term is always a better financial option. If you or someone you know are looking to sell or purchase a residence we encourage you to speak with Lisa Kalous.

Negotiating the Renewal Option


 

 

Most commercial leases typically run between 5- 10 years. In good leases, there are provisions to the rental agreement allowing a tenant to extend the length of the lease. A general rule of thumb: Instead of immediately exercising your renewal option, try to negotiate each renewal term instead. However, if you come to a standstill, you should have a safety net of something already negotiated ready for your protection. This is especially true if your location is critical or if your business is difficult to move. Here are my three quick tips to negotiating this most important feature in any commercial lease:

Always negotiate the renewal clause in the original lease

The new rental rate for a renewal period can sometimes work on a predetermined basis, as mentioned above. It is more likely however that a renewal clause will state that a fair market value be used to determine a new rate. While renewing automatically may sound easy, make sure to check spaces around your area in order to get a good idea of what other spaces are going for. Knowledge of the market and comps are both key when negotiating.

Stipulate the rate from the beginning

The fair market value itself should be carefully discussed and defined. Never let the landlord try to interpret what the FMV should be. Make sure that the FMV is defined as including items such as the tenant improvement allowances or concessions you might find from the landlord’ competition. When you are able to stipulate a specific rental rate for the renewal option, you protect yourself. If the market is higher than your renewal rate, you’ve already locked in the lower renewal option rate. If the market is lower than the renewal option rate, you are still able to try and negotiate the renewal rate down.

Know how to ask

Typically, concessions (or leasing incentives) include free rent and tenant improvement dollars. Business owners are sometimes shocked to learn that these concessions are also potentially available on lease-renewal terms.

Many times, landlords tend to take their existing tenants for granted. What many long-term tenants can negotiate is the cost to acquire a new tenant. Realtor fees, background checks, and potential lost monthly rent all add up – don’t be afraid to use your long-term, immaculate renting history with your landlord as leverage.

Of course, you have to know how to ask for incentives to get them; the landlord won’t graciously offer them out of goodwill.

Consider hiring a trusted broker in your area

Even if your company is somewhat familiar with the market and rental negotiations and believe you have someone with the time to properly manage the re-negotiation- you should still consider representation through a professional services firm that can help negotiate you the best deal.

Suburbs vs. The City: Two Factors for Picking Office Locations


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Choosing where to house a business can be extremely difficult – especially when deciding between the city or the suburbs. There are the obvious factors to take into account; financials, space, client locations, commute and employees. However, there are two lesser-known pulling factors that you need to take into account: Tax credits and split-office locations. These two aspects may not be as simple as you think.

Tax Incentives

Most people know that certain states are considered more business-friendly to major companies than others. South Carolina is now a well-known manufacturing hub with companies like Jacobs Engineering, Boeing and BMW all housing American operations in the Palmetto State. It should not come as a surprise that local economies do this as well. In fact, just last year Vernon Hills extended a tax incentivised deal to keep CDW in the Chicago suburb. Some may argue that it is ridiculous to offer a multi-billion dollar company tax breaks to stay. However, look at the flip side – by keeping their headquarters in Vernon Hills, thousands of residents continue to be employed by CDW, which stimulates the local economy.

This should not be confused as a suburb-only tax break. In fact, seeing as the Chicago mayoral runoff is coming up, Rahm Emanuel has been both criticized and praised for trying to bring major businesses back home. One of the major incentive programs is the Economic Development for a Growing Economy (EDGE), which lowers payroll taxes for newly relocated businesses. According to CNBC, Illinois is middle-of-the-road when it comes to business friendliness – ranking as the 27th most business friendly state. By offering tax incentives to move to the city, Chicago politicians are hoping to attract more long-term investments.

Split-Office Locations

Split-office locations seem to be a growing trend for offices who want to have a presence in a downtown city, yet want to avoid paying the full costs for a large office. This can be incredibly beneficial – say you are an enormous manufacturing firm who has clients downtown or that visit Chicago often. By splitting your location, you can have your sales, account managers and C-suites downtown in an easily accessible location for meetings. You are also saving money by keeping the bulk of your company in the suburbs where space is far cheaper per square foot.

However, companies that choose to go this route need to be wary of potential resentment amongst employees over the location at which they will be working. This argument works in both directions. Many times, people located in the suburbs would far prefer to have a location near them, and commuting an hour into the city is far from ideal. The other primary concern with splitting your office is reducing contact between departments. If you look at many company surveys, inter-department communication always seems to be an aspect that employees complain about the most. If your company is already facing issues communicating between departments, then splitting the office locations between downtown and a suburb may serve to widen this gap.

Granted, the majority of your suburb versus city decision should probably be weighed on finances, clientele and employees. However, if those aspects do not solve your dilemma, then these secondary factors can end up playing a major role. Taxes or tax breaks can cost or save a company millions per year, and splitting office locations can be beneficial, as long as your business fits the right mold.

Top FAQs: #3


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3) How is my rental rate determined? The cost of a space is determined by several extraneous factors. Whether the market is down or up, square footage is the only really reliable way to gauge your rental fees. Office and retail spaces are calculated on a per square foot/per year basis. Industrial rents are usually per square foot/per month.

 

 

Check out Top 5 FAQs #5 and #4 too!

5 Things to Examine In your Lease Agreement


 

So you finally found the space you were dreaming of. Now it is time to work out the details beyond the first year’s rent. Each particular aspect of the lease has its own importance and to ensure the security of the great new spot you are locking down, do not just skim over all the nuances.

Tenant Advisory Group is your advocate when a landlord may be out of bounds with your lease agreement. Bill Himmelstein, founder and CEO of Tenant Advisory Group offers these five topics as ways to protect yourself before you sign on the dotted line.

1) Free Rent
The amount of months that the space is occupied and no rent is paid. Rent is the most obvious factor of the lease and a broker who understands the market is able to maneuver several months of free rent for you. The market standard for long term leases is to receive one month free per each year of the lease. So, if you sign a 6 year lease, then you should be expecting to get 6 free months.

2) Tenant Improvement Allowance
For the tenant who is looking to build out the available space, ensuring that the lease allows you to make those improvements and have them paid for by the landlord is critical. There can be a cash allowance which will go toward hiring a contractor. The amount that is allocated will depend on your financial stability as well as the terms and duration of the lease.

3) Escalation
As landlords are in a constant effort to get the most bang for their buck, you need to be sure that there are clauses protecting you from unreasonable rent increases. Having a yearly increase over the course of the lease or a specific percentage by which rent can rise keeps you from losing control of your budget.

4) Securitization (security deposit)
All landlords will seek some sort of securitization on their leases. When a landlord knows the tenant well or believes that the tenant does not carry much risk, the security deposit becomes reduced. However, if you hold greater risk to your leased space, then it will be important to the landlord to securitize a portion of their out of pocket expenses to ensure that the landlord is protected and comfortable if there are any major issues. This deposit will allow for money to be refunded back or credited towards your rent as long as the tenant is not in default.

5) Termination Option:
The termination option is an extremely valuable piece of the negotiation. Your landlord will not offer this unsolicited. For leases that are longer than five years, it is critical to have termination rights. By negotiating this into the lease, if the rates dip below market value, then you will be able to exercise the right to terminate and move or use it as leverage to reduce your rate. Likewise, if rates have risen above your current levels, a right to terminate can be used to ensure you maintain below market rates.

 

By William Himmelstein