Tenant's Market in Chicago
Updated: Jul 17, 2018
With over 4 million square feet of new office space expected to deliver to the Central Business District (CBD) over the course of 2016 and into 2018 plus an additional 1.4 million square feet coming to the surrounding Chicago submarkets, landlords are preparing themselves for a tenant’s market. Coupled with ever-rising construction costs and demand for labor, Chicago tenants can begin planning for a more competitive market. The incoming tenant’s market means that there is more space available than there is demand for the space. This is ideal for tenants because landlords will be likely to offer competitive lease conditions in an attempt to ensure their existing space is filled. Tenants can expect their landlords to be accommodating with updates to their space as these minor changes will be cheaper than a full build-out for a new tenant. Landlords will also be looking to sign longer-term leases in an attempt guarantee a greater return of the up-front costs of a new tenant. In addition to the incoming tenant’s market, commercial construction costs in Chicago and nationwide are at an all-time high, having increased an average of 2.3% year-over-year for the past five years nationally. Chicago construction costs are expected to jump an additional 3.5% - 4% in 2016 according to Mortenson Construction Cost Index. Even though the cost of materials is decreasing, the demand for skilled labor has increased. This is due partially to a smaller labor pool than in the past as well as the high volume of construction happening throughout Chicago. Chicago’s construction market took a massive hit during the recession and recovered more slowly than other cities. Due to the lowered demand for construction, the employment pool shrank to what it is today. However, the city’s construction rates have grown steadily for the last two years and will end the year at healthy levels. Steadily rising demand for subcontractors has pushed the cost of construction up despite the fact that construction materials have shown little to no increase in prices. The majority of new construction in Chicago is geared towards multi-family residences and hotels, though the commercial market is not without new space. By early 2018, the CBD will have 4 million square feet of new space and the surrounding Chicago submarkets will be home to an additional 1.4 million square feet of new space. Under these circumstances, Chicago’s landlords will have to offer more competitive renewals and lease extensions. Landlords will be looking to renew their existing tenants because updates and changes to existing conditions cost less than entire build outs and landlords will be eager to ensure tenancy. Tenants can also expect landlords to push for new leases to have longer terms in an attempt to amortize ever-growing TI allowances and work letters. Longer lease terms mean the landlords will more likely recover their upfront costs and provide an element of security for landlords. Despite all this, there has been no shortage of major relocations within the CBD. CNA famously sold their landmark building at 333 S Wabash Avenue at the end of last year in order to move into one of the CBD’s new buildings, 151 N Franklin Street. Other large relocations in the area include Classified Ventures, Constellation Brands, and Hyatt Hotels among many others. Though relocations are still not uncommon, occurrences have decreased. Over the last year, large, long-term renewals have surged instead. Leo Burnett at 35 S Wacker Drive, Mayer Brown at 71 S Wacker Drive, Deloitte at 111 S Wacker Drive, and DRW Trading at 540 W Madison Street have all opted to renew in their current spaces rather than test the waters in the city’s new buildings. The combination of a more competitive market and record-high construction costs are factors that both tenants and landlords will have to balance in their upcoming transactions.