The Effect of Tech Subleases
Updated: Jul 17, 2018
For the last several years, the tech industry has driven Chicago’s office market towards its recent highs and helped the city become a nationally recognized technological hub. With big name firms like Google, Yelp, Uber, and Gogo staking out claims, and smaller tech companies moving into any and all remaining space, the technology sector has left an unquestionable footprint on the Chicago office market in recent years. Overall, tech companies currently hold 10.6% of office space in the Central Business District, or CBD, and accounted for nearly a quarter of downtown leasing activity in 2015. As funding for tech companies slows and expansion stagnates, office leasing in the most active areas of Chicago’s office market will slow with it.
The appeal of the city is not exclusive to tech companies; the general trend over the last several years has been a migration to the CBD from the suburbs and the surrounding Chicago neighborhoods. Ravenswood in the city and Oak Brook in the suburbs have seen the loss of many big name tenants like Newark Inc. and McDonald’s to the CBD. When companies, tech or otherwise, make the move to the central location of the CBD, they put themselves in proximity to the hippest restaurants, shopping, entertainment, and residential opportunities in the area and in turn, tap into the greatest potential for a young, talented workforce.
However, the revitalization of areas that were once considered ‘no-man’s-land’ is largely a result of tech companies filling vacancies that traditional office users historically haven’t found appealing. Areas like River North, River West, and Fulton Market are full of the loft-style buildings and open floorplans that the tech sector’s young, collaborative workforce finds attractive. The area’s newfound appeal and the booming tech industry have transformed the city’s former industrial/meatpacking areas into alternative “hip” office environments.
At the beginning of the tech boom in Chicago, many of the city’s landlords, led by Sterling Bay Companies, Spectrum Real Estate, and Urban Innovations, saw the potential in the area and their foresight paid off. River North’s and River West’s affordable rental rates and hip residential options proved attractive to even the largest tech companies. When Google first expressed their intention to move to the new building at 1000 W Fulton, or 1K Fulton, landlords started preparing for an influx of tech-related companies following in Google’s footsteps. Google’s landlord at 1K Fulton, Sterling Bay, bought millions of square feet in River North/West Loop loft spaces to prepare for the impending boom. The tech giant’s move to the old food storage warehouse caused a frenzy of activity in the area, and landlords and developers responded by successfully marketing out-of-date buildings into collaborative work environments.
Recently, however, there have been indicators that Chicago’s technological trend is slowing. Google has recently listed 50,000 SF of their 350,000 SF space at 1K Fulton for sublease and Avant has laid off 60 employees after expanding by 50,000 SF just last year, indicating that there will be an increasing vacancy rate. The Google sublease, along with availabilities from Rocket Fuel, PunchKick Interactive, Channel IQ, and Rise Interactive are some of the first tech subleases to come onto the market in over four years.
Tech funding is declining across many markets including Chicago. Venture capitalists in Chicago have suggested they are being more exclusive with their deals and entrepreneurs are having a harder time raising money. For example, online lending company Avant has not only laid off 60 employees, they’ve also delayed plans to move into credit cards and car loans. It’s not a user base Avant has struggled to find; the company has instead had trouble raising the money necessary to fund the borrowers it has acquired.
Though Chicago has not felt the slow-down as strongly as some of the other big tech markets, like Silicon Valley and New York City, the tech community in the Midwest is prepared for a pause in activity. Investors still have money and local ventures are prepared to make investments as valuations continue to decrease, but it will come at the cost of tightened growth and stagnation in office leasing.
Compounded with other trends, such as law firm consolidation and over 3 million square feet in new deliveries, it is likely that Chicago’s growth will slow over the next few quarters. This means rental rates are likely to go down while vacancy goes up. With the large subleases hitting the market, the slowdown will likely happen before the CBD’s new buildings are delivered, as was originally expected.