Tag Archives: Commercial Real Estate


From "It's Electric" by Scott Swigart

At a glance…
  • Chicago office vacancy remains above ‘equilibrium’ by four points (14.4%), yet virtually unchanged from the previous quarter.
  • Rental rates continue to soften, slipping to $28.30 per rentable square foot (rsf), a decrease from last quarter’s $29.25.
  • Landlords continue to be aggressive in negotiating to retain existing tenants.
  • The bulk of market activity involves flight to quality in the leasing market with tenants taking advantage of historically low pricing.
  • Office space absorption figures suggest a slight increase in overall demand and leasing activity. Absorption is positive 80,622 rsf for the quarter, compared to the previous quarter of negative 27,582 rsf.
  • Sublease vacancy decreased to 2,511,330 available rsf from 2,658,482 available rsf
  • Many companies have excess, underutilized space.  The bulk of this ‘shadow space’ must be absorbed before a healthy market returns

Issues impacting Chicago office space, and many other markets, include: high unemployment, housing foreclosures and weak pricing, stagnant economic growth and diminished financial reserves of the small business.

We expect the recovery to move slowly for commercial office space in Chicago.

Major transactions this quarter:
  • Groupon at 303 E Wacker (150,000 rsf short term sublease expansion)
  • PNC Bank at 1N Franklin (116,000 rsf renewal/expansion)
  • University Health Consortium at 155 N Wacker Drive (Relocation to 56,290 rsf)
  • Crain’s Communications at 150 N Michigan Avenue (Relocation to 54,425 rsf)
New construction may be coming:

A new, 1 million rsf office tower may be coming to the downtown market in 2014.  In November 2010, Trammell Crow and Insite Real Estate announced their plans to construct the tower at 301 S Wacker Drive.  Alter Group and White Parks Realty are  also eyeing 625 W Adams as a site for a 490,000 rsf office tower.  Finally, Fifield and CBRE are alleged to be planning a 350,000 to 425,000 rsf office tower at 601 W Monroe.

Where is the opportunity?

There is a lack of A+ prime -view, high-rise space. What little there is will not be discounted as much as  tenants would like to see.  However, great opportunities continue to exist in the B and B+ building segment. Landlords under pressure are looking to minimize the negative market forces by packaging creative deal structures.

It’s a great time to be a tenant in the market. Don’t be one without excellent representation.



Clifton Gunderson LogoChicago, IL – April 27, 2011 – Clifton Gunderson has signed a short term sublease for 3,397 rentable square feet at 311 South Wacker Drive on the 9th floor to accommodate their newly formed litigation practice

“Formerly office space for Sellers Capital, the space has highly upgraded millwork and beautifully built out offices that provided Clifton Gunderson with a turnkey office solution allowing this business line within the organization to get up and running quickly,” says Rhea Campbell of Bella Terra Partners, who represented them. Clifton Gunderson announced in a separate message that “moving to this location further demonstrates Clifton Gunderson’s commitment to the ever-growing needs of the Chicago community.”

Clifton Gunderson is ranked as one of the nation’s largest certified public accounting and consulting firms. The firm provides a wide range of assurance, tax and consulting services to clients in a variety of industries. Founded in 1960, Clifton Gunderson has a staff of more than 1,900 professionals serving clients from 46 offices across the country.


A recent report released from The Financial Crimes Enforcement Network, a part of the US Department of Treasury, outlines the rising amount of suspicious activities in the Commercial Real Estate Industry.  Between 2007 and 2010, the amount of Suspicious Activity Reports (SARs) regarding Commercial Real Estate financing fraud nearly tripled. The top 4 categories for these frauds were: false documents, misappropriation of funds, collusion-bank insider, and false statements.  And, the top 5 locations of the reported subjects were: Georgia, Illinois, Florida, New York and California. In the last few years, commercial rents and occupancy rates have fallen and commercial loan defaults have risen. An estimated $1.4 trillion in Commercial Real Estate loans will reach the end of their terms by 2014. As financial institutions fear more loan defaults, they will be keeping a keen eye out for these kinds of suspicious activities.


By underestimating the economic benefits to be gained from a routine renewal, tenants may miss a major cost-reduction opportunity.

"Money Roll 2" by Zach McCarthy

Landlords are acutely aware of the difficulty tenants have in moving and will look to use this awareness to their advantage. The decision to renew or relocate should not be made solely on the basis of per-square-foot rental costs. Tenants need to evaluate “remain-in-place” issues such as:

  • What’s the difference in required space needs at the current building vs. a relocation?
  • What ability exists to upgrade the existing space for technological improvements and what capital is required to do so?
  • What disruption to business will present itself during any renovation or upgrades to the space?
  • What ability will remain to reshape the organizational image or culture, if desired, in the current space?
  • What expansion opportunities exist in the current space?
  • What opportunities exist to amend an existing lease and how can the tenant take control of the negotiation timetable?

Landlords believe they operate from a position of strength in a renewal negotiation because they perceive they have better market knowledge than the tenant, control of the process and timetable, and an appreciation of the tenant’s “inertia” and the real cost of moving.

Tenants can level the playing field by engaging a tenant representation professional to act on their behalf just as the landlord has his or her own brokerage professionals representing his or her interests. When a tenant engages a professional to represent them, the landlord will understand that the tenant is serious about pursuing relocation and that they will be aware of all relocation opportunities and “remain-in-place” issues. In other words, in engaging a tenant representation professional, a tenant will level the playing field by engaging their own team who will have the same information the tenant’s landlord does to evaluate renewal and relocation scenarios.

Step 1- Create the Program

We start with a space planner who creates a “program” of a tenant’s space need. A program identifies the number of offices, cubes, conference rooms, server rooms and the like that is required for the operation to function optimally. It identifies adjacencies (where everyone sits for optimal collaboration) and allows tenants to rethink their business workflow. As tenants evaluate other spaces, the space planner will perform test fits to see how a tenant’s program works in alternative buildings. This exercise will validate how tenants can use the reworked space and confirm how much space tenants will need to take in a new location. Because of loss factors, building core types, and building layout, different buildings will require different footprints for the same program.

Step 2- Create the Financial Model

We then create a financial model for the renewal space allocating the costs and risks to the landlord associated with vacating a tenant’s space. This analysis should take into account the submarket and overall absorption trends of the area, lost income created by time the landlord will need to lease up the space when a tenant vacates, required tenant improvements for a new tenant taking a tenant’s space, and credit risk.

Step 3 – Conduct a Credible Market Search

A critical part of any successful renewal strategy includes a credible search of the market, showing a tenant’s landlord that they’re serious about looking into alternative locations in order to reduce occupancy costs.

Step 4 – Identify and List the Key Elements for Renewal Negotiations

A tenant’s ability to maximize the economic benefit which a tenant achieves if they renew will hinge on their ability to assist in shifting the “market or valuation risk” from them to the landlord.

Every tenant’s renewal strategy should be tailored based upon their current office building’s situation. However, there are four key elements that always need to be developed and implemented by your brokerage professional to execute a successful renewal strategy:

1.  Lease Provisions-The tenant team must have a clear understanding of its lease provisions, utilize favorable clauses to its benefit, and prepare defenses against potentially harmful provisions.

2.  Understanding the Landlord’s Objectives/Constraints-A tenant’s brokerage professional should understand the issues and implications of the building’s current situation, including ownership profile and their financial objectives, building debt, tenant profile, including credit, rental rate proformas, rollover, and the market perspective.

3.  Timing-A tenant must develop its occupancy strategy early enough to allow for a renewal to be developed outside of the renewal rights in the lease.  The potential exists to negotiate terms and conditions tailored to a tenant’s needs while providing certainty to all parties.

4.  Well-Defined Tenant Objectives-The tenant team must clearly define its renewal goals in terms of rent, escalations, work contribution, options and other lease rights.  A tenant’s ability to define specific “target” prior to approaching the landlord will increase a tenant’s credibility with the landlord and ultimately the likelihood of a successful, fair market renewal.

What a tenant perceives as favorable renewal terms may be a downright steal to the landlord.


Sam Chandon, global chief economist of Real Capital Analytics writes an excellent article at The New York Observer titled: Why the Rosier Employment Report Still Falls Short.  To summarize, he believes the recent employment report paints a very optimistic picture about the rise of jobs and the overall improvement of the economy.   After all, February saw the largest one-month improvement in jobs added to the US market since May 2010. However, due to factors such as the slow rate of job growth and rising global political and economical conditions, the commercial real estate sector, in particular, may see a slower increase in business than expected.

Chandon writes:

“In areas that are more directly relevant for prime office-space demand, the results have been consistently disappointing. Information services reported no increase in jobs in February. In the financial services sector, employment fell by 2,000 jobs over the month; and this sector has almost 50,000 fewer jobs than a year earlier. While many financial institutions have reported robust recoveries in profit levels, these gains have yet to translate into an observable improvement in the sector’s overall employment levels.”

We agree with Chandon. One month of job gains does not a trend make.


Reis Inc., a New York based real estate research firm, reported 3rd quarter vacancy rates of 16.5%. Couple this with a climbing unemployment rate of 9.8% (Yikes) and there doesn’t seem to be a recovery of any sort happening here.

Rightly so, The Wall Street Journal is reporting (Fed Frets About Commercial Real Estate) that the Fed has concerns about commercial real estate and the speed with which banks are taking their losses.

The fact of the matter remains unless you have jobs growth there is no demand for office space. People can’t or won’t start new companies and existing employers are shedding space not expanding into space.


For tenants, the next two years will offer an opportunity to secure dramatically low cost office space. Here’s why:


The unemployment rate increased from 8.1% in February to 8.5% in March. Adding insult to injury, January job losses were revised from 655,000 non-farm payrolls to 741,000. Since the recession officially began in December 2007, the economy has lost 5.1 million jobs with almost two-thirds (3.3 million) of the decrease occurring in the last 5 months. Many are saying we’re skidding across the bottom of this severe recession but I disagree.

Commercial real estate is just beginning to show weakness that will eventually cripple many owners and force a wave of bankruptcies. In fact, 525 W. Van Buren was the first building to be sold in Chicago’s central business district for $130 million, $6 million less than what the seller or investor paid for it five years ago. This transaction is the first example of a significant downtown commercial real estate property changing hands for less than the seller paid. Read more…