Office renovation projects are favored in today’s market
O’Hare has remained one of the most popular submarkets for many reasons—ready access to public transportation and proximity to the airport, to name a few—and one type of project that has gained considerable momentum in the submarket involves the revitalization of middle-tier office buildings.
NAI Hiffman Executive Vice President Jason Wurtz said one of his best-performing buildings recently has been an O’Hare Class B building, Cumberland Centre. Integris Ventures purchased a distressed note for Cumberland in 2022 and have since secured more than 130,000 square feet of new and renewal leases—most recently, one for the City of Chicago that will start in July. Hiffman was also able to secure a $16 million refinance loan in April for improvements and deals.
Office renovations have become increasingly significant in today’s market due to the widespread impact of the post-pandemic work-from-home trend on the sector. In order to entice employees back into physical workspaces, companies are recognizing that updating their offices is not just an option, but a necessity. Many forward-thinking companies anticipated the eventual return to work six to 12 months into the pandemic and took proactive measures, such as creating spec suites and renovating lobbies, to accommodate the transition. And while suburban Class A spaces experienced a surge in demand over the past decade, they are now facing challenges. Large corporate users are hesitant to make decisions about their future work schedules and the amount of office space required, causing a sense of uncertainty. Although some employers are regaining control over their workforce, the situation is still evolving. Most companies are actively competing to attract employees, and one effective way to do so is by offering modern, well maintained and amenity-rich workspaces—while being mindful of the delicate financial conditions.
Wurtz said all companies are opting to renovate existing infrastructure instead of building new, driven by the rising cost of construction and the hesitancy of tenants to commit long term, among other factors.
“These spaces are minimally expensive for new deals,” Wurtz said, “so companies know they can put those concessions toward a reduced rent or more abatements or moving expensive.”
That’s part of the appeal of Cumberland Centre.
Ten years ago, Wurtz said that the prevailing trend involved transforming Class B spaces into Class A ones and overcrowding buildings with numerous amenities. According to him, in a submarket like O’Hare, it’s crucial to take note of one’s identity. “When all is said and done, Cumberland Centre stands among the giants, yet we take pride in being a Class B building. What sets us apart is our accessibility to the train, suburban convenience and the fact that we’re the only multi-story Class B building in the vicinity.”
Not to mention, Hiffman recently secured over $16 million in financing for renovations and new deals. Securing financing has become increasingly challenging, and Wurtz said that those with financial resources will have the advantage in closing deals. Cumberland Centre is still undergoing renovations, but the spec suites have been completed are currently being leased out. In the past 18 months alone, the building has witnessed approximately 143,000 square feet of lease renewals and new deals. Notably, LA Fitness has renewed their commitment for 47,000 square feet, demonstrating a long-term commitment, which Deluxe Check has taken a full floor, signing a lease for 46,474 square feet.
It’s no secret that the office sector is struggling in the city, and it’s possible that these projects are contributing to the improved occupancy rates observed in suburban areas like O’Hare. Another example of this trend is 5500 Pearl Street, also owned by Integris Ventures. The building had a mere 4% occupancy in 2019 that grew to 96% occupancy by 2022.
Wurtz stated that the location played a role, and their approach was assertive. While others were stagnant, Hiffman actively pursued all those active in the market. The building had plenty of available space and spacious floor plates, which attracted a wide range of tenants, such as Lakeshore Recycling, who leased one and a half floors.
Concourse Chicago is a 180,000-square-foot single-story project of which Hiffman leased 110,000 square feet at the beginning of the pandemic, all due to the flight to a better price point, and nominal amenities that have done very well, like a fitness center, co-working lounge and a meeting space. Some tenants just want to be able to check the box, and it doesn’t always have to be elaborate.
These examples are a testament to the flight to renovated Class B. But that’s not to say office renovation projects are always smooth sailing. Even with the comparatively lower cost of renovation projects, finances are still something to be wary of, and it circles back to the importance of understanding your position in the market.
“A mistake that’s easy to make is going overboard with improvements,” Wurtz said. “Keep a delta between you and projects classed higher. This approach seems to align with the current demand, as the economy encourages cost-cutting and space optimization. Not all tenants prefer to customize their own space; instead, they find it more convenient to select colors and let the landlord handle the rest. Cumberland Centre stands out as the best of its kind in the market, and though it might not offer all the bells and whistles in terms of amenities, it’s a modern and well-maintained property that fulfills the requirements of many companies.”
Naturally, renovations can be advantageous for all types of classes, particularly in today’s market. Glenstar is another company with big office renovation footprint in O’Hare, particularly with Presidents Plaza located at 8600-8700 West Bryn Mawr Avenue—also attractive to tenants for its unique features and convenient city address.
Glenstar started the renovation in 2019 and completed it in a few months in perfect timing before the pandemic. In line with the strategy recommended by Jason Wurtz, Glenstar took advantage of the dead time and spent about $20 million to transform the entire asset, including renovated common areas, a modernized lobby, and best-in-class amenities like a 12,000-square-foot fitness center, conference center and tenant lounge with games like shuffleboard and a bar that serves coffee in the morning and liquor in the afternoon—the first and only building in the suburbs with that offering. Glenstar Executive Director, Asset Management Mickey Stefan said these amenities transformed the property and solidified their place as the best in the market which he maintains is crucial to entice employees back in the office.
According to Stefan, “Class A tenants seek office spaces with comprehensive amenities that enhance the workday experience. That’s what Presidents Plaza does, leading to successful leasing there, as well as our other assets. I would argue Presidents Plaza is the best suburban multi-tenanted building in Chicago, and I think there are a lot of brokers that would agree.”
Downsizing is one strategy large companies are using to be able to afford the space. And unlike many other buildings, Glenstar has managed to raise rental prices at Presidents Plaza due to high demand.
Unique amenities help with occupancy, as well. Not only does it help existing tenants in encouraging their employees back, but it helps the building’s retention rate. The building is currently sitting at mid-80% leased, which is above market vacancy, and it’s only a matter of time before the number reaches 90%.
Renovation projects are a trend that both Wurtz and Stefan expect to continue for the foreseeable future. And while you might see new spec offices in Fulton Market, Stefan said ground-up projects are unlikely in the suburbs any time soon. “I don’t think you’ll see developers kick off a new spec multi-tenant office building any time soon, and there hasn’t been one for a long time. People would rather find a well-located lower-class asset with capital and put money towards transforming it.”
Both Wurtz and Stefan anticipate that renovation projects will remain a prevalent trend in the coming years. The initiation of new speculative multi-tenant office building is improbable, as people continue to opt to invest in well-located lower-class assets and transform them.
About NAI Hiffman:
NAI Hiffman is one of the largest independent commercial real estate services firms in the US, with a primary focus on metropolitan Chicago, and part of the NAI Global network. We provide institutional and private leasing, property management, tenant representation, capital markets, project services, research, and marketing services for owners and occupiers of commercial real estate. To meet our clients’ growing needs outside of our exclusive NAI Hiffman territory, we launched Hiffman National, our dedicated property solutions division, which provides property management, project services, and property accounting services across the country. NAI Hiffman | Hiffman National is an award winning company headquartered in suburban Chicago, with more than 250 employees strategically located throughout North America.
About Hiffman National:
Hiffman National is one of the US’s largest independent commercial real estate property management firms, providing institutional and private clients exceptional customized solutions for property management, project management, property accounting, lease administration, marketing, and research. The firm’s comprehensive property management platform and attentive approach to service contribute to successful life-long relationships and client satisfaction. As a nationally bestowed Top Workplace, and recognized CRE award winner, Hiffman National is headquartered in suburban Chicago, with more than 250 employees nationally and an additional six hub locations and 25 satellite offices across North America.