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March 2022

Single-Story Offices Grow in Stature as Tenants Look for Safer Options

Concourse Chicago

From Bisnow:

By Brian Rogal

Single-story office buildings were once regarded as nothing more than cheap options for firms looking for inexpensive deals.

But the pandemic has corporate America scrambling for options other than traditional office towers, raising the profile of these low-slung properties, which let tenants control their own HVAC systems but also allow their workers to directly enter their workspaces and avoid crowded elevators and lobbies, attractive features to employees with lingering fears of airborne pathogens.

“Single-story has never been the sexiest space, but Covid has made it shine,” said NAI Hiffman Executive Vice President Steve Chrastka, who handles leasing for single-story properties in the suburbs and began publishing a quarterly report on this asset class and its place in the overall Chicago office market. “There are going to be groups and people that don’t want to be in elevator buildings anymore.”

Berger Asset Management founder Jonathan Berger acquired Concourse Chicago, a 165K SF, single-story office property at 8601 West Bryn Mawr Ave. near O’Hare Airport, in 2018 and said leasing stayed strong through the pandemic. He attributes that to the property’s new amenities and to the perception that single-story offices are safer.

“No one is walking through any lobby, no one is sharing bathrooms with another tenant or company, and no one is sharing any ventilated air,” he said.

When he bought the property, occupancy stood at about 30% and rose to about 60% by the time the pandemic struck in 2020, he said. But instead of hunkering down, Berger kept signing deals, and occupancy at Concourse Chicago is now over 90%. And even though vacancy soared elsewhere in Chicagoland, tenants have been willing to pay more for spaces in Concourse Chicago.

When Berger took over the 12-building property in 2018, tenants were typically signing deals for $18 gross per SF, Berger said. But the last two leases, for the Ministry of Foreign Affairs of El Salvador and engineering firm GEI Consultants, both between 6K SF and 8K SF, were for roughly $27 per SF.

“That’s the tell, right there,” Berger said. “I think single-story’s reputation was as a low-cost, low-service space provider, and that was a good thing, and still is for many companies, but the asset class has become more legitimate over the past year or two.”

Chrastka and NAI Hiffman’s Jason Wurtz represent Concourse Chicago in all leasing activities, and Chrastka said the work inspired him to dig deep into the single-story office market and create Chicagoland’s first analysis of the asset class. He found that suburban single-story properties held their own during the worst of the pandemic, especially in the O’Hare submarket, while occupancy deteriorated at many other suburban properties.

The 22M SF suburban single-story office market at the end of 2021 had a 15.9% vacancy rate, roughly where it stood at the end of 2020, Chrastka found. Leasing activity totaled 1M SF for 2021 across 425 deals, a small boost over the 991K SF tallied in 2020. The vacancy rate for single-story offices around O’Hare stood at 7.8% by the end of 2021, down from 8.9% in Q3 2021.

According to Colliers International, the overall suburban market saw its vacancy rate rise from 23.6% at the end of 2020 to 26% by the end of last year, when overall vacancy around O’Hare stood at 20.2%.

Demographic changes could push more companies to start taking up suburban space, according to First American Title Chief Economist Mark Fleming. Millennials were already migrating out of dense urban areas prior to the pandemic to buy suburban homes, and that trend accelerated when Covid-19 hit.

In 2020, the populations of lower-density counties in large urban metros grew by more than 0.8%, he said, citing census data, while populations of urban counties in large metros declined by about 0.5%. If those trends continue, more firms will follow their workforces out to the suburbs, providing a fresh source of tenants for single-story offices.

“They were the ugly duckling stepchildren to the urban core, but that seems to have changed,” Fleming said.

Berger said landlords acquiring single-story properties will need to do some work and upgrade the amenities if they want to bring over tenants accustomed to Class-A towers. In addition to installing new roofs and planting new trees at Concourse Chicago, among other renovations, Berger added an outdoor lounge, fitness center, free conference room, public art, and the landlord hosts public events and Zumba and Pilates classes for tenants.

“That was a game-changer for that complex because you don’t typically see that in single-story offices,” Chrastka said. “Usually, you just drive in, there are brown brick buildings and you pay your rent.”

Concourse Chicago also benefits from its location and lower cost compared to Class-A properties, he added. It is a few blocks from the Chicago Transit Authority’s Cumberland Blue Line Station, along with access to the airport, several highways, suburban Rosemont’s entertainment district, Rivers Casino in nearby Des Plaines and several high-end restaurants.

The average rental rate for Class-A space in the O’Hare submarket is more than $35 per SF, according to Colliers International.

“As long as you have owners willing to invest in the sites, I think single-story offices, depending on their location, will continue to pull tenants out of higher-end office buildings or midtier office buildings that are not amenitized,” Chrastka said.

Berger has continued to snap up single-story properties. In 2020, his firm, The Equitable Funds, acquired 1305-1375 Remington Road, a four-building complex in northwest suburban Schaumburg with 84K SF, and last year it acquired the adjacent 1340-1350 Remington Road, a two-building complex with 48K SF.

Berger combined the two properties, now called One Story Schaumburg, and plans on a renovation program to add amenities similar to the ones at Concourse Chicago, including outdoor seating and lounge space.

“We’d like to keep buying more,” Berger said.

Read the article in Bisnow.

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