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March 2022

In 2022 Office Landscape, Success May Boil Down to Who’s Minding the Store

From Heartland Real Estate Business:

By Bob Assoian
Executive Vice President, Hiffman National

When it comes to which office properties will succeed in the coming years, success may boil down in part to who is minding the store.

Like most big cities, Chicago’s office market has been tested by the pandemic, and office property owners face a far more competitive environment. Year-end 2021 office vacancy rates were nearly 18 percent in the central business district (CBD) and over 25 percent in the suburbs, or 44 and 35 percent higher, respectively, than two years prior, according to NAI Hiffman research. Hybrid work is here to stay, and some employers are shrinking or shifting their office footprints.

When the pandemic is finally in the rearview mirror, office demand is not going to be the same as it was a couple of years ago, although we are still figuring out just what it will be.

Which office properties survive and thrive in post-pandemic Chicago and nationwide will depend on many factors, including the property’s age or condition, its location and, increasingly, how well the property is programmed and run. That includes satisfying tenants in terms of everything from air quality to event assistance; meeting lenders’ environmental, social and governance (ESG) requirements and other new demand; and making cost-effective decisions to maximize net operating income for owners.

A proven breed of higher-service property managers can help. As a combination of concierge, business advisor, health consultant, accountant, construction project manager and event manager, this property management team controls the tenant experience and plays a critical role in a building’s operational efficiency and financial success.

CBD, Suburban Snapshot

Signs point to the office market recovering in Chicago following the world’s public health crisis, although it will come slowly and many assets will need more investment – including great property management – to compete.

In downtown Chicago, the office vacancy rate was 17.7 percent in fourth-quarter 2021, compared with 12.3 in fourth-quarter 2019, per NAI Hiffman research. While there is a way to go to reach record-setting pre-pandemic leasing of 11.5 million square feet in 2019, which was the best in a decade, it’s a good sign of recovery that Chicago’s CBD had about 1.8 million square feet of new leasing activity in the fourth quarter of 2021 – including signing seven deals over 50,000 square feet.

Popular downtown submarket Fulton Market had 153,774 square feet of absorption and 885,751 square feet of space under construction at year-end, including state-of-the-art, amenity-rich tech, life sciences, showroom and other commercial space designed to attract top talent.

In Chicago’s suburbs, there was 1.4 million square feet of new office leasing activity in the fourth quarter of 2021, up 41.2 percent over fourth-quarter 2020 – a notable increase. Full-year leasing activity is now only 11.3 percent below the pre-pandemic pace of 2019. Class A office in the North Suburban submarket led suburban submarkets in net absorption entering the fourth quarter of 2021 at 53,910 square feet.

Of course, Class B and C space and some large suburban office campuses are for sale, ready to be retrofitted into Class A or converted for other uses. Sears’ former headquarters in Hoffman Estates, which includes 2.4 million square feet of office space across seven buildings on 126 acres, is scheduled to go up for sale this year and its future is unclear in an already oversupplied market.

The Allstate campus in the northern suburbs sold to Dermody Properties, a Nevada developer, for $232 million in late 2021. It may be replaced by 3 million square feet of warehouse space in 11 industrial buildings.

Clearly, we’re navigating an active but competitive environment. And as old spaces take on a new shape and more Class A space comes on the market, property management can be the key differentiator in a building’s successful lease-up, tenant retention and long-term health.

Making the Best of It

In Chicago and nationally, commercial real estate owners want the kind of property management that helps them maximize value from their investment.

Last fall, my team at Chicago-based NAI Hiffman launched Hiffman National, officially taking our 20-year-old property management business to the national market. With a tried-and-true, relationship-driven, customized approach as the foundation of our business, we are delivering modern best-practice solutions to our clients.

We work with clients to determine which metrics and programs should matter most to them for financial success, and we build our service to help them meet those goals. We go head-to-head with multinational companies and turn what is often dismissed as a commodity service into something more bespoke. A key thing we’re doing this year is helping employees return to the office and regain the connections they lost while working from home.

Our approach has us wearing many hats. Sometimes our tasks are as simple as bringing bento box lunches to employees, the kind of thoughtful and fun gesture that makes a direct impression. Other times we’re helping tenants reorganize their space to accommodate post-pandemic expectations.

For one office building in Deer Park, we’re focused this year on making the most of the acreage. We know today’s employees want to easily get outside and be active throughout the workday, like they can at home, and we are working toward adding beanbags, a pergola and a shared bike program. Last year, we helped building ownership attain the International WELL Building Institute’s (IWBI) WELL Health and Safety rating to showcase the facility’s commitment to employee well-being.

Our firm’s dedication to customer service makes clients think they’re our only customer, but the efficiencies of our buying power come from our large portfolio. We work with owners, individual tenants and lenders, who have a stake in how a property is built and operated. For example, in a post-pandemic world attuned to both health, safety and social activism, lenders are seeking a commitment to ESG. So, we’re making sure we understand not only how to walk an owner and tenants through WELL, but also how to help them set and reach ESG goals.

The market has been responsive to our approach; Hiffman National now has 105 million square feet of property under management including office, retail, industrial and medical office, in 28 states. We attribute this growth in part to investors’ and owners’ desire to make the most of their portfolios in a tough time, whether through significant physical upgrades and retrofits, operational efficiencies or improved talent acquisition and retention.

In 2022 and beyond, the office properties that succeed will be those where people want to be – because they’re updated, safe, fun and well-run. For success now, pay close attention to who is minding the store.

Read the article online in Heartland Real Estate Business.

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