New Satellite Offices Could Offer Suburbs A Lifeline, But So Far It Isn't Happening
Most corporate offices remain depopulated, even empty, and landlords everywhere worry what the future holds. But the latest Chicagoland statistics may show a partial silver lining, at least for the suburbs.
The overall suburban numbers aren’t good. Vacancy increased 100 basis points in Q3 to 23.2%, according to new research from Colliers International. And even though Class-A suburban properties have mostly outperformed other buildings, their vacancy rate also increased 100 basis points to 23.9% in Q3. That’s a turnaround from Q2 when overall vacancy stayed flat even in the face of the pandemic and Class-A buildings saw a decrease in vacancy.
“Obviously, with the coronavirus pandemic, a lot of companies are re-evaluating their space needs,” Colliers International Senior Research Manager Ronna Larsen said.
The somewhat good news for suburban property owners is that although the amount of sublease space available increased since the pandemic accelerated in March, it hasn’t yet flooded the market. And there is at least one possible lifeline.
“There are already a lot of corporations reviewing their downtown space and considering establishing suburban satellite offices,” Larsen said.
Some remain skeptical that companies will toss a lifeline to landlords by establishing small satellite offices for employees worried about the safety of public transportation to the central business district or their ability to social distance in the dense urban core.
“When all this started, the big word was that everybody downtown would establish a satellite office in the suburbs,” Cresa principal and tenant rep Mark Montana said. “Obviously, this is a still-evolving situation, but I’m not seeing it yet, not to any degree that is going to move occupancy rates. I wish I could say we’ve seen 10 people who have done it and there is a line of 20 others waiting to do it, but we haven’t.”
Suburban leasing activity was slow in Q3, Larsen said. Both Class-A and Class-B offices reported negative absorption. Only six new renewal or lease expansions of 15K SF or more were signed throughout Q3 in the suburbs, half the number completed in Q1.
The suburbs have 2.8M SF of sublease space available and 1.3M SF vacant, according to Colliers. That is an 800K SF increase in the past six months.
“But it’s nothing like the amount of sublease space we’re seeing downtown,” Larsen said.
The downtown Chicago supply of available sublease space surpassed 5M SF in Q3, more than 25% higher than Q2, according to Savills. Similar surges have hit downtowns across the U.S., including Philadelphia, Atlanta, Boston and Manhattan.
Several blocks of downtown Chicago space greater than 50K SF became available in Q3, Savills found. That includes 76K SF occupied by Trunk Club at 333 West Ohio St. in River North and Cars.com’s full floor at 300 South Riverside Plaza in the West Loop totaling 53K SF.
Montana said that while Chicago’s CBD is almost deserted, with about 10% of the office workforce still commuting to their jobs, the suburbs fare better. Roughly 25% to 30% of those workers leave home each workday for the office, which may explain why suburban firms have so far given up less space for sublease.
Still, Colliers’ suburban forecast isn’t exactly rosy, Larsen said. Most of the new leases for the rest of the year will probably come from small- to midsized tenants. Meanwhile, large corporate users should continue delaying long-term decisions at least until 2021. More subleases will hit the market, helping press down rental rates. Tenants with upcoming lease expirations will also settle for short-term extensions rather than tying themselves down with long-term deals.
“Short-term deals are smart, and we’re advising our clients to do the exact same thing,” Montana said. “It has nothing to do with the uncertainty surrounding the election. It has to do with what people deem safe.”
Cresa works with clients throughout the suburbs and the CBD, and Montana said what most deem safe are the continued use of work-from-home models while they take time to consider their futures. So far, home offices have served most very well, and it isn’t uncommon to see companies looking for places to store their office furniture rather than to make moves to reopen.
“Obviously, this is still an evolving situation, but I see work from home being much more significant than the use of satellite offices,” he added.
The entire office market could be on the verge of major change that outlasts the pandemic. Montana works with a client he said he can’t name that has about 110K SF, and it may allow about 70% of its administrative staff to work mostly from home.
“They may only need 22K SF; we’re seeing a lot of things like that,” he said.
Whether companies continue the widespread use of home offices depends partly on employee productivity, Montana added. The first six months at home were an interesting novelty to many, but boredom could set in, children could get underfoot and others will simply miss having colleagues at hand.
“There are five generations in the workforce and every generation, regardless of their work patterns, wants to be collaborative with other people,” he said. “But right now, everyone is hunkered down at home.”