River North Tenants Dipping Their Toes Back In The Water
Downtown Chicago remains largely quiet during the workweek, but some landlords are beginning to notice a slight change in tenants’ attitudes toward returning to their offices. Many are making contact and inquiring about what the protocol is for coming back and how they can accomplish it in safety.
“I’ve fielded more calls in the past two weeks than I did in the past three months,” North Wells Capital principal Tony Lindsay said.
Tenants typically want to just dip their toes in, perhaps move a small number of employees back downtown, and keep most workers at home. Lindsay said North Wells Capital and its partner, Urban Innovations, which together own and operate a portfolio of historic River North loft office buildings, are preparing the way for those making return plans.
The partners signed a long-term, full-floor lease with Workbox Coworking Co., a coworking center and startup accelerator, for more than 15K SF at their 306 West Erie St. The newly renovated structure is the centerpiece of Verso, a proposed three-building community hub. NWC acquired the five-story building in 2017, and nearly doubled its size during the renovation.
Workbox is the first office lease at 306 West Erie St., but Lindsay said NWC and UI look at it as more than a simple office deal. They expect Workbox to help River North’s many entrepreneurs and creative office tenants ease back into traditional office use. He estimated that on a given day, NWC’s portfolio is 12% to 15% occupied, about the same percentage as the rest of downtown Chicago.
“We did a lot of digging to find the right partner, and we liked the Workbox model, because it's both a coworking space and an incubator,” he said.
Lindsay added that tenants can take a desk or two at Workbox as a way to start their return. Others that decide to permanently shrink their occupied space can shift into the Workbox coworking space. As an accelerator, which provides strategic planning, access to capital and financial advice, Workbox can help new companies grow large enough to lease their own offices, hopefully within the NWC portfolio.
“We’re feeding tenants to them, and Workbox will feed some back,” Lindsay said. “It’s going to be a real give and take.”
The vacancy rate in River North grew from 7.8% in Q4 2019 to 13.4% one year later, according to Colliers International, with nearly 700K SF of negative net absorption in 2020.
Having flexibility will be important as the market recovers, according to MBRE Managing Director Andy Davidson. The advent of vaccines may have boosted users’ confidence that they can return to their offices, but most are also trying to calculate how much space they need long term, and what percentage of employees can shift to working from home.
Although the coworking firms that cut deals to take on huge amounts of leased space just before the coronavirus pandemic hit will continue to suffer, some coworking providers may benefit from all the current office market’s uncertainty, Davidson added.
“Our business depends on people feeling good about long-term decisions, but right now, tenants are not sure whether they can sign leases, or what kind of leases they can sign," he said. "So there is a big shift toward flex office space."
There’s a lot of uncertainty in River North, Lindsay said, especially as the bread and butter of many River North landlords are users that rent 1K SF or less, and many of them may decide to go 100% remote. But the new way of using offices could also open up opportunities from larger tenants that want to downsize.
“We’ve seen a real uptick in people looking for smaller spaces as they consider returning to work,” Lindsay said.
The four- to six-story walkup apartment buildings in River North may also become more popular with tenants now uncomfortable with the huge elevator buildings just to the south in the Central Loop.
“That does give us a little bit of an advantage,” Lindsay said. “But at the end of the day, the name of the game is to hold onto your tenants whatever the return-to-work scenarios look like in the next six months.”