While Chicago office availability is plentiful in certain market sectors, closing a deal is a more rigorous process than it was in the past.

As Chicago office tenants continue to flock to the best spaces available in the market, the brokers representing them are taking a harder look at the owners on the other side of the table. They are digging into buildings’ capital stacks, negotiating protections into lease agreements and ensuring owners are financially capable of funding tenant improvements, panelists said at Bisnow’s Chicago Leasing Conference on Sept. 29.

“Forecasting and understanding the financial makeup of your counterparty is really sort of the first point of making sure that we all understand the market, and it's more acute now than it's ever been,” Savills Chicago Region President Robert Sevim said at the event, held at The Allegro Royal Sonesta Hotel Chicago Loop.

Discussions over rental rates or concessions come up quickly, but ensuring the owner can perform — especially over a multiple-year period — is key, Sevim said. The evaluation process extends to what’s around the corner in the building, like lease rollover dates and debt maturity.

Sevim said the capital gap between what a landlord can support in financing a build-out and what the tenant has to pay can also become a stumbling block. He said he spends a lot of time gaining an understanding of the capital stack of a building, an owner’s ability to respond to a deal quickly, and a sense of certainty and assurance that an owner is able to perform.

“Their ability to be quick and certain means that they either are owned in cash, which is more of a rarity, or their lender position is pretty secure,” Sevim said.

The top end of the market has benefited from flush landlords who can execute on leases.

Trophy properties have recorded 610K SF of positive net absorption year-to-date, and overall trophy office vacancy in the central business district dropped 420 basis points year-over-year, according to data from Cushman & Wakefield. Class-A office properties made up 62% of CBD leasing activity through the third quarter, totaling 2.9M SF.

“The top end of the market is absolutely on fire,” Colliers principal Dan Arends said.

Cushman & Wakefield Managing Director Jeff Skender said that for the first time in his 20-year career, he’s seeing “an arbitrage opportunity” where quality buildings don’t realize their position in the marketplace. He said this lets him create urgency for clients and get them into buildings faster, at lower rental rates than they might pay if they waited.

Arends said he’s seen a “dramatic change” in tenant activity over the last two to three years. In the aftermath of the pandemic, tenants were all executing short-term deals as they figured out their work-from-home and hybrid strategies. Now, he said it seems like every tenant knows exactly what their space needs are.

There’s just one holdup.

“The problem is, in that same period, the capital markets are going to hell, and it's very hard to get any money,” Arends said. “It's very hard to get refinanced. It's hard to get good-news money.”

Both Arends and Sevim said tenants are looking at top office spaces in the market two to three years before the spaces open up. Arends said it’s hard to find two or three floors available in top buildings, so tenants need to secure space ahead of time to avoid getting bounced for another tenant who wants it.

Arends said landlords have been more willing to accept certain contract terms than they would have three or four years ago, like set-off clauses, escrow provisions and SNDAs, which protect tenants in the event of building foreclosure.

“Getting the protection is the only thing that satisfies me,” Arends said. “I don't make the decisions; they make the decisions. All I have to do is explain the risks so that I can help them make the best decision.”