Owner’s Perspective: Recession Speculation Defies Strong Demand for Office Space in Chicago

CHICAGO—With some economists and business leaders beginning to express some fear that a recession is in the offing sometime in the near future, Globest.com decided to go to a major commercial real estate business owner to get some perspective on how they view the current business climate and whether there are indeed storm clouds on the horizon.

Dan Park, senior vice president and asset manager at KBS, which has significant holdings in Chicago, discusses below the prospect of recession, market conditions in Chicago and popular amenities for tenants.

Park serves as the market leader responsible for carrying out investment objectives in the Chicago, St. Louis, Kansas City and the Midwest areas on behalf of KBS REIT, pension fund and sovereign wealth fund clients.

He is responsible for execution of strategic business plans for each owned property with a focus on achieving cash flow yields, occupancy and leasing, which exceed investment objectives, as well as identifying new acquisitions and dispositions. His portfolio consists of six assets containing approximately 3.2 million square feet.

Globest.com: There has been a lot of talk recently regarding a potential recession, what is your view on the CRE market overall, and especially, the Chicago market/?

Park: The fundamentals driving the commercial real estate industry remain positive in many of the top metropolitan markets across the country, including Chicago. We are seeing strong job growth, population growth, and a ramping up of some of corporate America’s top companies.

Demand for office properties and leasing activity continues to be strong. We are not seeing a slowdown in growth in companies of any size, from startups to large, mature firms. In fact, we are actually seeing an uptick in lease renewals and longer lease terms for a lot of our larger tenants. Average office leases typically extend for anywhere between five and seven years, and we are seeing tenants sign leases upwards of 10 to 15 years.

This is demonstrative of the market’s strength which is especially true in Chicago, where we recently expanded leases at 500 West Madison with Accenture and Industrious. Accenture recently announced 600 new jobs and expanded their lease by nearly 190,000 square feet, making it the new anchor tenant of the building. We are now rebranding the building to Accenture Tower. We’re excited to see such blue-chip companies grow and expand in our portfolio.

Chicago is undergoing a significant growth period, and there is a strong migration of top talent and companies to the area. This is something we anticipate will continue for years to come.

Globest.com: What is driving growth in Chicago?

Park: The downtown Chicago market is undergoing tremendous growth as more and more tech companies relocate to the region. For example, Salesforce recently signed a 500,000-square-foot lease in the area along with Uber, who also recently signed a 463,000-square-foot lease. CBRE recently ranked Chicago as the third highest in tech talent momentum among 50 U.S. and Canadian markets.

This migration and expansion of tech companies is largely driven by two factors. First, many tech companies and tech talent are being priced out of coastal markets such as San Francisco and are in search of strong value alternatives. Downtown Chicago has all the key ingredients of becoming a tech epicenter, catering to the young millennial workforce. It is extremely walkable, equipped with quality mass transit, and has access to excellent nightlife, unique restaurants and foodie concepts, high-quality retail, and dense urban housing. This makes Chicago very attractive to tech firms as it delivers the quintessential live/work/play environment that tenants and their employees demand.

Second, the competition for tech talent is less than the coastal markets. Chicago has a diversified economy and is not dominated by tech companies. In many coastal regions, due to the vast number of tech companies, the competition to recruit talent is fierce and the cost to retain them keeps going up. Chicago provides a great alternative as cost of living and occupancy costs are significantly lower than the costal markets.

Globest.com: What are the latest trends in office amenities that are attracting tenants to the area?

Park: Not long ago, amenities such as tenant lounges, fitness centers, concierge services, and on-site restaurants were all considered unique and a premium set of amenities.

Today, these types of amenities are considered building-standard among top office buildings and are often a requirement from prospective tenants. Beyond attractive compensation packages, companies are using their real estate as a recruiting tool.

This is leading to a larger shift where amenities are being mirrored after the hospitality industry. Tenants and their employees are now demanding hospitality-like amenities that provide a warm and relaxing atmosphere.

These amenities may include concierge services, nap-pods, wellness rooms, common area/lounge spaces that blur the lines between indoor and outdoor, and rooftop patios, among many others. We are considering adding rooftop amenities that cater to this growing demand, especially in the Chicago market.

Tenants are also demanding convenient access to transportation and walkable amenities. In Accenture Tower, the first two levels of the property are comprised of 80,000 square feet of retail space, with more than 45 stores and restaurants. The building is situated above Ogilvie Transportation Center, one of the main train stations connecting downtown Chicago to the suburbs. Our central location provides convenient and easy access to all modes of transportation that Chicagoans can’t find anywhere else in the city.

Globest.com: What does KBS integrate into its office assets that provides tenants with unique experiences?

Park: KBS has a very active asset management philosophy and we take a very hands-on and proactive approach with our properties and our tenants. We are constantly engaged with our assets and our markets.

In addition to this philosophy, we incorporate unique amenities that go beyond the physical space. For example, we are developing a building app for Accenture Tower. The customized app will provide a variety of features that make life more convenient for tenants and their employees, such as commute times, train times, and details surrounding amenities at the property. It will also allow tenants to order food through the app and submit tenant requests. In addition, the app will serve as a tool for property management to stay engaged with our tenants, updating them with upcoming events and happenings at the property.

Through our active asset management approach, we also host unique events that go beyond Margarita Fridays. We pay special attention and are intentional in designing events that create a sense of community within our building. At Accenture Tower, each week, not only do we host fun events like Sangria and Karaoke, but we also hold professional workshops, and community-driven events that benefit local charities.

We believe these events create a culture and environment that aid tenants in retaining employees. A happy work environment translates to a pleasant culture and more retention. This is something we always want to help facilitate for our tenants, and we have been very successful at accomplishing this at Accenture Tower.

Dan Park can be reached at dpark@kbs.com. KBS is one of the nation’s largest buyers of commercial real estate and has completed transactions exceeding $39 billion. In 2018 National Real Estate Investor ranked KBS the 8th largest office owner globally.

KBS’ headquarters are located in Newport Beach, CA, with other offices in New York and Washington DC. Assets under management by KBS-affiliated companies exceeded $11.6 billion as of June 30, 2019.