Will Retail Bail on CBDs With Empty Offices?

A food services company that operates a market in Sterling Bay’s 1.7M SF River North office tower in Chicago sued the landlord last month, seeking reimbursement for build-out improvements in an early termination of a 10-year lease that will enter its third year at the end of 2023.

Quest Food Management, which operates Farehouse Market in River North, says it’s owed more than $515K because it has a clause in its lease that guarantees $2.5M in annual sales, which it says it hasn’t come close to achieving due to the “vast reduction” in the number of office workers in the building.

Sterling Bay responded in a letter to the tenant noting that Sterling Bay subsidized the market’s operations between June 2020 and September 2022 at a cost of $430,000 and abated $142K in rent the landlord could have collected, according to a report in TheRealDeal.

We asked a real estate broker in the neighborhood—who works in a 2M SF office tower in Chicago’s Loop and exclusively represents landlords—if disputes of this sort between landlords of half-empty office buildings and ground-floor retail tenants are likely to proliferate.

Peter Caruso, Managing Director, Brokerage at JLL’s Chicago office told GlobeSt. that office landlords he represents don’t offer early termination clauses or reimbursement of build-outs, but many of them are subsidizing ground-floor tenants like restaurants.

“It takes most businesses three years to get up and running. If they fail, the cost of the [build-out] is their skin in the game,” he said.

“In the Loop, the landlords are doing most of the contribution to [retail] tenant improvements, and we’re barely at 50% of occupancy. It’s three days a week,” Caruso said. “There’s a pretty good lunch crowd on Friday, but then it just dies. There’s no more happy hour on a Friday.”

Unless the office occupancy picture gets much better in Chicago’s downtown, the outlook is gloomy for ground floor retail in office buildings, he said.

“JLL is in a 2M SF building and there are only a couple of businesses open in our building. I can complain until I’m blue in the face for more of them to open,” he told us.

“We’re telling our landlords that unfortunately if the corporations have employees come in three days a week, they can explain to them that’s why there’s no restaurant in the building,” Caruso said. “If Jimmy Johns is only selling 400 sandwiches a week and they don’t make enough money to pay for the goods they’re buying, why would they stay open?”

Subsidies of ground-floor retail by office landlords is not a viable solution if three-day work weeks persist for Chicago’s downtown office workers, Caruso said.

“There are only so many subsidies that you can give, rent being one of them. It’s 25% of operating costs, and it’s still not enough,” he told us. “You’re paying me a percentage of your rent and I’m paying for your management cost. I’m going to pay you $10,000 a month to stay open—and still nobody is making any money—zero.”

“You can only give so much and then there’s nothing left to give,” Caruso added.

“If three days per week [in offices] continues, downtown will continue to look like its looked for the past three years. It might get worse,” he told us. “You need the people back. If the people don’t come back you lose the business corridors, all of them.”