End of Year 2023 Schaumburg Area Office Market Update!
October 25, 2023
Office building values continue to decline
If a building’s income won’t cover the debt service, lenders are generally foreclosing, or accepting a “deed in lieu” of foreclosure. If the income can cover the debt service, some lenders will extend a loan when it comes due, even if the value of the building no longer supports the amount of the mortgage (so called “extend and pretend”).
Seller vs. buyer disconnect
There is a wide gap between seller expectations, and buyer estimates of value. Some sellers are marketing their office properties via auction, since there’s not enough market data (sales comps) yet to support the usual building sale process. Auction buyers are valuing buildings on a “price per pound” basis, buying in at a low enough level that they feel confident they can make a project a success.
Tenants adapting to the post-pandemic environment
The most common arrangement is a hybrid work model, with employees required to be in the office for a certain number of days each week, with the remaining days being work from home. With this arrangement, tenants are finding that they can reduce the size of their space and still function well. There are tenants at opposite extremes of the spectrum (100% in the office or 100% work from home) but those examples are in the minority.
Things will get worse before they get better for landlords
Many tenants still have long term leases in place that will expire over the next few years. As these leases run out, tenants are likely to downsize, or vacate their spaces entirely. This will compound the issues landlords will have with their lenders, as referenced above. Outdated office properties are, in some cases, being demolished, and their sites being redeveloped with alternate uses (industrial, multi-family residential, retail, etc.)
Tenant’s market
The market is decidedly in favor of the tenant. Landlords, while trying to keep their “face” rental rates at pre-pandemic levels, are sweetening deals with above standard rent abatement, higher tenant improvement allowances (for those landlords who have access to funding), and various non-financial concessions (signage, options to terminate, expand, contract, etc.)
Flight to quality
Many tenants, as they reduce their office footprint, are trading up to a Class A building with many amenities (on-site dining, fitness facilities, tenant lounges, etc.) . They can often do this and keep their overall rent cost the same, or even reduce it. By trading up, many tenants feel their new office environment will be more appealing to employees who have so far been reluctant to come back to the office.
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