Tenant Advisors Mid Year 2023 Schaumburg Area Office Market Update
July 13, 2023
1) Office building values declining
- Lenders will “pretend and extend” a mortgage as long as possible if the income covers the debt service
- They’ll foreclose (or accept a deed in lieu of foreclosure) if a borrower isn’t covering the debt service
2) Office building value disconnect
- Sellers and buyers are far apart in agreeing on values
- Many sellers have resorted to auctions to sell their properties since there’s not enough market data to support the normal sales channels
3) Tenants are adapting to the post-pandemic environment
- Many are going to a hybrid work environment with flexibility between work in the office and work from home. Many tenants with this model are downsizing their office space.
- Some are closing their offices entirely and going to a 100% work from home model, although these tenants are in the minority.
4) More bad news is coming for landlords
- The full pain of the post-pandemic office market hasn’t been felt, since many tenants still have time left on their leases.
- As these leases expire, many tenants will either reduce their size, or simply not renew their lease
- This phenomenon means a long term (if not permanent) reduction in the demand for office space.
5) Tenant’s market
- All of this translates into a soft market, in favor of the tenant
- Landlords are sweetening deals with increased rent abatement, higher tenant improvement allowances, and various non-financial concessions as well (signage, options to terminate, expand, etc.)
6) Common trend among office tenants
- Many tenants, in addition to reducing the size of their space, are taking advantage of the soft market to trade up to a Class A, highly amenitized building. They see this as a way to lure employees back to the office with amenities like fitness centers, daycare facilities, and tenant lounges.
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