As I’ve been working day in and day out in the suburbs, I’d like to reflect on how the suburbs are doing since events of the past year in order to inform the industry moving forward.
Looking at this from a high level, the office market is definitely still facing challenges, retail is showing signs of a rebound with a number of people looking for space, and the industrial market remains strong, although there is a supply challenge. While I am getting some deals done, there is definitely still some trepidation there. People are very cautious before pulling the trigger because they want to make sure that things don’t surprise them again.
Analyzing from a size perspective, smaller spaces (1,000 to 2,000 sf) are definitely in higher demand than larger spaces (4,000+ sf). I think that we will see more dramatic shifts in the office sector as leases expire in the next year or two and companies determine how much of their workforce will remain working remotely which will allow them to reduce the size of their offices. Right now, I believe landlords are doing everything that they can to keep existing tenants so I haven’t seen as many relocations as expected.
Even though demand for office space has taken a hit, we are still seeing opportunities. For example, I have a mixed-use development that includes office and retail space. I started the assignment by working to fill three retail spots. The landlord also mentioned having an office space that he was renting out as individual executive office suites. He decided to add this space to our leasing assignment as an afterthought and said “I only have one person in the space right now so I might as well market it”. That office space ended up being the first one to get filled.
The driving factors for this are that if it is a good location, the office spaces are still in demand. As a result, this puts even more pressure on the more poorly located spots, since people are going to fill the best locations first.
One other interesting concept that I am seeing right now is there is certainly a gap between the expectations of prospective tenants (or buyers) regarding pandemic-related discounts versus that of landlords and sellers, who are not budging as much. I think this is why people are more willing to bite the bullet for a prime location and not spend as much time negotiating for a less desirable location.
Though there is still some concern for the future, that fear is definitely lessening. We’ve seen several prospective tenants who shut down during the pandemic and lost their space (but continued to work with their clients virtually) who are now ready to move back in and sign leases again.
A lot of landlords are also getting creative during this time in order to get deals done. For one deal that I completed recently, the tenants did not need all of the space immediately but they anticipated needing it in the near future, so we did a reduced rent for the first year and got creative with the structure of future payments. I’m also seeing more willingness to provide tenant improvement allowances. Overall, there is more motivation to adapt and more acceptance that you need to get a bit creative in order to get deals done during these times.
One of our mantras here at InSite revolves around the InSite DIfference, which references the difference between being a Good broker and being a Great broker. This means that it is my job to bring creative concrete solutions. With my background in banking and finance, I work to analyze the numbers and come up with economically viable solutions that someone might have otherwise not thought of or overlooked.
Looking forward, I’m really excited for more new concepts coming in retail. We haven’t seen too many unique or experiential concepts this past year but we have seen recent interest for ideas like an axe-throwing concept, a Hawaiian Acai bowl café, and a bubble tea shop. Looking at the start-ups, they do seem to be extra cautious and I also have not seen a lot of franchises branching out quite yet but I am eager to see what happens here in the coming months.
Talking specifically about the future of the suburbs, I think there will be a little bit of a rush in the short term for those who lost their space and are ready to come back. Office space is most intriguing to me because as people’s leases end, I truly believe there will be a tectonic shift. There will be a large percentage of people who do not go back to the office and continue to work from home. As a result, the need is going to totally change. It will be really interesting to see how landlords adapt to that.
I am also keeping a close eye on the potential for continued growth on the office-share concept. While some workers want flexible workspace, others need dedicated space specifically for things such as files or even for a place to go between meetings or court cases.
Another idea that fascinates me is the move from urban to suburban populations. Given the fact that so many workers are fleeing the City; will that force the downtown offices to move out and relocate to where their workers are now? These are questions that we are interested in following over the next few quarters and years to come and we look forward to reporting back on them.
There are so many factors like this in so many different industries. While I don’t know exactly how it will all shake out, I know there will be major changes. And with change comes opportunity, so I am here trying to adapt to the circumstances as best as possible and will continue to be prepared for the unexpected.
To learn more about the suburbs, I would welcome the opportunity to have a conversation. Please connect with me on LinkedIn or send me an email at andrew@insitecommercialrealty.com. I currently serve clients throughout Northern Cook County, Lake County, McHenry County, and DuPage County.
Learn more about Andrew Prunty.