“No dumb questions” Chicago office tenants buying art, furniture on landlord’s dime

Who gets to keep the art?

That’s a question downtown Chicago’s commercial landlords and their new tenants need to hash out these days while negotiating deals, one that rarely came up before the pandemic emptied offices.

With high vacancies in the central business district, record amounts of sublease space, and one of the nation’s hottest spots for new commercial development next door in the Fulton Market office district, downtown landlords are in a tough spot.

They’re willing to offer more perqs than ever for tenants to land new leases or extensions, including upgraded furniture, computer equipment and even artwork for the office, said Tony Karmin, a Chicago broker representing tenants for Colliers International. He just negotiated a 20,000-square-foot lease on behalf of the consultant Axiom to double its footprint at 200 West Adams Street.

“All bets are off in this market. There are no dumb questions, there’s no dumb requests, there is no request that’s too aggressive,” Karmin said.

All the swag reflects just how tough it is for landlords to fill office space after vacancies in the Loop surged to almost 30 percent and remain high in major metro areas across the nation. In San Francisco, one office landlord is offering a Mexican vacation to brokers who just book property tours for clients, and similar incentives are on tap in Chicago for those who set up multiple viewings, said Steve Goldstein, a tenant rep broker for ChicagoBroker.com, an affiliate of Jameson Commercial.

While rental rates came down only slightly during the pandemic, concession packages from downtown landlords have gotten sweeter for tenants. They’re more flexible than before the health crisis, especially in terms of how tenants can use buildout allowances, the amount of money landlords make available to tenants for interior construction or renovations.

Landlords previously let just a portion of unused funds from a tenant’s buildout get credited as rent, and would only reimburse tenants for hard construction and moving costs, while furniture, equipment and other soft costs were shouldered by tenants. Those limits in many cases have been removed.

“That’s a really big difference between today and what we’ve seen in the past,” Karmin said.

The deal structure has set off a hunt for spaces tenants can use as they are, without having to put big bucks into changing the previous occupant’s interior finish.

“Really, our value and what we’re doing today is the evaluation of existing condition space,” Karmin said of tenant reps.

Construction allowances have grown to reflect rising costs of materials and labor amid the pandemic; Karmin puts the range between $80 and $120 a square foot, with upwards of $100 becoming more common. Tenants and their brokers are capitalizing on those offers by finding ways to avoid using funds on building costs so they can put them toward rent.

“Where the real deals are is if a tenant can reutilize existing space,” Karmin said. “Especially in those situations where you don’t need all the dollars to go into the space, a tenant can completely update their furniture, completely update their technology.”

Bargains in Loop buildings aren’t enough to stop the momentum in Fulton Market, though. The former meatpacking district was Chicago’s only pocket where availability dropped in 2021, and new construction proposals there keep coming. It’s far more expensive to rent in Fulton Market, yet tenants have shown a willingness to cough up cash to be in buildings with amenities like fitness centers and rooftop decks.

“You still have pretty unreal demand. They’re clamoring to be in Fulton Market,” said Ari Klein, a broker for Cushman & Wakefield.

He pointed to 167 Green Street in the Fulton Market district, which is fully leased after signing multiple tenants through the pandemic, including two leases across 89,000 square feet by White Claw maker Mark Anthony Brands and Lukas Walton’s philanthropy and investment firm, deals first reported by Crain’s.

“Chicago is not like a coastal market. It’s not like New York or San Francisco where we get these super low vacancy numbers. Chicago gets to 9 or 10 percent vacancy and that’s when people start to build,” Klein said.

With vacancy nowhere near that low in much of the city, though, landlords are willing to haggle with tenants for discounts used on the front end of leases. They’d rather do that than lower advertised rental rates paid throughout the life of a lease because lenders are more sensitive to reduced rents. Getting cash out of buildings through refinancing in a few years would be complicated much more by cutting face rents than offering bigger concession packages.

“A landlord can’t do you a favor that’s going to ding its ultimate property value. They’ve been offering way more incentives on the abatement side. They want the commitments. Abatement is OK for today as long as they have cash flow for the future,” said Klein.

Even Goldstein, of ChicagoBroker.com, got out of the landlord business this year, choosing to sell a River North office building he owned for more than a decade at 162 West Hubbard Street for $5.9 million in a deal recorded in January – the sale price exceeded the $1.9 million mortgage attached to the property in 2008 and another $2 million mortgage from 2018.

“I thought I would never sell,” he said. He wanted to unload it before pouring capital into the property’s ventilation and other upgrades needed to make workers feel safe amid the pandemic. “The market has become so tenant friendly.”

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