Q&A: Telos Group’s Nikki Kern on retaining office tenants and more

Deals for 400,000 square feet of downtown Chicago office space last year earned broker Nikki Kern, of the landlord representative Telos Group, one of the city’s top commercial real estate honors.

The timing of her clients’ pricey renovation projects helped, as landlords Beacon Capital at 303 East Wacker and 601W Companies at 1 South Wacker started big overhauls of their properties just before the pandemic, making them competitive in today’s amenities wars.

After Beacon’s $35 million renovations finished at 303 East Wacker, Kern’s team closed a lease for 68,000 square feet with siding products maker James Hardie. She finished the year with 200,000 square feet across multiple leases at 601W’s One South Wacker, which underwent a project that relocated its fitness center and tenant lounge from a space on the property’s mezzanine level that Kern said simply “checked a box” before the upgrade without impressing too many tenants.

Now, those perks are on the 28th floor and the space “literally drops jaws when we walk [prospective tenants] into it on tour,” Kern told The Real Deal.

“Bringing amenities to one of the best floors in the building, you’re going to get a lot more out of it than if you were going to rent that floor for a couple more dollars per square foot to one tenant,” she said.

In May, Kern — who spent 12 years as a broker at JLL representing downtown building owners before jumping to Telos in 2018 — was named office property agent of the year for 2021 at the Greater Chicago Food Depository’s 34th annual commercial real estate awards dinner, long considered the sector’s top event of its kind.

“In a year of Covid, it was a tremendous feat,” Kern said. “But the (spaces) were the right product at the right timing hitting the market with the upgrades finished, when users were coming back to the office and looking for that top-notch amenity package that could attract their employees back to the office.”

She kept the momentum rolling this year, playing a role in brokering an expansion by 50 percent of trading firm IMC’s lease at Willis Tower, the tallest building in Chicago, to 150,000 square feet.

Read on for Kern’s takes on the importance of tenant retention in a challenging market for landlords, why there may soon be more occupiers forced to make real estate decisions after more than two years of putting them off and how negotiations for expansion and contraction rights are changing. This interview has been condensed and edited for clarity.

Are landlord reps putting a greater emphasis on retaining tenants they already have? Replacing a tenant that leaves is as competitive as ever amid near-record vacancies, and with tenants tending to change sizes as their leases expire, how do you prevent them from testing the market?

It’s important to get ahead of your vacancy. So to engage your tenants early, to understand what their issues are and help them solve their problems before the market can. If you have a tenant that needs to expand or contract, if you can make that happen for them before they go out to the market, you’re going to be in a much better position than if you delay and that tenant starts looking in the market. Once they start looking in the market, they may not come back.

Have you had success with retention lately?

For sure. At 1 South Wacker, we retained almost everybody, other than a couple tenants that closed their office, which wasn’t something we could obviously help. We’ve only lost a couple tenants that we weren’t able to solve their issues. At Willis Tower, we addressed a need for IMC, which needed to expand. Their lease didn’t expire for a few years but we were able to get them a contiguous floor for expansion, and then give them some expansion rights on top of that along with an extension of term.

Are expansion rights getting costlier for tenants as landlords might be growing more cautious with them due to the tendency to downsize right now?

It depends on the amount of expansion they’re interested in and the timing. You want to make sure you’re providing something that isn’t forcing you to sit on vacant space. But if it’s available and you can provide it, it’s important to tenants. Any flexibility is important to a tenant, whether you’re giving them contraction rights, expansion rights or rights of first offer on contiguous space, because tenants are in this limbo position right now. They’re not sure what they need going forward. They think they can contract, but in a few years from now, who knows what their position is going to be? They might decide everyone is coming back to the office and actually want a seat for everybody, whereas today they may have thought having one seat for every two people was enough. If you can be creative with your tenants and prospective tenants to give them any flexibility, you’re going to be in a better position to make the deal than a landlord that can’t.

Are tenant requests for rights to both potentially expand and contract during a lease term becoming more common?

They’ve always asked for it. They’ve always wanted it. It’s just dependent on if the landlord can do it. The landlord still has to be very smart about offering those rights. You can’t encumber yourself to sit on vacant space.

How much more time do tenants need to test their hybrid work schedule arrangements before finalizing their future real estate footprints?

Tenants are not making quick decisions. They’re being thoughtful about what they need going forward. I think there is going to be a ton of pent up demand that will come to a head at the end of 2022, into 2023. So we’ll see a lot more of this movement once tenants are able to get their arms around what’s working for their company and what’s not in terms of getting people back to the office.

What tactics are important at the negotiating table as a landlord rep in today’s market favoring tenants?

It’s important to see ourselves as consultants. So getting the product right with our owners. And then we’re marketers secondly, so we’re telling the story and broadcasting it in a unique way that’s getting the market’s attention. And then third, we’re leasing brokers. I think the successful firms and brokers are going to be the ones digging in, understanding their product, what it needs, implementing it, creating the right story, telling the story creatively. And then leasing the space will become easy or more natural because the product is there and ready and it’s going to be attractive in the market, whether it’s a tenant’s market or a landlord’s market.

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