Ranking Chicago’s Priciest Office Tenant Buildouts

In Chicago, a combination of high vacancy rates and renovated Class A towers has landlords and tenants shelling out more money on their interiors than ever.

Owners and lenders claim the spending is justified to fill their spaces, while would-be tenants know they need environments nice enough that they can mandate employees work in the office most of the week.

City building permit data analyzed by The Real Deal shows just how much they’re paying.

Chicago’s 11 biggest spenders office dropped $600 million on interior improvements over the last three years, the analysis showed. The total costs of constructing, furnishing and outfitting office space with networking and audio-visual equipment have surged in the post-pandemic era, sometimes to more than $300 per square foot for elite spaces — far higher than pre-2020, commercial real estate experts said.

Yet behind flashy collaboration spaces and amenity upgrades lies a complicated new reality for lease negotiations. With so many office towers facing distress or hovering near loan maturities, tenant brokers are rewriting the playbook on how to structure deals.

Landlords shoulder some of the construction costs to get leases with key tenants, which can be important to buildings’ long-term financial health. For debt-free landlords, concessions given to tenants keep their properties in the running, whereas money spent on buildouts at financially troubled buildings is more about landlords trying to stay afloat.

For the latter, the enormous cash commitments mean increasingly complex conversations have to be had with lenders, who watch cash flow like hawks and worry that spending now could be disastrous later. Of course, the dollars that tenants receive in concessions typically get tacked onto the back end of a lease in the form of higher rents.

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Bringing Lenders to the Table

Take Invenergy’s expansion at 1 South Wacker Drive, a 601W Cos.-owned building where the tenant’s buildout ranked among the top in the city. The sustainable energy company spent approximately $35 million as it grew to 226,000 square feet within the property in the last couple years. But getting the deal across the finish line required delicate maneuvering with the building’s loan servicer, Blackstone, due to an approaching maturity of a $310 million mortgage debt.

“It was critical that Blackstone got comfortable with Invenergy staying,” Brad Serot, a veteran tenant rep broker with CBRE, said. He ironed out several of the city’s largest deals in recent years that included big tenant improvement projects, including the Invenergy expansion that allowed for a loan extension.

“In the event the owner can’t perform, a lender will step into their shoes and perform. When you’re talking about an anchor tenant-type transaction, it’s crucial for a deal because the dollars are so high,” he said.

Though tenants’ ability to haggle with landlords and lenders to get a good chunk of their construction paid for has never been stronger, contractors can be wary of working with a firm in financial trouble.

Steve Zuwala, founder of Chicago-based Interior Construction Group, a firm purchased this month by contractor Bulley & Andrews in a bid to beef up on office work, notes that in his first 34 years in business, his firm filed perhaps one or two mechanic’s liens. Over the past few years, it’s had to file at least half a dozen. “Now we have to be more careful about which landlords we work with,” Zuwala said, underscoring the financial distress rippling through the Loop.

When companies are looking to invest heavily in a space — requiring three- or four-day in-office work weeks by offering top-tier perks — they need absolute certainty promised buildout funds will materialize, even if the landlord goes into foreclosure.

“The key is how to protect my client, and make sure that an owner and/or a lender performs,” Serot said.

Before 2020, standard tenant improvement packages rarely exceeded $100 to $150 per square foot, and brokers primarily dealt directly with financially stable landlords. Today, packages can soar well past $200 per square foot, and the negotiating table is considerably more crowded.

“In 2020, that was the first time where I had to do a tri-party agreement with an owner, a receiver, a special servicer, and get it court-approved,” Serot explains. “Now, you do them all the time.”

Fancier fancy

While tenants are broadly taking less square footage, they are routinely spending to create flexible, collaborative environments that promise to excite workers to leave their homes.

“Now more than ever, with people returning to work and needing to get that culture built back, a place has to have sophistication. You have to build the components of success into it,” Al Fiesel, commercial business unit leader for design firm Lamar Johnson Collaborative, said.

Even for tenants bypassing ground-up custom builds in favor of landlord-designed, pre-built spec suites, the baseline for quality has shifted: The basic of today is the fancy of six years ago.

“The standards have been elevated by landlords who want to attract tenants who don’t want to deal with design and construction,” Christy Domin of Riverside Investment & Development, developer of BMO Tower at 320 South Canal Street, said. “The bar has risen.”

The select group of tenants still making deals isn’t spending quite enough to make up for the dropoff in leasing.

“Tenants, they’ve dressed up their spaces, but the greater quality of space hasn’t really replaced the quantity,” Zuwala said. “We’re getting closer to filling that gap.”

At the absolute top of the market, however, the frantic back-and-forth over tenant improvement allowances fades into the background. Developers of newly built, premium towers offer deals that come with high-end buildouts. If a tenant wants more than that, they just pay — it’s not really part of the negotiation.

“For the majority of these tenants, particularly in trophy buildings, these are their forever homes,” Domin said “Very rarely is it about minimizing out-of-pocket costs. They are building a home they plan to be in for many, many years, and so they’re not going to skimp.”

Offset Rights and Free Rent Fortunes

So, what happens when a distressed landlord promises a $200-per-square-foot TI package but comes up short on cash? Brokers are building safety nets into leases for this possibility.

If an owner is deficient, Serot ensures his clients have offset rights. If a tenant has to dip into their own pockets to finish a promised buildout, they don’t just get paid back — they can get penalized rates charged to the landlord in the form of rent relief.

The idea behind the penalty is that the tenant now has to put dollars into real estate that they could have invested in their business, Serot said. “So instead of it being dollar-for-dollar, maybe it’s $1.15 to the client in the form of free rent,” he said.

For distressed buildings run by receivers, cash is incredibly tight, meaning “free rent” has become the preferred currency rather than cash to fund interior buildouts. Lenders and receivers are more motivated to grant extended periods of free rent on the front end rather than writing eight-figure checks for construction.

Debt-Free Premium

Conversely, the market is creating an advantage for deep-pocketed, debt-free building owners who can afford to cut aggressive checks upfront, to keep top-tier tenants away from competitors with cheaper rents after buying buildings out of distress.

One prime example is the NBC buildout after the broadcaster chose to keep a lease but shrink its size at its namesake Columbus Drive tower, which is owned outright by a German family without the burden of debt. NBC’s project totaled roughly $23 million across 68,000 square feet, heavily focused on intensive studio redevelopments.

Similarly, Morgan Stanley, the debt-free institutional owner of 155 North Wacker, opted to bypass complicated concession math when Monroe Capital relocated into the skyscraper.

“For all the free rent we negotiated in the TI, they just wrote us a check upfront for over $300 a foot,” Serot, who co-brokered the deal, said. “When a building is owned outright, the owner is agnostic. They’re not worried about how much money they can or can’t spend. They have deep pockets, and they want to fill their buildings.”