Commercial Real Estate

The Future of Work: Report on Changing Office Spaces Signals Shifts in the U.S. Economy

An exhaustive analysis of flexible workspaces and coworking underlines big shifts in how we work today

From Curbed Chicago | By: PATRICK SISSON

WeWork

Coworking and flexible workspaces are more than just the latest trend, or a new driver of the office space market. According to an exhaustive report released this week by The Instant Group, the strong growth in this sector, increasing nationally at a rate of 10 percent last year to encompass nearly 4,000 locations across the United States, reflects larger shifts in how we work. With more then 40 percent of the American workforce employed on a contingency basis, according to the report, and an increasing number of larger corporations, such as Verizon and Microsoft, buying into the concept of community- and collaboration-oriented workspaces, expect the market for these spaces to continue to expand rapidly.

Not surprisingly, the flexible office and coworking market still clusters around a handful of big metropolitan areas, with half the market in just 50 cities, mostly driven by the growth of TAMI (technology, advertising, media, and information technology) firms. Both San Francisco, which saw a 11.5% increase in desk space last year, and Washington, D.C., which saw a 17.2% jump, are prime examples.

What may be surprising is just how much of the growth in this industry comes from corporate clients, as opposed to the freelances, tech entrepreneurs, and small businesses often portrayed as the natural occupiers for these environments. Instant's report notes that 79% of the companies making deals for spaces of 40 desks or more have been large corporations, and the number of deals of this size have tripled over the last two years, driven by demand from the corporate sector. WeWork, for instance, is hugely popular with Microsoft, according to the report.

This increased demand has been a boon to landlords, who have now been given a new means to market, rent, and profit off their investments. New York City provides a great case study. Pent-up post-recession demand had led to a boom in office space construction—26 million square feet of new space is scheduled for completion—and with older stock unsuitable for the needs of modern tenants, many are turning to flexible or coworking-type layouts, featuring higher density, open spaces with collaborative break-out areas.

Models differ considerably within the industry, with big players, defined as companies with more than 50 locations such as Regus and WeWork, making up on 30% of a fragmented market. The majority of new spaces have been opened by small businesses or landlords looking to activate dormant office space, creating a competitive market with extensive consumer choice.

"The coworking model is highly nuanced and differs considerably across the US," said Michelle Bodick, Managing Director of Instant US. "The focus of the facilities we surveyed varies enormously; some are aimed at building local communities of artisans or minorities together [those aimed at particular trades or demographics], but also drop-in membership provision for people who want somewhere to work for an hour."

While WeWork continues to grab the headlines, it’s relatively small (66 locations, 2 million square foot of office space), compared to established owner Regus, which operates 3,000 centers globally in 900 cities and is pivoting towards providing more and more flexible space. The company opened its 1,000th U.S. location last year, has begun to install community managers in its office centers, and recently acquired Spaces, a Dutch coworking company, with plans to establish the brand in the United States (it’s already opened a handful of locations in California).

As Regus’s growth suggests, the U.S. is certainly not alone in embracing a new type of workspace. The global market for flexible workspace now totals $21 billion, due to a compound growth rate of 21% over the past five years.

Looking ahead, Instant forecasts increased U.S. growth in this agile sector, especially in secondary markets that are both near a primary city, such as Delray Beach or Encino, and have an industrial or manufacturing history (which means plenty of large factories and industrials spaces ripe for conversion).  More corporate clients are turning to this kind of space for innovation labs and in-house incubators, and the desire for a different experience with more networking opportunities means more demand for operators large and small. Looks like the old-fashioned dream of a corner office may need to be reconsidered.

Original Article: Curbed Chicago | By: PATRICK SISSON

Portillio Backed Firm Pays $139 Million for Single Tenant Buildings

A new Chicago venture whose investors include hot dog baron Dick Portillo paid $139 million for 48 single-tenant retail buildings, including seven in the Chicago area.

BlueRoad Ventures said it bought the portfolio last month from Brauvin Net Lease, a privately held real estate investment trust managed by Chicago-based Brauvin Real Estate.

It was the first acquisition for BlueRoad, an asset management and investment firm launched in the fall, said Managing Partner Tim Farrell.

“The diversity of the tenant mix and locations offers long-term value for our investors,” Farrell said. “We’re aggressively growing our portfolio and looking for opportunities throughout the country.”

BlueRoad is seeking retail and office properties with long-term leases in place and large vacancies to fill, Farrell said. The company, whose investors are wealthy individuals and family offices, also has private-equity and financial and accounting services arms, Farrell said.

Farrell is a longtime real estate investor and developer whose former firm was called Farrell Office Properties. His projects included converting the Garland Building at 111 N. Wabash Ave. to office condominiums. Although that project and similar ones struggled during the recession, Farrell said 97 percent of the Garland space has now been sold, and “our investors did extremely well on the deal.”

BlueRoad’s chairman is Portillo, who will invest in some deals, as he did in the acquisition from Brauvin, Farrell said.

Portillo has been active in real estate investments since selling the Portillo’s Hot Dogs chain to Boston-based Berkshire Partners for nearly $1 billion in 2014.

In late 2014, a Portillo venture paid $74.4 million for 18 Chicago-area buildings leased to his former chain, and also acquired two other Portillo’s buildings in Arizona.

In other real estate investments, Portillo paid more than $24 million last year for an Oswego shopping center and sold a Hinsdale home for more than $3.8 million after he and his daughter-in-law bought it for almost $2 million and rehabbed it.

Tenants in the Chicago-area properties acquired by BlueRoad are Burger King franchises at 2000 W. 47th St. in Chicago and 11740 S. State Route 59 in Plainfield; private elementary and middle school operator Chesterbrook Academy, in buildings at 1571 and 1587 Oswego Road in Naperville; Steak ’n Shake at 2121 Willow Road in Glenview; a Fresenius Medical Care dialysis facility at 2601 S. Harlem Ave. in Berwyn, and National Tire & Battery at 1360 Ring Road in Calumet City.

Other tenants in the more than 1 million-square-foot portfolio include CVS, Advance Auto Parts and Tractor Supply, according to BlueRoad. The buildings are in 18 states.

The average remaining lease term is more than 10 years, Farrell said.

“We have the capital and the flexibility to pursue a range of deals in the office and retail asset classes,” Farrell said. “We will absolutely look at one-off deals. That’s going to be our bread and butter.”

Brauvin, meanwhile, plans to acquire about $200 million in net-leased retail properties for its 17th fund, President James Brault said.


Commercial Real Estate: Post-Rate Hike

FORBES | ARTICLE BY ELY RAZIN
FEBRUARY 23, 2016

What are the potential positive and negative effects of the interest rate hike on the commercial real estate industry?

There has been much talk recently about what the Federal Reserve’s first interest rate hike since 2006 means for the US economy as a whole. Here we take a look at the impact of rate hikes (current and future) on commercial real estate, examining first the prospective disadvantages and then the potential benefits.

Figuring this out isn’t straightforward, as interest rate changes have multiple impacts on commercial real estate (CRE). Further, the very causes of the Fed's decision to raise interest rates may signal that other economic factors are at play, and these, too, may impact CRE.

Further complicating things, the timing of the rate hike coincides with the “maturity wall” of commercial-mortgage-backed securities that need to be refinanced within the next two years. The maturity wall means there will be many borrowers who need refinancing in any case because their loans are maturing, while the rate hike could prompt those borrowers to seek out refinancing sooner rather than later.

It is worth noting that since the recent rate hike is small and the rate remains low—the quarter-point increase raises the target range to 0.25 percent to 0.5 percent—the current hike may not have a massive effect on its own, but subsequent hikes are predicted for next year.

The Bad News: Why Rate Hikes Could Be Bad for CRE

Access to capital is one of the main drivers of any real estate deal, whether acquisition or new development. Higher interest rates mean that borrowers have to pay more in interest than they would if they had borrowed the same amount of money before.

In the short term, these higher rates may prompt concern about future rate hikes and could drive borrowers to seek refinancing now, before rates rise again. Others may wait, and the higher rates could cause greater friction. In the extreme, higher interest rates may constrain property deals, as they can become a barrier to entry for borrowers, who now have to pay more to access money for loans or mortgages.

Cost of capital is a second consideration, as higher rates mean that the “rental price of money” has gone up. This could lead to borrowers paying more interest to lenders (a good thing for financial institutions). However, it could also lead borrowers to get smaller loans in the first place if they calculate that they would not be able to keep up with interest payments on a larger loan, forcing them to either put up more equity or target lower-priced properties. Further, riskier loans (like construction loans) and riskier assets may be even harder to finance efficiently, given the added risk premiums.

Higher capital costs could also increase default risks. These may be bad for lenders, that is, unless they are non-traditional “vulture” players employing a loan-to-own strategy and secretly hoping for defaults in order to seize properties. In an extreme situation, if these defaults start to spread, they can ultimately be bad for the economy as a whole.

Property valuations may also be affected. To explain, the copious amounts of cheap debt capital sloshing around the market have buoyed property values. An extended period of increasingly expensive debt, by contrast, may cause valuations to erode.

Property players are not the only ones affected by these changes; the lending institutions themselves may be affected as well. Knowing that higher interest rates erode both borrower net income and property value, lenders could respond by tightening lending standards or loan collateralization. For instance, they could limit lending in riskier markets or reduce the loan-to-value ratio (LTV), effectively meaning that they would require a greater proportion of money upfront before issuing a loan. They might also require more collateral to back up their loans.

Current loan portfolios are potentially put at risk, not only new lending activity. While lenders can reduce their exposure on new loans by imposing stricter lending criteria, their exposure on existing loans could increase. As noted above, default risks can have an impact on all players.

If a property owner has a net operating income of $1 million and a capitalization rate of 3.75 percent, for instance, an interest rate hike of just 0.25 percent will trigger a cap rate hike (and a lower property value) that results in a 5 percent rise in the LTV, which is a key measure of risk. This could potentially push up a loan from a high but acceptable LTV of, say, 75 percent to a riskier LTV of 80 percent, which means that the borrower’s equity will be reduced to just 20 percent of an existing investment. In the pre-crisis bubble, many lenders were prepared to issue loans for particularly high LTVs.

The Good News: Why Rate Hikes Could Be Good for CRE

It’s not all bad news. The impact of the Fed’s change and any similar ones in the future could be to “de-risk” the CRE economy and head off another burst bubble. Once again, the more conservative atmosphere and tighter lending standards can make it harder to get a loan. This environment means that higher interest rates give lenders and borrowers alike an incentive to minimize risk, which can reduce the proliferation of the kind of bubble that preceded the recession.

Prudential standards rise too. When lenders and borrowers know that a higher interest rate makes it harder for borrowers to maintain cash flow and for property values to stay stable—both have reason to be more cautious and thoughtful before racing into a loan.

One man’s garbage may be another’s gold, but the financing for this golden garbage may drop off. As a result of higher interest, lenders will need to manage their risk better and become more selective as to which properties they’re willing to finance.

Even a slight dip in property value could make some loans less advisable, and deals involving borderline properties are likely to be most affected. At the same time, other players will benefit, particularly bridge or other specialty lenders who are willing to fund—but at what cost?

And once the traditional lenders become more selective, the borrowers may have to fall in line, since they generally need loans if they want to invest in commercial real estate.

Finally, there's one more factor to consider. Higher interest rates may actually signal a strengthening economy. Indeed, the fact that the Fed has raised interest rates means its economists consider the economy to be in good shape, and a healthy economy is a boon for healthy real estate. The reason? A growing economy, if it becomes inflationary, can lead to higher rental prices and higher sale prices.

“This action marks the end of an extraordinary seven-year period during which the federal funds rate was held near zero to support the recovery of the economy from the worst financial crisis and recession since the Great Depression,” Federal Reserve Chairwoman Janet Yellen said in her announcement of the rate hike. “With the economy performing well, and expected to continue to do so, the committee judged that a modest increase in the federal funds rate target is now appropriate, recognizing that even after this increase, monetary policy remains accommodative.”

So are rate hikes likely to be good for commercial real estate or bad for commercial real estate? As you can see, the answer isn’t black and white, and it’s worth remembering that at the moment, interest rates are still low. But ultimately, we can reasonably expect rate hikes to lead to a more conservative and less risky lending environment, for worse and for better.

To Compete, Lake County Needs To Be More Affordable

GlobeSt.com | Article by Brian Rogal

March 4, 2016

CHICAGO—Brad Migdal, a site selection expert with Transwestern, tells GlobeSt.com that the recent moves by Allstate and Beam Suntory should motivate Lake County to make it cheaper for millennial workers to live there.

The Merchandise Mart has now become one of the most significant tech hubs in the US.

CHICAGO—The plans announced this week by AllstateCorp. and Deerfield, IL-based Beam Suntory to make moves from the suburbs into the Merchandise Mart are not really surprises, given the parade of companies that have made similar migrations in the past several years. And Brad Migdal, executive managing director of the site selection/business incentives practice at Transwestern, tells GlobeSt.com that Lake County could lose even more workers in the near future if it doesn’t do something to make living there more affordable. 

“Lake County’s biggest problem is its property taxes; it’s like paying two mortgages,” he says, and if the younger tech workers that most companies want to recruit can’t afford Lake County, those companies will continue to move to where the workers do want to live. And these days that means the city. 

“These moves are great for Chicago, but bad for Illinois,” he adds, because the state is no longer attracting companies from out of state, as it did when Boeing moved from Seattle, but instead just shuffling existing ones around. “We have these beautiful corporate campuses in the suburbs, and they are going to turn into dinosaurs.” 

“We have had some great successes in the suburbs with the pharmaceutical sector,” but “every year a new bunch of millennials move to Chicago. They move to where they want to live, rather than to where the jobs are.” And the most important consideration for most companies these days when selecting a new site is how it will help with talent recruitment. “Every project I do now, whether it is office or industrial, the companies are chasing labor.”  

And although Allstate says only about 400 of its workers, primarily those involved in quantitative research and analytics, will make the move from its Northbrook headquarters to 45,000 square feet on the Mart’s eighth floor, Migdal wonders if that is just the beginning. After all, if the move helps Allstate recruit tech workers, company officials may decide to move advertising, marketing and other departments downtown. “What then happens to that property?”

“The suburban real estate market is at a crossroads,” he says. “We just need to make it more affordable for millennials. Chicago is winning that battle.”

Link to Original Article

GlobeSt.com [official website]

The Cool New Digs of SRAM - Trending the Open Office Concept

One Day at SRAM by Perkins + Will

SRAM, a bicycle components manufacturer recently took space at 1K Fulton in Chicago's West Loop Neighborhood, which has an interesting development story.  The building was an old cold storage facility that took about a year to thaw and redeveloped into a brand new office building, home to companies like Google and SRAM.

The growing trend of these creative spaces are showing that the blurred space between our work/life balance is being recognized and companies want their employees to be happier while working longer and of course, harder.  

These spaces come at a price as many lounge/creative/open areas add to the rentable SF and bottom line, but that's not what it's all about.  Companies like SRAM see this as an investment and great justification to increase collaboration, flexibility and inspiration.  This type of creative layout is not for every industry, but it is interesting to see more companies trending towards an open concept.  Factor in the cost of employee retention and there may be an argument to justify that expensive espresso machine.

Tour the new digs of Chicago's SRAM

Original Article: Curbed Chicago | By: AJ Latrace

 

 

9 of Chicago's hottest tech offices: Company Culture and New Office Trends

Source: Built in Chicago - Andreas Rekdal

Source: Built in Chicago - Andreas Rekdal

Source: Built in Chicago
From basketball courts to Nintendo rooms, here are 9 of Chicago's hottest tech offices
Author: Andreas Rekdal

With a shift in the office environment, we're seeing a lot of companies shifting from the traditional private offices to more open collaborative environments.  Cultural changes in the work place have been the predominant force behind these changes.  

Although this open environment is not for every company, the link below shows some really cool offices and how it can be done.

JBS Commercial Real Estate to Lease Corporetum III

Lisle, Illinois (January 22, 2016) Local Real Estate Investment Group, American Landmark Properties Acquires Lisle office building commonly known as, Corporetum III, located at 750 Warrenville Road, Lisle, Illinois; a unique 91,722-square-foot, 4-story Class A building that caters to small and mid-size companies in desirable DuPage County. The office building features state of the art gym facilities, upscale conferencing center and many new improvements to modernize the asset.  Office Space availabilities at the property range between 1,500 to 23,087 Square Feet. Corporetum III offers floor to ceiling windows, park views, unique private terraces and a full floor availability of approximately 23,087 SF.  

American Landmark Properties is a local investment group owning nearly 8,000,000 square feet throughout the Midwest and northeast.  American Landmark Properties will begin renovations including multiple spec suites, lobby and other common areas.  Furthermore, ownership has earmarked funds for tenant improvements and leasing commissions.  Ownership is well positioned to accommodate a quick occupancy and motivated to make deals.

JBS Commercial Real Estate was awarded the exclusive leasing assignment for Corporetum III, a 4-story Class A office building recently purchased by Skokie based, American Landmark Properties.

Brian Silverman and Jason Shibata from JBS Commercial Real Estate will serve as the listing agents for the Lisle office property.  For leasing information, please call 312.462.1020.