Still heading into the office: Pandemic expected to boost suburban office
As I write this article, Facebook just announced a new 730,000-square-foot office lease in New York, and Amazon will add 3,500 office employees in six major cities, including 2,000 in New York City.
And just 30 days ago, Microsoft leased a total of over 1.1 million sf of office in Atlanta, Redmond, Wash., and Virginia.
COVID-19 has not killed the need for office space. In fact in the suburbs it may be accelerating an office revival begun several years ago. At NAI Hiffman we're fielding calls from business leaders across Chicagoland and beyond who are exploring their options, including moving to the suburbs from downtown or keeping their Loop office as a hub and establishing smaller, "spoke" offices across the city and suburbs. With a lot of varied and customizable product on the market, now is the right time to take a look, whether you are an investor or prospective tenant.
Why we still need the office:
At the early onset of the pandemic in the spring, many appreciated the opportunity to work from home safely, embracing Zoom and other remote technology. But extended screen time is bringing fatigue, and most are looking forward to in-person interactions not only with teammates but also with the customer.
Some positions or divisions may still work mostly from home, like consultants who often work remotely anyway. For the rest of us, the office beckons. And while companies will likely continue to offer remote work options, I believe the office will reign again as the primary workplace. Why?
Recruiting and training. With employees being a company's No. 1 asset and millions of people entering the workforce every year, they need a place to train, observe seasoned colleagues and be mentored -- all tough to replicate virtually.
Collaboration, creativity and innovation. There's nothing like being together to generate light bulb moments and engage with teammates and clients in the spirit of outstanding service.
Security. It's harder to keep data secure when everyone is working in different places.
Culture. The camaraderie that is developed in the office fosters culture and values and is a challenge to duplicate online.
Ergonomics. Most organizations have made significant investments in workstations as office environments have shifted to address healthy teams. The makeshift home offices are not helping this approach.
Activity picking up:
Suburban office vacancy had improved in recent years as employment improved and more Millennials move to the suburbs. That trend should accelerate as more people look to the suburbs for a lifestyle that offers greener, less dense, more open space. Recent reports reflect mortgage applications are up in the suburbs as much as 40% in Chicago and Washington, D.C., as well as Houston, Los Angeles and Denver.
Per our research, suburban Chicago office vacancy checked in at 19.24% midyear, a 54 basis point year-over-year increase, with vacancies ranging from a low of 11.03% around O'Hare to a high of 26.55% for the Northwest suburbs. While new lease activity is expected to slow in light of the pandemic, second-quarter absorption actually remained positive at 125,206 square feet, and the sublease vacancy rate was relatively unaffected at 0.68%, down from 0.73% as compared to the second quarter of 2019.
The O'Hare submarket saw the greatest number of move-ins, with 175,444 square feet in the second quarter. As for new leases executed in Q2, the East-West Corridor had several notable transactions, including American Board of Radiology (71,183 square feet) at 814 Commerce Drive in Oak Brook, while both LTF (40,091 square feet) and XPO Logistics (50,663 square feet) signed for new space at The Shuman in Naperville.
In Chicago's suburbs, older office buildings renovated to Class A are king. With limited new inventory, updating existing buildings and adding amenities creates new suburban options that are attractive to tenants at a fraction of the cost of new construction or a downtown office. Examples include 215 Diehl Road in Naperville, 160,000 square feet built in 1988 and undergoing amenity renovations, and Golf Tower in Rolling Meadows, a 280,000-square-foot "white box" that a tenant can customize like a build-to-suit, but faster and less expensively.
Single-story offices like the Concourse near O'Hare are also appealing, with lots of parking, private entrances, easy access to outdoor space and no elevators.
Whatever corporate environment a company is looking for, the suburbs likely have it -- and as more Millennials make their home in the suburbs, companies will want to be close to a strong talent pool. As a tenant looking to explore your options, there's likely no better time than now to capitalize on some of the alternatives.
• Jim Adler is an executive vice president in NAI Hiffman's Office Services Group.