Suburban Offices Refilling Office Space Left by Companies Moving to City

By: Ryan Ori, Crain’s Chicago Business A run of big-name companies moving offices from the suburbs to downtown Chicago is a lift for the city, but many of the jilted villages and landlords are refilling the abandoned space, signaling that suburbia still is a valued address for business. The one-way flow into the city has been accelerating. In just the past month, Kraft Heinz announced it will move its Kraft Foods Group headquarters to the East Loop from Northfield, while ConAgra Foods and Motorola Solutions are in talks to lease chunks of downtown office space big enough for hundreds of employees. Mead Johnson Nutrition has confirmed it will relocate from Glenview to a West Loop tower now under construction. And McDonald’s has begun filling a satellite office in River North, 20 miles from its Oak Brook campus. Despite those high-profile moves, preceded by United Airlines, Motorola Mobility, Hillshire Brands and Gogo transplanting their head offices from the suburbs, property developers say vacated suburban offices are attracting new tenants, mostly from nearby addresses. Moreover, even amid corporate urbanization, suburban vacancy fell to an eight-year low of 20.3 percent in the second quarter, from 23.7 percent a year earlier, according to Chicago-based Jones Lang LaSalle. In suburban Cook County the rate is 12.2 percent, below downtown’s 13.0 percent. “The suburbs seem a lot like Y2K to me,” says Chris Epstein, president and managing partner of Beco Midwest, which last year bought a more than 1.1 million-square-foot campus that Motorola Mobility left behind in Libertyville last year. “There’s a doomsday element to this, and we don’t see it materializing.” Epstein’s venture, a division of Rockville, Md.-based real estate developer Beco Management, got the property for a steal, paying just $9.5 million. But it plans to pour almost $100 million to convert the property into a modern, multitenant facility called Innovation Park Lake County. Construction work began this month. “We do not buy the this-or-that logic, that you’re going to have all urban or all suburban,” Epstein says. “You’re going to have both.” Suburban office owners also point out that the total volume of downtown moves is a drop in the bucket for an office market with almost 128 million square feet downtown and nearly 107 million in the suburbs, according to Los Angeles-based CBRE. The suburbs also boast 22 companies in the Fortune 500 (including Kraft Foods), versus nine in Chicago. “Since the mid-’80s, I’ve seen the migration trend go both ways,” says Mark Hamilton, a partner at Itasca-based developer Hamilton Partners. “I think the media has an exaggerated narrative that every firm is moving to the city.” His firm has lost two headquarter tenants to the West Loop: Sara Lee spinoff Hillshire from a Downers Grove building in 2012 and in-flight wireless provider Gogo, which is wrapping up its move from two buildings in Itasca. All but a below-ground block of Sara Lee’s space has been filled by suburban tenants that were looking to upgrade. Hamilton Partners is likely to weather Gogo’s exit, too, says tenant broker David Saad, a CBRE executive vice president based in Chicago who represents Gogo. One reason: Easily accessible, modern buildings with plentiful parking—a key element as companies pack in more employees—keep thriving, Saad says. Another top-quality building developed by Hamilton Partners, but no longer owned by the firm, went from vacant to fully occupied in one swoop when Abbott Laboratories spinoff AbbVie chose the Mettawa structure as its headquarters last year. It is a sublease from McLean, Va.-based Capital One Financial, which made the 558,859 square feet available after moving employees downtown and elsewhere in the suburbs.
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A run of big-name companies moving offices from the suburbs to downtown Chicago is a lift for the city, but many of the jilted villages and landlords are refilling the abandoned space, signaling that suburbia still is a valued address for business. The one-way flow into the city has been accelerating. In just the past month, Kraft Heinzannounced it will move its Kraft Foods Group headquarters to the East Loop from Northfield, while ConAgra Foods and Motorola Solutions are in talks to lease chunks of downtown office space big enough for hundreds of employees. Mead Johnson Nutrition has confirmed it will relocate from Glenview to a West Loop tower now under construction. And McDonald’s has begun filling a satellite office in River North, 20 miles from its Oak Brook campus. Despite those high-profile moves, preceded by United Airlines, Motorola Mobility, Hillshire Brands and Gogo transplanting their head offices from the suburbs, property developers say vacated suburban offices are attracting new tenants, mostly from nearby addresses. Moreover, even amid corporate urbanization, suburban vacancy fell to an eight-year low of 20.3 percent in the second quarter, from 23.7 percent a year earlier, according to Chicago-based Jones Lang LaSalle. In suburban Cook County the rate is 12.2 percent, below downtown’s 13.0 percent.
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“The suburbs seem a lot like Y2K to me,” says Chris Epstein, president and managing partner of Beco Midwest, which last year bought a more than 1.1 million-square-foot campus that Motorola Mobility left behind in Libertyville last year. “There’s a doomsday element to this, and we don’t see it materializing.” Epstein’s venture, a division of Rockville, Md.-based real estate developer Beco Management, got the property for a steal, paying just $9.5 million. But it plans to pour almost $100 million to convert the property into a modern, multitenant facility called Innovation Park Lake County. Construction work began this month. “We do not buy the this-or-that logic, that you’re going to have all urban or all suburban,” Epstein says. “You’re going to have both.” Suburban office owners also point out that the total volume of downtown moves is a drop in the bucket for an office market with almost 128 million square feet downtown and nearly 107 million in the suburbs, according to Los Angeles-based CBRE. The suburbs also boast 22 companies in the Fortune 500 (including Kraft Foods), versus nine in Chicago. “Since the mid-’80s, I’ve seen the migration trend go both ways,” says Mark Hamilton, a partner at Itasca-based developer Hamilton Partners. “I think the media has an exaggerated narrative that every firm is moving to the city.” His firm has lost two headquarter tenants to the West Loop: Sara Lee spinoff Hillshire from a Downers Grove building in 2012 and in-flight wireless provider Gogo, which is wrapping up its move from two buildings in Itasca. All but a below-ground block of Sara Lee’s space has been filled by suburban tenants that were looking to upgrade. Hamilton Partners is likely to weather Gogo’s exit, too, says tenant broker David Saad, a CBRE executive vice president based in Chicago who represents Gogo. One reason: Easily accessible, modern buildings with plentiful parking—a key element as companies pack in more employees—keep thriving, Saad says. Another top-quality building developed by Hamilton Partners, but no longer owned by the firm, went from vacant to fully occupied in one swoop when Abbott Laboratories spinoff AbbVie chose the Mettawa structure as its headquarters last year. It is a sublease from McLean, Va.-based Capital One Financial, which made the 558,859 square feet available after moving employees downtown and elsewhere in the suburbs. “Class A buildings have done extremely well,” Saad says. “The problem with suburban product right now is a lot of it is dated, a lot of it doesn’t have the parking that’s needed today, and they don’t have great amenities. What brings the market down is these big campuses.” ‘A DRAG’ AT&T’s expiring lease at a 1.6 million-square-foot campus in Hoffman Estates is “going to be a drag on the market for a long time,” Saad says. The owner, Oak Brook-based InvenTrust Properties, declines to comment. On the other hand, the Kraft campus was renovated recently, is in a desirable location in the affluent north suburbs and—unlike some single-tenant buildings, such as those built around large atriums—can be divided up to serve more than one company. In far north suburban Libertyville, Beco’s biggest challenge could be its almost exurban location. But Epstein says his company already is in talks with three tenants that would take up 370,000 square feet combined. In buying the former Motorola buildings at less than $8.50 per square foot, the firm can invest heavily in features such as fitness classes, food trucks, shared bicycles, charging stations for electric cars, a farmers market and outdoor cafes while still undercutting competitors’ rents, he says. “We’re not looking to build suburban sprawl,” Epstein says. “They’re self-contained campuses.” After all, urban is in—even in the suburbs. Originally posted on Crain’s Chicago Business.