When tech giants Meta and Salesforce said last week they will sublease a combined 240,000 square feet of their Chicago offices, they not only added to an already record amount of available space on the market. They pointed to a growing trend across the country.
In putting high-end space up for grabs, the California-based companies are betting they can benefit from the so-called flight to quality among office renters who are interested in taking offices that can stand out and lure workers to come into the office in the era of remote work.
Real estate professionals say the spaces coming to the market, though different in many ways, are likely to be well received at a time when new and unusual offices hold added importance for renters.
“There continues to be a flight to quality,” said Newmark office tenant broker Bob Chodos, who is not involved in either of the new subleases. “Tenants are building facilities that are commute-worthy, that will entice people back to work in great spaces.
“I would expect that those subleases will do well.”
Meta, the parent of the Menlo Park, California, social media company Facebook, joined San Francisco-based software provider Salesforce in recent months announcing plans to lay off workers and slash space globally as they cut costs in an uncertain economy.
Last week, both companies confirmed to CoStar News that they plan to put blocks of their Chicago space on the sublease market.
Competing for Tenants
The space will add to already fierce competition for tenants, with many downsizing as they move, further adding to the supply of unused space.
“It will create a need for those competing Class A trophy assets to be sure they’re sharpening their pencils” on new deals, said Savills office broker Robert Sevim, who represents tenants.
Salesforce said it will make available as much as 125,000 of its 500,000 square feet in Salesforce Tower, the 60-story trophy building set to open this spring on the Wolf Point site along the Chicago River. In the Loop business district, Meta said it looks to sublease about 115,000 square feet of its 263,000 square feet in the 35-story tower at 151 N. Franklin St.
Similar opportunities already have flooded urban and suburban markets throughout the country, with the total volume of sublease space more than doubling in the three years since the onset of the pandemic, according to a CoStar analysis.
The amount of Chicago-area space available is at a historic high, with 101 million square feet up for the taking, which works out to about 19.7% of the total inventory, CoStar data shows.
In downtown Chicago alone, the sublease inventory now totals nearly 8 million square feet, according to Newmark.
Office Conversion Possibility
That has led Chicago officials to take unusual steps, including soliciting proposals to convert some office buildings in the financial center on and around LaSalle Street into affordable apartments. Mayor Lori Lightfoot on Tuesday unveiled three proposals that could receive public subsidies.
Older buildings on and around LaSalle have been hit particularly hard by the trend of companies upgrading their space in recent years. Major tenants such as Bank of America and BMO Financial have moved west to new towers along the river or a few blocks farther in the fast-growing Fulton Market district.
Even trophy buildings haven’t been immune, with the 60-story riverfront tower at 300 N. LaSalle losing Kirkland & Ellis to the soon-to-open Salesforce Tower and Boston Consulting Group to a new tower that Sterling Bay is building at 360 N. Green St. in Fulton Market.
Those moves have created opportunities for tenants to upgrade should they choose to sublease space at 300 N. LaSalle, whose owner plans a $30 million in improvements.
Yet for tenants seeking never-used floors along the river, which is typically some of the highest-rent space in the city, the Salesforce Tower opening presents a rarity, industry professionals say.
Salesforce’s broker, Brad Serot of CBRE, told CoStar News that unlike most sublease deals that come at a discount to the original rent, he expects to fill the space at the full market rate. But the space is raw, so sublease tenants can negotiate packages with tenant improvement allowances for their buildouts, he said.
‘Market Deal’
“We’re offering a market-rate deal with concession packages,” Serot said. “We’re treating this like a direct deal. The views and the quality of the building don’t exist anywhere [else] in the city. We can offer a market deal for somebody who wants to be in a Class A trophy asset.”
Rents at the top of the market are $46 to $55 per square foot on a gross basis, Serot said. Factoring in taxes and operating expenses, a deal at Salesforce Tower could run well over $70 per square foot.
Based on preliminary talks with potential tenants, Serot said he expects to have the five floors subleased within the next couple months to one to three companies.
Those in the industry say tenants such as law firms and private equity firms are among the companies likely to pursue the space.
Meta’s space differs in that it will come with below top-of-the-market rates, and it is move-in-ready at a time when buildout costs are soaring, brokers say.
“It’s also an opportunity at a location different from where tenants have been moving,” said JLL office tenant broker Meredith O’Connor. “The flight to quality hasn’t just been to nicer space, but most of the tenants have been moving west. This opportunity is unique because it’s not Fulton Market and it’s not right on the river.”
Quicker Move-In Option
The Franklin Street space could appeal to tenants looking to move in immediately, if the company is willing to occupy the type of open-layout design favored by Meta and other tech tenants, Sevim said.
“Salesforce Tower may have more success early because it’s more of a clean slate, whereas 151 N. Franklin may be more user dependent and layout dependent,” he said.
Meta leased the space in 2018 and initially planned to move in early 2020, but that plan was delayed by the pandemic. Instead, large numbers of workers began moving in last year.
The latest Chicago subleases are coming onto the market after months of worries about the effects of rising interest rates and more recent bank failures on the real estate industry. Those challenges have followed the already major impact of COVID-19, with remote-work trends persisting.
Some companies have begun pushing harder for workers to return to the office more days per week.
Recent layoffs and other contractions by the likes of Meta and Salesforce could give employers more of an upper hand than they’ve had in a tight labor market, according to Chodos.
“As this recessionary tone continues and layoffs continue, you’ll see companies bang the drum more on returning to the office,” he said.