Small Suburban Companies Are Ready To Move And Signing Historic Deals

Dan Dahlke said he knew it was important to watch the bottom line when he recently became CEO of a suburban nonprofit. The group had to downsize just before he came aboard and with its office lease up for expiration this summer, upgrading office space wasn’t uppermost in his mind.

“I was 95% certain we would stay where we were,” he said of DayOne Pact’s office at 750 Warrenville Road in west suburban Lisle, where it annually serves thousands of people with disabilities.

But after hiring a broker to scout the nearby options, Dahlke got a surprise.

“There were really aggressive offers by landlords,” he said.

Owners beset by the region’s high vacancy rate, a problem worsened by Covid, were willing to give months of free rent. The group looked at half a dozen properties, with offers ranging from five to six months on the low end all the way up to a free year. Generous offers also came in to pay for moving expenses and new furniture.

“For a not-for-profit organization, where cash is always something you have to be careful with, all this really helped us decide to make a move,” he said.

DayOne Pact isn’t alone, according to NAI Hiffman Executive Vice President Aubrey Van Reken-Englund. The suburban tenant broker said in 13 years of working, she hasn’t seen landlords more willing to offer concessions such as free rent and paying for tenant improvements. Most are also far more flexible, agreeing to let tenants spend allowances however they want as well as including termination options in new leases.

That’s opened a window of opportunity, especially for small firms, which occupy 10K SF or less — the ones most likely to be preparing their returns to the office.

“I’ve never negotiated better deals than I have in the last six months,” Van Reken-Englund said, including “a few deals that provided zero investment return to the landlord" where the building owner just wanted to fill vacant space.

“In general, I’m seeing concessions that are double or even triple what had been the market standard,” she added. “It’s proving that you don’t have to be United Airlines to get a great deal; you can be a nonprofit or a family-owned investment firm.”

Van Reken-Englund represented DayOne Pact in the lease negotiations for its new 7K SF space in the Corporetum Office Campus at nearby 550 Warrenville Road. It will occupy the new office later this month after moving out of 750 Warrenville Road.

Landlords are far less likely to offer reduced rent levels, Van Reken-Englund said.

A lot of institutional owners have lenders that won’t allow them to go below a certain rate, and unlike giving tenants a few free months, lowering the rent permanently will also negatively impact a building’s value by cutting into the returns of potential buyers.

“And once you start cutting your rates, other tenants will get wind of it,” she said.

Average rent in the suburbs has actually increased during the Covid crisis. By Q2 2021, average gross rent stood at $22.11, according to a recent report from Colliers International, up from $21.80 in Q2 2020.

Other suburban deals Van Reken-Englund handled include Sebold Capital, a boutique investment firm relocating from Naperville to Westwood of Lisle at 2441-43 Warrenville Road in Lisle; AXION RMS, an employee benefits provider relocating from Downers Grove, also to Westwood of Lisle; Hummingbird Pediatric Therapy, which signed a new lease of 11K SF at 9018 Heritage Parkway in Woodridge; and Upstream Investment Partners, which renewed its 5K SF lease at Westwood of Lisle.

Landlords’ willingness to ink deals lucrative for tenants is about simple supply and demand, according to Colliers International Vice President Brent Jacob, who represented the owners of 550 Warrenville Road in negotiations with DayOne Pact.

The suburban vacancy rate jumped from 20.8% in Q2 2018 to 25.4% in Q2 2021, according to Colliers. And the amount of sublease space on the market went from 2.6M SF just before the coronavirus pandemic hit to more than 4.1M SF.

“It’s reminiscent of 2008,” Jacob said. “It’s a great time to be a tenant looking for space.”

The majority of tenants checking out available buildings are privately held small firms, ones seeking 10K SF or less, he added. They’ve been able to make decisions on how to use space in the post-Covid era and are ready to move while the big suburban players need more time to make adjustments. But even though the suburbs have been a tenants’ market with an elevated vacancy rate for a very long time, these small firms have more choices than ever before.

“When this market was a bit more favorable to landlords, there might be five available options, now there’s 10,” he said.

That means tenants like DayOne Pact can trade up into Class-A spaces with better amenities, including 550 Warrenville Road, where the owner recently renovated the fitness facility and lobby and revamped the food service.

“You have to be competitive on an economic basis, but the buildings that tend to be absorbing the deals right now are also ones with amenities that look fresh and updated,” Jacob said.

“We couldn’t have occupied this space two years ago. We couldn’t have afforded it,” Dahlke said.

To go along with better amenities, the new lease included nearly one year of free rent. With the moving and furniture allowances, that gives DayOne Pact the breathing room it needs, he added. The savings can be plowed back into better services for clients and raises and more benefits for staff members, giving a needed boost to its hiring efforts.

“We are in a very competitive job market right now, and one of our biggest expenses is our lease, so this is going to help us bring in the best talent," Dahlke said.