Chicago Software News - Business Section - February 2000 E-Real Estate In Chicago: Are all the Corner Windows Taken? --- Deborah Bosi
Suddenly Chicago has more partners on its dance card than it could count in years. Has it changed its perfume, new ‘do? Well, there
have been plenty of cosmetic changes to be sure lately, but a lot of equally powerful behind-the-scenes facelifts too. This
synergistic approach has made an impact that will hopefully bring lasting change to the city’s bottom
line. Here’s what we’ve
been noticing around town.....
On the government level, Mayor Daley’s Internet initiatives are building in their intensity. The landmark Lytton Building, soon-to-be renamed CITe; the Lakeside Press Center (a.k.a. R. R. Donnelly Lakeside Press Building); and the Habitat Goose Island campus at 1132 W. Blackhawk St., are all being prepped for internet tenants. City sponsored forums between real estate developers and entrepreneurs has brought into light the very specific needs these new start-ups have over their brick and mortar predecessors. As Bob Gaudreau, Coach of the Regus Business Centers describes it; there are more than half dozen IT specific infrastructure needs a dot com must have.
Bandwidth tops the charts as the most pressing request, preferably with built-in firewalls. Though start-ups are clamoring for downtown locations, Gaudreau believes without access to broad bandwidth these companies literally cannot operate at all. Built-in LAN capability ranks about second. Most areas in the United States have a three month wait list for installation at a cost of $4 per/ft. Regus offers four category 5 cables to every workstation that leads to a patch in panel. Most dot coms cannot operate if their workstations can’t communicate, so LAN ready facilities are a prime draw. Regus Centers operates the Triangle Plaza facility near O’Hare. They are hoping to make their offices the workplace destination of the IT industry in the Chicagoland area, so that if an IT professional switches organizations, they will ask for a Regus office as part of their package.
A 30-Year Lease?
One of the most serious impediments to lease agreements for dot coms is the length of the lease. In the early ‘902, a depressed commercial real estate market went begging for tenants. However, as the economy turned around, and more and more commercial lofts were converted into residential space, the market witnessed a serious squeeze; rents have increased 63% since 1998. Landlords began to forgo some of the infrastructure niceties many tenants had come to expect in office space. Carpeting, doors, ceiling tiles, kitchens were no longer standard.
To make matters worse, dot coms usually want some unusual amenities - supplemental air (to cool all of that high-tech ‘stuff’ as John Madden might say), 6 watts per foot of electricity and four electrical outlets per work platform to name a few. As Steven R. Goldstein, President of Metro Concepts, describes it, “dot coms want sexy space, near restaurants, public transportation and health clubs. They want their space to have some kind of identity for recruitment purposes.”
It may be the same kind of allure that Gaudreau is building into Regus’ news office spaces in the southwest suburbs. Their cybercafes were first launched in their West Loop location with two small open-air areas per floor. Within the next 30 days, they’ll open a 3,000-sq. ft. cafÈ/per floor, equipped with cappuccino machines, televisions, computer with T1 internet connections and comfortable lounging furniture. Not exactly the standard bill of fare most Loop landlords offer.
Yet downtown is still where lots of the action is focused for young firms. And thanks to the Mayor, says Goldstein, downtown is well wired, though River North and River West are on there way too. “It’s more of the residential and fringe parts of the business areas, like Wicker Park, where wiring is still needed and seen as more costly,” says Goldstein, who believes landlords can get a higher rate of return for their property by selling to a residential developer ($150-$300 per/ft on the average) than it is for them to lease to a dot com.
When Can We Move In?
Maybe it’s just another sign of our instant society, but when a young struggling dot com finally gets some vc cash, they want to move into their new suite of offices by the week’s end. Landlords, on the other hand, want to see lots of financial paperwork. When the two perspectives meet, things come to a standstill.
Goldstein who has been working with dot coms and small space clients since 1900, believes many landlords “just don’t get it.” “They want personal guarantees, up front rent and letters of credit. “ Dot coms can’t tie up the little cash they have into sheet rock, ceiling tiles, and large security deposits. But as Gaudreau explains it, “Landlords know that six out of ten dot coms go under and landlords need that high security deposit to make improvements.” In addition, that long lease they’re banking on the tenant signing is exactly that - the collateral they need to get financing from the bank.
The market is so strong most landlords can pick and choose their tenants. And to ensure they get the cream of the crop, they sometimes use the services of companies like RealPage, Inc., a software provider that specializes in the management properties industry. Their services include screening, market intelligence, and compliance reporting. But a savvy broker can provide some valuable advice to both client and landlord. Jobsonline.com was looking for 2,500 sq.ft of office space.
With those perimeters, Goldstein felt their options were limited. However, when they finally signed a lease, it was for 9,500 sq.ft in River North! Why? The landlord was willing to accept a set up rent structure in the lease and use abatements so the firm could be secure in knowing that while they now do not need the entire 9,500 sq.ft, it would not be rented out from under them just as they grew into it. Both parties found the arrangement very cost effective.
How open are landlords to these non-traditional arrangements? Goldstein says it depends on the client. It helps to have a story (‘It’s like a beauty contest; everyone wants to dance with the prettiest girl in the room.”). But Goldstein warns dot coms that finding and acquiring space does not happen overnight. If a dot com promised a client a certain job within a few weeks, he might not be able to come through if his rental negotiations suddenly turn sour. Goldstein says this happened to one of his clients, who was 99% through with the negotiations when the landlord called and said he just got another offer on the same space - but this time from a tenant with a AAA credit rating. The landlord wanted to halt negotiations while he rethought his options.
While downtown Chicago appeals to dot coms with lots of young workers, the more established IT firms are heading towards Chicago’s East-West corridor, attracting slightly older workers who have established homes and families in the suburbs. Those professionals want an easy commute too and are attracted to the campus like settings that can be found in areas like Lisle, Naperville, and even Schaumburg. However, whether they are located in Chicago or its suburbs, many of these firms aren’t concerned about access to public transportation because the amount of administrative and other lower paid employees who depend on public transportation is low.
While Gaudreau believes the Mayor’s initiatives have yet to have a real impact on the behavior of most landlords, he believes the future will bring public and private forces together for the reshaping of the commercial landscapes. He envisions cities offering land and tax credits while private industries forming partnerships with landlords and tenants. “People in this industry like to work close together,” says Gaudreau. “That’s how Silicon Valley started, and we are seeing this phenomenon happen in cities across the country: Miami, Dallas. It will happen here too.”
Bricks and Mortar Click
While the business of the brick and mortars no longer seem as glamorous as the christening of each new dot com, there are some exciting new developments percolating as the two business methods converge. General Growth Properties, which manages or owns 131 shopping malls in 39 states is dedicated to seamlessly integrating the on-line experience with its in-mall sales, says CEO John Bucksbaum.
Two examples include its holiday season offer: a photo taken with Santa preserved on diskette, that will enable the customer to order additional prints and create holiday cards at home. This diskette also provides a link for the customer to test GGP’s on-line/in-mall feature: their new Malibu.com website. Here customers can shop at the very same stores located at their local malls. They can order merchandise and have it delivered to their home or go to the mall to pick it up. Local GGP malls include Golf Mills in Niles and Northbrook Court in Northbrook, IL.
New Life in Industry Fossils?
Reports of their early demise may have been grossly exaggerated. All those industries that were thought to be fatally hemorrhaging in the Internet age have seen an infusion of interest. Whether through B2B or B2C sales, industries such as trucking, auto parts distribution, restaurant supplies, and toolmakers have been brought back from the brink. Many are so convinced of this new wave of success that organizations such as COMDEX, who sponsors the Midwest’s largest IT show, has recently decided to make Chicago its headquarters.
At a recent luncheon of local IT professionals and venture capitalists, COMDEX announced its interests in bringing together more local upstarts with traditional businesses to create a kind of hybrid brick and click network. It also announced its creation of the first e.millenium award to honor e-business applications at the upcoming COMDEX/SPRING 2000 at McCormick Place in April. Chicago - the city that keeps reinventing itself.