Chicago’s office market is changing as tenants and brokers take a more cautious approach to deals. With ample availability in certain sectors, the focus has turned to scrutinizing landlords’ financial capabilities and negotiating lease protections. Panelists at Bisnow’s Chicago Leasing Conference on Sept. 29 emphasized the need to ensure owners are financially capable of funding tenant improvements, reflecting a more rigorous deal-closing process than in the past.

A Closer Look at Landlord Finances

At the recent Chicago Leasing Conference, industry experts highlighted the increased emphasis on understanding landlords’ financial health. Robert Sevim, Savills Chicago Region President, stressed the importance of forecasting and evaluating the financial makeup of counterparties. This involves examining buildings’ capital stacks, lease rollover dates, and debt maturity to ensure landlords can fulfill their obligations over multiple years. Sevim noted that this scrutiny is more acute now than ever, as tenants seek certainty in an uncertain market.

Sevim pointed out that the gap between what a landlord can finance and what tenants must pay can be significant. He spends considerable time assessing landlords’ ability to respond quickly and with certainty, often indicating a secure lender position or cash ownership. This diligence ensures tenants are not left vulnerable to financial shortfalls from landlords.

High-End Properties Thrive

Despite broader market challenges, the top end of Chicago’s office market is performing exceptionally well. Cushman & Wakefield data reveals that trophy properties have recorded 610,000 square feet of positive net absorption year-to-date, with overall trophy office vacancy in the central business district dropping 420 basis points year-over-year. Class-A office properties accounted for 62% of CBD leasing activity through the third quarter, totaling 2.9 million square feet. This segment’s success shows the demand for premium spaces, even as other sectors struggle.

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This success is partly due to well-funded landlords who can execute leases efficiently. Jeff Skender, Cushman & Wakefield Managing Director, noted an unprecedented “arbitrage opportunity” where quality buildings don’t fully recognize their market position, allowing tenants to secure space at lower rental rates. For the first time in his 20-year career, Skender sees this as a strategic advantage for tenants willing to act quickly.

Changing Tenant Behavior

Tenant behavior has shifted dramatically in recent years. Dan Arends, Colliers Principal, observed that tenants now have a clear understanding of their space needs, a stark contrast to the post-pandemic period when short-term deals dominated. However, capital market challenges persist, making it difficult to secure financing and refinance existing debt. This duality—clear tenant needs versus tight capital markets—creates a complex leasing environment.

Tenants are increasingly looking at top office spaces two to three years before they become available, aiming to secure prime locations in advance. Arends noted that finding two or three contiguous floors in top buildings is challenging, necessitating early planning. Landlords, in turn, have become more open to contract terms that protect tenants, such as set-off clauses, escrow provisions, and SNDAs, which safeguard tenants in the event of building foreclosure. These protections are now a priority for tenants handling a volatile market.