“We’re seeing the most significant demand in the market from the tech sector right now,” said Nikki Kern, senior vice president at JLL Agency Leasing in Chicago. “We definitely are seeing a big push for Class B space from tech users.”
So-called Class B is an office designation that refers to older buildings with fewer amenities and less updated systems. Rent for space in these buildings can be up to 40 percent less than newer “Class A” buildings, which offer more modern amenities and services along with the latest and often most environmentally desirable systems.
Class A rents increased more than 9 percent since the end of 2011, according to JLL, which pushed more companies to Class B, which is now seeing a big drop in vacancies as well as rising rents. Some “Class B” buildings are now upgrading common spaces, like lobbies, in the hopes of attracting tech customers.
“We can spend dollars on the things that matter, so what matters to the people working for us? They want the best computers they can get. They want high-speed Internet access. They want space, they want a lot of space,” said Irv Shapiro, DialogTech’s CEO.
Shapiro is a baby boomer, but his company is filled with millennial employees, and he is more interested in making them happy—retaining them—than impressing clients with fancy finishings in the space.
“Historically you rent glitzy spaces because you want to impress your customers. In our business, in a high-tech business like ours, our customers never visit us,” chuckled Shapiro.
Instead Shapiro invested in the technology—huge bundles of orange wires in basket-like hangings that are clearly visible and accessible across every ceiling. Garage doors turn large conference spaces into smaller ones at the touch of an opener.
He also put in an enormous game space with ping pong and pinball, right next to the large kitchen where everything from the Cheerios to the Red Bull is free to employees. Space, thanks to lower rent, also allowed him to lease more than he currently needs, so he can expand his company easily.
“We still create a message to the people that work here that what’s important is what’s on your desk, what’s in between your ears, the environment we create, not that we’re putting mahogany on the walls,” said Shapiro.
The same is happening at a slightly newer, but still “Class B” space just a few blocks west at 222 South Riverside Plaza. This classic 1970s-style office building is now a mix of traditional law firm spaces and new tech spaces. At Medix, which places workers in health care and information technology, there are also wide open spaces and unfinished ceilings. And millennials, lots of millennials.
“The average age in our company is 26, so we have that same zest for that young talent, so when people walk in to interview at Medex they have to feel and understand that we are moving in the direction to become a talent technology company as well, so we have to look the part,” said Andrew Limouris, president and CEO of Medix.
The demand is starting to drive Class B rents higher, and Limouris is already worried that he won’t be able to afford the next lease. He moved his company from the Chicago suburbs where rents were about $12-$15 per square foot. Now he pays $35 per square foot. That may be less than Class A, but that is changing, thanks to tech.
“The entire country is going to see a difference where the lines are going to be blurred between the Class B and the Class A product, and rental rates are going to not necessarily be one thing in ‘Class B’ and another in ‘Class A,'” said JLL’s Kern.
In Chicago, Vornado, which owns the iconic behemoth, the Merchandise Mart, is seeing big demand from tech. Motorola was the first to move in in 2012. Then Yelp followed just a few months ago, transforming what had been dark spaces with closed-in offices blocking the windows, to wide-open, bright, colorful spaces with every possible amenity for its more than 300 mostly millennial employees. It boasts both an Apple-style “Genius” bar for tech help as well as a beer bar.
The demand in Chicago has some dubbing it “Silicon Prairie,” but tech is changing the office landscape across the nation. In northern Virginia’s Crystal City, Vornado is backing another tech incubator, leasing office space in the hopes that the area will draw even more tenants. In Seattle, Porch.com, a home remodeling website that is busting at the seams in its current space, is in the process of moving to a much larger, older building that, again, offers great wide spaces at a cheaper rent.
The office sector as a whole was hit hard during the recession and has been slow to revive, as mainstream companies look for smaller spaces to house fewer, telecommuting workers. Tech, however, is the outlier, but one that could drive an old sector of the office market into a brave new world.