Chicago Tenant Improvement Allowance: What to Expect
Sarah Noel Block, MS
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In Chicago, commercial rent may be going up, but so is tenant allowance.
Purpose: To learn about the current state of office rental space and tenant allowance in Chicago.
Highlights:
- Current office rent in Chicago
- What to expect from tenant improvement (TI) allowance in Chicago
- Entrepreneurship in Chicago
In 2016, Chicago commercial office space rent went up .6%. In 2016, it went up .3%. Fortunately, tenant-improvement (TI) allowance went up 6.6%, according to the Real Deal.
What does that mean?
That means that the cost of renting office space in Chicago was actually 2.6% lower in 2017.
Related: Tenant Improvement and Build-out Construction - 3 Questions Every Tenant Should Ask
Tenant allowance and Chicago
Nationally, Chicago is near the top of TI allowances (hint: you should build your business in Chicago). Crain's Chicago Business reported that rent in Chicago averages $50.49 a square foot. The average tenant improvement allowance is $6.23 a square foot in Chicago, according to a Jones Lang LaSalle analysis.
According to CBRE, Chicago Class A buildings handed out higher TI allowances than Manhattan, San Francisco, Houston, and Seattle.
There are two schools of thought on the high TI allowances.
1) There is more raw space available, so it costs more to get it ready for a business to use.
2) The market is softening and landlord's need to provide a good incentive to choose their building.
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How does this affect office tenants?
Tenants prefer a higher rent, if it means less in up-front costs which can cause difficulty for a start-up.
"Landlords have been willing and tenants have pushed back when it comes to who spends the money to build out office spaces," says Steve Hearn, an office space owner.
How does this affect property investors?
Landlords will gladly provide a larger upfront tenant improvement allowance if it means higher rental income and a longer lease.
While Hearn says, "It just hurts writing much bigger checks in some of these deals than you ever thought you would." Steve Sitz, CBRE Vice President counters, "There have been times where it's been proven out that [trading a higher TI allowance for longer leases] makes sense."
Related: 2018 Tenant Improvement Tax Depreciation: 3 Questions to Ask Your CPA
In Conclusion
Chicago is the place to be for entrepreneurs. Yazin Akkawi, Inc columnist, said, "Chicagoans are pragmatic and have a sensible idea of what can be achieved. But, most importantly, they are grounded in their motivations for disruption. And that's exactly what positions Chicago to be the next global hub for innovation."
That is why entrepreneurs are flocking to Chicago.