Chicago landlords take on risks with leases to money losers

On its surface, real estate activity in downtown Chicago is humming along, a good sign for continued growth in jobs. Office vacancies are declining and rents are rising, but not so much as to hamstring business relocations. Studies show about 5 million square feet of office space in Chicago are under construction, inventory the market should take in stride.

Underneath it all, however, is there something rotten? Namely, a reliance on companies in technology and coworking — the term for shared office space — that are losing a ton of money? It reminds me of the great dot-com bust of 2000, which hurt many investors and some landlords here.

Two cases come to mind: Uber Technologies and WeWork. Uber was in town last week to promote, with Mayor Lori Lightfoot, its 10-year lease for 463,000 square feet in the Old Main Post Office, a significant win for a building that’s the biggest turnaround story in Chicago real estate. It’s great to think that Uber indeed will hire 2,000 people over the next three years to fill that space, largely dedicated to Uber Freight.

However, while Uber has sidled its way into our daily lives, it hasn’t proved itself as a business. The publicly traded company lost $1 billion in this year’s first quarter and more, about $1.3 billion, in the second quarter. The “headline” loss for the second quarter was $5.2 billion, but most of it was onetime stock compensation to employees, a sliver of which went to qualifying drivers.

Can this company even last as a long as a 10-year lease? CEO Dara Khosrowshahi said with more than $10 billion in cash and plans to dominate several segments of transportation, Uber is a solid credit risk. But it is spending massive amounts on research, staff and space, adding to immediate and long-term liabilities. Besides its Chicago deal, Uber is opening a large hub in Dallas.

WeWork is another matter. Brokers say with about a million square feet, equal to perhaps a 50-story tower, WeWork has become the largest tenant of downtown office space. It has 12 locations and is known to be adding several more. And it’s just one of several coworking companies active here. Others include Regus, Industrious and MakeOffices. No one has tried the name MakeWork. Yet.

Coworking, or flex space, typically involves these companies signing a long-term lease with the landlord, then subleasing on short terms to individuals or companies. There’s an emphasis on amenities. Exercise rooms, comfortable lounging areas and coffee bars are common. Some have stepped up the game, offering beer and bourbon.

“Landlords are clamoring to give WeWork space,” said Jack McKinney Sr., vice chairman at real estate firm Cushman & Wakefield. Yet WeWork’s losses grow with its revenues, as it has shown in its frequently revised plans for an initial public offering. Its public filings show that while its revenue for the first half of 2019 doubled compared with the prior-year period, its operating loss grew at the same rate, to $1.4 billion.

Rich Hein/Sun-Times

A prominent office space broker said he sees a serious reckoning ahead in flex space that will harm operators with the weakest finances. “When this ride ends, it will be pretty brutal,” he said, speaking on the condition he not be named. His argument is that landlords will figure out how to attack an inefficient market and offer their own short-term deals that cut out middlemen such as WeWork.

Others contend even if financing terms change, coworking will get bigger. A report by real estate firm CBRE Group said coworking accounts for only 1.8 percent of space nationally — and just 1.6 percent in Chicago, where the total is 3.8 million square feet. CBRE said the nationwide share could grow to 13 percent in 10 years.

Whatever the future, the leasing trends emphasize the ephemeral nature of work. Uber depends on drivers trying side hustles. Coworking is built on staff that’s here today, gone tomorrow.

It’s a short-term world. Employees with long-term priorities may have to settle for the beer and bourbon.

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Welcome to this weekly column about economic development and its challenges and trends in Chicago. We’re calling this feature Chicago Enterprise, which some will recognize as the name of a well-regarded magazine the Civic Committee of the Commercial Club of Chicago sponsored in the 1980s and 1990s. I edited it for part of its life, and I hope to bring its spirit to this effort. Reach out with your thoughts and comments to droeder@suntimes.com, and thanks for reading.