Chicago Tech Book 2016 FINAL

CBRE RESEARCH

// TECH BOOK CHICAGO //

2016

//Table of Contents01. Executive Summary

02. Tech Footprint

Tech Submarket Snapshots: River North

Tech Submarket Snapshots: West Loop

Tech Submarket Snapshots: Central Loop

Development Pipeline: Fulton Market

Development Pipeline: Goose Island

03. Office Market

04. Tech Talent

05. Tech Industry Indicators

06. Industry Outlook

TECHBOOK CHICAGO 2016 EXECUTIVE SUMMARY// 4

TECH INDUSTRY DEFINITION

INDUSTRY CATEGORIES INCLUDE:

FINTECH

E-COMMERCE

COMPUTER SYSTEM, DESIGN AND RELATED SERVICES

TELECOMMUNICATIONS

ADVERTISING/PR/MEDIA/DIGITAL

COMPUTER/ELECTRONIC PRODUCTS, ELECTRICAL EQUIPMENT AND COMPONENT MANUFACTURERS

SOFTWARE

WEB SEARCH PORTALS

Executive Summary

01

4 // © 2016 CBRE, INC.

TECHBOOK CHICAGO 2016 EXECUTIVE SUMMARY// 5

TECH DEMAND FOR SPACE RISING

6.8M SFTotal space leased by tech tenants since 2011.

Most active year was 2015 at 23.8% of overall leasing activity in the CBD

GROWING SPACE REQUIREMENTS

50-100K SFTech space requirements have gotten much larger,

as tenants in the market between 50,000 and 100,000 sq. ft. more than doubled,

up to 37% from 15% in 2014

OFFICE MARKETFulton Market and Goose Island office submarkets developing around

major tech users that are transforming the landscape

FUNDAMENTAL DRIVER IN LOCAL ECONOMY

22.6%Growth in Tech sector

employment since 2010

LOCAL FUNDING ALLOWING COMPANIES TO STAY AND

GROW IN CHICAGO

$1.7 BInvested in Chicago

startups in 2015

VIABLE OPTION FOR INVESTORS AND CAPITAL FUNDS

17%Venture Capital exits have increased by 17% Y-O-Y

INDICATORS

TECH ECOSYSTEM CONTINUES TO GROW IN THE URBAN CORE

11.5M SFOccupied by 428 tech firms

in the Chicago CBD

LARGEST AMOUNT OF TECH OCCUPIED SPACE

4.0M SFOccupied by tech

in West Loop

GREATEST IMPACT OF TECH ON ANY SUBMARKET, ALBEIT A SMALL OFFICE INVENTORY

45.2%Concentration of tech in Fulton

Market/Far West Loop

TECH FOOTPRINT

TECH FOOTPRINT

6 // © 2016 CBRE, INC.

BY THE NUMBERS

11.5 MSF OCCUPIED BY 428 FIRMS

10.6% OF TOTAL OCCUPIED SPACE IN CHICAGO CBD

26.8% CONCENTRATION IN RIVER NORTH SUBMARKET

IMPLICATIONS Chicago’s tech ecosystem continues to grow as investors fund acquisitions and IPO’s of the city’s fastest-growing and most profitable companies. However, as tech tenants continue to expand within the CBD and beyond, many worry of the possibility of a looming tech bubble, driven by over-valuations for start-up firms.

Tech Footprint

02

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TECH FOOTPRINT

TECHBOOK CHICAGO 2016 TECH FOOTPRINT // 7

Chicago’s tech ecosystem continues to flourish, creating a host of opportunities for landlords and tenants. In total, more than 140 Chicagoland tech companies received funding in 2015, collectively raising more than $1.7 billion in equity and debt financing. Venture capital funding for digital startups increased 8.9% over 2014 levels and startup exits, through acquisition or IPO, jumped to a grand total of $8.2 billion, marking the city’s strongest year for tech companies. This momentum has contributed to strong demand for office space, with 1.7 million sq. ft. leased in 2015, representing 23.8% of total leasing activity.

Growing interest from international and local venture capital firms has sparked demand from tech tenants seeking space in submarkets all over the Chicago CBD. Tech tenants currently occupy 11.5 million sq. ft.1, representing 10.6% of the total CBD occupied sq. ft. While tech tenants represent a relatively low percentage of the overall market, their share has grown at a larger rate than any other segment in recent years. Since 2011, tech companies have accounted for an annual average of 15.0% of total leasing activity. From 2013 to 2015, tech leasing remained in the top three industries, along with financial and legal services.

While River North remains a top submarket for this industry – having a 26.8% tech footprint – the largest tech occupancy can be seen in the newly designated Fulton Market/Far West Loop Submarket, which grew rapidly as tech tenants expanded beyond startup offices in adjacent areas. Tech tenants in this growing submarket currently make up 45.2% of the local inventory, however, this is partly due to the fact that Fulton Market has only 2.2 million sq. ft. of office product, compared to the 11.3 million sq. ft. and 44.2 million sq. ft. in the River North and West Loop submarkets, respectively.

In the most popular submarkets of River North and West Loop, vacancies plummeted and rents soared in response to growing demand. Rising demand for creative office space in vintage buildings favored by tech firms has led to tightened supply in River North, where the vacancy rate stood at 8.3% overall in Q4 2015 and at 8.0% for the Class C lofted buildings favored by tech tenants. The area has also seen rents rise by 5.7% year-over-year. Similarly, West Loop office properties have seen average asking rents go from $37.46 per sq. ft. to $39.61 per sq. ft. annually, an increase of 5.7%. Due to this, tech users have been forced to look elsewhere for new or expanding space requirements. As an example, after raising over $650 million in funding, Avant, an online marketplace for consumer loans, plans to hire an additional 600 employees over the course of 2016. As a result, it expanded its footprint by 51.6% at 222 N LaSalle St.

As tech tenants demand more space, developers have responded by constructing new product in growing submarkets such as Fulton Market, which delivered over 600,000 sq. ft. in 2015 with another estimated 3.0 million either under construction or planned over the next three years.

FIGURE 1:

TECH FOOTPRINT BY INDUSTRY SUBSECTOR

35%SOFTWARE

18%AGENCY

17%B2B WEB

15%CONSUMER

WEB

15%ECOMMERCE

Sector breakdown of the top 100 companies (by employee)Source: Built In Chicago, 2015.

The growing space requirements of Chicago’s tech firms is due in part to their growing workforce. Established local firms such as Groupon and GoGo, and national companies like Yelp and Salesforce, have significantly expanded in the CBD, helping to foster growth in the tech ecosystem. These companies draw talent from the city’s world-class universities and well-rounded labor pool. Since 2010, employment in the Chicago tech sector has grown by 22.6%, while average wages have increased by 5.1%. As can be seen in Figure 1, the majority of the city’s more than 3,200 digital firms are concentrated in the software sector, representing 35% of the top 100 tech companies. As tech tenants cluster in popular submarkets such as River North and the West Loop, this concentration of tech talent has fostered a creative, forward-thinking environment in which to do business. It should be noted, these benefits come with associated risks. Although Chicago’s economy is typically associated with a high degree of business diversity, submarkets with the highest concentration of tech tenants may experience volatility in market fundamentals in the event of a downturn in the tech industry.

1 This does not account for shared workspace offices such as WeWork or Regus, which host numerous tech tenants on any given week in the CBD – an estimation ranging from 500,000-700,000 sq. ft. of temporary/shared occupied space.

TECH FOOTPRINT

8 // © 2016 CBRE, INC.

Those submarkets with a greater diversity of occupiers, such as the Central Loop, will be better able to endure the softening of any one industry.

Chicago’s tech scene is growing and drawing investors that are injecting larger amounts of capital into local startups each year. Before 2015, only one company, Mu Sigma, could be categorized as a unicorn – a company with a valuation of one billion dollars or more – but as of the close of 2015, the city has produced three additional firms that have achieved this status: Uptake, ExteNet Systems and Avant Credit, valued at $1 billion, $1.4 billion and $2 billion respectively, according to Built In Chicago. As investor’s interest in local firms grow, many worry if the current levels of tech investment are sustainable. As the Wall Street Journal succinctly puts it in an interview with an East Coast hedge fund manager, “pricey stock valuations, record high levels of margin debt and a near record number of money-losing companies going public

have made some investors nervous that the market has rallied far beyond what the fundamentals dictate.” While signs of caution can be found all around, others point out that although company valuations may be high, there is evidence that if a crash is on the horizon it may not be as great in magnitude to what the economy experienced in 2000. Nationally, funding levels for tech firms have been rising steadily since 2012, but still only stand at 40% of their 2000 levels (the height of the dot-com bubble). Additionally, internet usage has quadrupled and since 2000 and the U.S. economy has finally regained all of the jobs lost during the Great Recession, indicating a stronger market for consumer and enterprise related tech services compared with the tech bubble of the early 2000’s. Despite these concerns, Chicago’s market fundamentals remain strong, the pipeline of talent continues to expand and investors continue to show interest in Chicago firms – Chicago’s tech scene appears poised for future growth.

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FIGURE 2:

HISTORICAL U.S. VENTURE CAPITAL INVESTMENT

Source: PwC/NVCA MoneyTree™ Report, Q4 2015: Thomson Reuters.

TECH FOOTPRINT


TECH FOOTPRINT

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45.2%FULTON MARKET/FAR WEST LOOP

6.5%CENTRAL LOOP

8.4%NORTH

MICHIGAN

26.8%RIVER NORTH

9.5%EAST LOOP

9.4%WEST LOOP

FIGURE 4:

TOTAL TECH OCCUPIED SQ. FT. BY SUBMARKET

Fulton Market/Far West Loop has the highest concentration of tech tenants at 45.2%. It also has the lowest inventory, which is why it ranks the lowest by total sq. ft. occupied

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NORTH MICHIGAN AVE.

RIVER NORTHEAST LOOPCENTRAL LOOPWEST LOOP

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T. ( M

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NON-TECH SF TECH SF

Source: CBRE Research, Q4 2015.

FIGURE 3:

TECH FOOTPRINT AND CONCENTRATION BY SUBMARKET

10.6%TECH CONCENTRATION

11,465,830TOTAL CBD


TECH FOOTPRINT

10 // © 2016 CBRE, INC.

SPOTLIGHT: GROUPONGroupon, headquartered at 600 W. Chicago Ave. occupies 375,807 sq. ft. The global e-commerce leader renewed its lease and expanded its footprint by 52.9% in July 2015. The non-traditional office building, owned by Equity Commonwealth, was originally built in 1908 as the Montgomery Ward mail-order warehouse. Tech firms are drawn to this type of building and 600 West Chicago has attracted other local companies such as Uptake and Lightbank. Groupon, which was launched in Chicago eight years ago, currently employs more than 2,100 people at the eight-story building in River North.

SPOTLIGHT: YELPYelp opened its first Chicago office at 222 Merchandise Mart Plaza in early 2015, joining a host of other tech tenants and the city’s first and largest tech incubator, 1871. The online city guide and business review website, currently takes up 132,044 sq. ft. expanding from its initial lease of 50,000 sq. ft. Formerly known for its expansive interior design showrooms the Merchandise Mart has become Chicago’s epicenter for tech innovation and entrepreneurship. Vornado Realty Trust, the building’s owner, describes the Mart is the nation’s second-largest office building, falling behind the Pentagon. Yelp plans to hire 300 new employees within the next 18 months.

TECH SUBMARKET SNAPSHOTS

River NorthRiver North has been long favored by tech companies for its amenity-rich environment, creative building stock and close connectivity to greater Chicago via public transit. Tech tenants occupy approximately 26.8% of River North office space. In contrast, tech tenants within the traditional Central Loop office market occupy only 6.5%. In 2015, the submarket saw significant leasing activity by tech tenants with 37.9% of all tech deals being done in River North, up from 17.2% in 2014. Meanwhile, rents have increased every quarter since Q4 2014 and direct vacancy has hovered below 10%.

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TECH FOOTPRINT


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RIVER NORTH TECH FOOTPRINT TAKEAWAYS• River North supply is very limited, with the direct

vacancy at 8.3% as of Q4 2015, compared to 11.4% for the CBD. Class A direct vacancy was at 3.7%, and Class B at 10.1%, compared to 11.1% and 11.8% for the CBD, respectively.

• Lack of available space coupled with no new construction has driven up the rents in River North – average asking rates have increased by 5.7% year-over-year.

• 50% of the tech tenants that reside within River North are located at 222 Merchandise Mart Plaza.

• 26% of the River North tech tenants call 600 W Chicago home.

TECH COMPANY CONCENTRATIONS

250,000+ SF

100,000–250,000 SF

50,000–100,000 SF

25,000–50,000 SF

10,000–25,000 SF

< 10,000 SF

TECH FOOTPRINT

12 // © 2016 CBRE, INC.

SPOTLIGHT: GOGONearly two years after announcing one of the largest suburban-to-city relocations in recent history, GoGo Inc. officially settled into its new headquarters at 111 N. Canal St. in June 2015 – joining a host of other tech tenants such as StubHub, Fieldglass and Twitter. The company, which offers in-flight wireless services to airline passengers, was previously based in Itasca, IL a western suburb near O’Hare Airport. The move is a consolidation of several suburban locations to 232,000 sq. ft. along the top four floors of the 98-year-old renovated warehouse managed and developed by Sterling Bay. The move has brought over 500 employees to the Chicago CBD.


West LoopAs startups grow out of their spaces in River North, vintage office buildings in the West Loop have benefited greatly from this movement, providing the same flexible space advantages as River North, but with larger floor plates essential for later stage growing tech firms. Tech tenants currently occupy 9.4% of the total space in the West Loop, totaling nearly 4.0 million sq. ft. Out of the 47 tenants occupying over 50,000 sq. ft. in the CBD, the West Loop is home to a total of 19 of these large tenants, comprising 60.6% of the tech footprint in the submarket. This includes large tech firms such as Gogo, LinkedIn and IBM.

12 // © 2016 CBRE, INC.

TECH FOOTPRINT


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WEST LOOP TECH FOOTPRINT TAKEAWAYS• The West Loop is the largest submarket, with

44,173,677 sq. ft. of rentable building area, with another 3.1 million sq. ft. being delivered by 2018.

• Overall average asking rents have increased for the past 14 consecutive quarters, rising by 14.9% since Q2 2015.

• 16% of the tech tenants residing in the West Loop occupy space at 111 N Canal, a Class B building that is 97% occupied – the majority of which is made up of tech tenants.

• Tech firms are attracted to 111 N Canal, a concrete loft style building that offers 58,000-sq. ft. floor plates, an ideal location with proximity to public transit, and an array of amenities including a game/conference facility and roof deck, full service gym, and secure bike room.


250,000+ SF

100,000–250,000 SF

50,000–100,000 SF

25,000–50,000 SF

10,000–25,000 SF

< 10,000 SF

TECH FOOTPRINT

14 // © 2016 CBRE, INC.

SPOTLIGHT: AVANTLocated at 222 N. LaSalle, Avant, an online personal lender, raised a total of $664 million in debt and equity financing in 2015 — the largest funding ever secured for a Chicago firm. The financial tech company expanded from its previous 30,000 sq. ft. headquarters at at 640 N. LaSalle in River North to 120,000 sq. ft. in the Central Loop earlier this year. The firm has announced plans to hire an additional 600 employees by the close of 2016.


Central LoopMore known for its traditional office users like law firms and financial companies, the 1.8 million sq. ft. of space leased by tech users in the Central Loop amounts to 6.5% of all occupancy in that submarket – making for one of the smallest tech footprints in the CBD. However, although the share of tech tenants in the Central Loop is small, the submarket offers users with expanding space requirements room to grow. While startup companies prefer the smaller lofted floor plates in River North that offer flexible configurations for collaborative workspaces, Central Loop buildings offer interior spaces that help more established companies focus on branding and department segmentation. Typical floor plates in River North average 17,000 sq. ft., while those in the Central Loop are 10-12% larger, on average.

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TECH FOOTPRINT


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CENTRAL LOOP TECH FOOTPRINT TAKEAWAYS• Central Loop has become a popular submarket for tech

companies as buildings such as 222 N LaSalle St and 203 N LaSalle St have been re-positioned as viable locations for these types of firms.

• In addition to Avant, tech companies such as kCura, Digitas, STATS, Sprout Social, and GrubHub call the Central Loop home.

• The Central Loop has the second largest volume of tech tenants by square footage, bested only by the West Loop.

• It is also the second largest submarket by rentable building area, totaling 35,818,728 sq. ft.


250,000+ SF

100,000–250,000 SF

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< 10,000 SF

TECH FOOTPRINT

16 // © 2016 CBRE, INC.

DEVELOPMENT PIPELINE

Fulton MarketDue to all the activity and developer interest, Fulton Market/Far West Loop was officially added as a submarket by CBRE in Q1 2015. What once was an escape from the high rents in West Loop and River North is now a contender when it comes to asking rates, with Class A rents going for high $30s gross. Granted, much of this product still needs to be built, but the bullishness for this submarket has not diminished. Defined as the area west of I90/94 to Ashland and between Grand Avenue and Madison Street, it has seen an influx of established tech tenants as well as start-up companies. Historic industrial properties have been redeveloped into modern flexible office buildings favored by tech firms. As of Q4 2015, there was 3.1 million sq. ft. of new development either under construction or in the pipeline. The area’s tech footprint is nearly 500,000 sq. ft. and is home to tenants such as Threadless, Basecamp and Sandbox.

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Target

1K Fulton535,000 SF

401 N. Morgan

910 W. Van Buren

820 W. Jackson

833 W. Jackson

850 W. Jackson

322 S. Green

300 N. Eliazbeth

954 W. Washington

1033 W. Van Buren

801 W. Adams

310 S. Peoria

940 W. Adams

901 W. Jackson

1021 W. Adams

210 N. Racine

1026 W. Van Buren

370 N. Carpenter 10,300 SF

1330 W. Fulton266,000 SF

(New Development 4/17)

1056 W. Lake(New Development)

Harpo 1058 W. Washington550,000-900,000 SF(New Development 2017)

1100 W. Grand100,000 SF

(New Development)

801-811 W. Fulton70,000 SF(New Development)

213 N. Peoria120,000 SF

(New Development)

NEW AREA OF OFFICE GROWTH

TRADITIONAL AREA OFOFFICE SPACE WEST OF LOOP

RANDOLPH ST RESTAURANT CORRIDOR

GREEKTOWN

NobuHotel

155 rooms

CrownPlaza

398 Rm.

SoHoHouse

35 rooms

AceHotel

150 rooms

EquinoxHotel

145 rooms

Lake &Green

165 rooms

16 // © 2016 CBRE, INC.

TECH FOOTPRINT


FULTON MARKET TECH FOOTPRINT TAKEAWAYS• Fulton Market has numerous proposed new

development projects, however, existing supply is limited. This has driven up the rents for the existing office product, and the average gross rents for a portion of the submarket are comparable to the Loop.

• 1000 W Fulton Ave, also known as “1K Fulton” was completed in Q2 2015, adding 535,510 sq. ft. to the inventory. This building is now 100% occupied.

• 1330 W Fulton, or “Fulton West” is currently underway and delivering mid-2017, adding another 290,000 sq. ft. of office space. Approximately 28% is pre-leased at the new development.

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n

DesP

lain

es

Hals

ted

Gree

n

Peor

ia

Sang

amon

Mor

gan

Raci

ne

Aber

deen

Eliz

abet

h

Carp

ente

r

MayAd

a

Ogde

n

Lake

Kennedy

Eisenhower

ogilviestation

unionstation

WholeFoods

Mariano’s

Target

1K Fulton535,000 SF

401 N. Morgan

910 W. Van Buren

820 W. Jackson

833 W. Jackson

850 W. Jackson

322 S. Green

300 N. Eliazbeth

954 W. Washington

1033 W. Van Buren

801 W. Adams

310 S. Peoria

940 W. Adams

901 W. Jackson

1021 W. Adams

210 N. Racine

1026 W. Van Buren

370 N. Carpenter 10,300 SF

1330 W. Fulton266,000 SF

(New Development 4/17)

1056 W. Lake(New Development)

Harpo 1058 W. Washington550,000-900,000 SF(New Development 2017)

1100 W. Grand100,000 SF

(New Development)

801-811 W. Fulton70,000 SF(New Development)

213 N. Peoria120,000 SF

(New Development)

NEW AREA OF OFFICE GROWTH

TRADITIONAL AREA OFOFFICE SPACE WEST OF LOOP

RANDOLPH ST RESTAURANT CORRIDOR

GREEKTOWN

NobuHotel

155 rooms

CrownPlaza

398 Rm.

SoHoHouse

35 rooms

AceHotel

150 rooms

EquinoxHotel

145 rooms

Lake &Green

165 rooms

FULTON MARKET HIGHLIGHTSNEW DEVELOPMENTS

EXISTING OFFICE

Photo Credit: Courtesy of Sterling Bay

TECH FOOTPRINT

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DEVELOPMENT PIPELINE

Goose IslandIn major cities across the country, developers have taken an interest in the rehabilitation of centrally located historic communities, creating fresh, appealing space for today’s young urban demographic known as the “Millennials.” Thanks to the foresight and innovation of industry-leading developers such as South Street Capital and R2 Companies, former warehouses and manufacturing plants are becoming new hubs of office and mixed-use development projects. Goose Island, located northwest of the CBD, is a prime example of this old-to-new paradigm and is on its way to becoming one of the most sought-after submarkets in the city. Additionally, just north of Goose Island in Lincoln Park, C.H. Robinson is planning a 207,000-square-foot build-to-suit with Sterling Bay at 1511 W Webster. Sterling Bay has also acquired the razed Finkl & Sons steel mill, encompassing 28 acres of land along the Chicago River and plans to develop more office product. It is only a matter of time before the development frenzy takes off in this peripheral area of downtown.

Larr

abee

King

sbur

y

Chicago River

Haines

Hooker

Hickory

Cherry

North Branch

Bliss

Division

Hals

ted

EvergreenEastman

Blackhawk

Cher

ry

North

Kennedy

934 N. North Branch

909 W. Bliss

700 W. Chicago

DMDIIWrigley Global

Innovation Center

Mercedes-Benz

enterprise rent-A-Car

Hertzrent-A-Car

Kendall College

Chicago Academy for the arts

British Schoolof Chicago

Toyota

Lexus

Apple store

REI

Crate and Barrel

FedExship center

Whole foods

starbucks starbucks

SoNo East apatments840 W Blackhawk st

Petsmart

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TECH FOOTPRINT


Larr

abee

King

sbur

y

Chicago River

Haines

Hooker

Hickory

Cherry

North Branch

Bliss

Division

Hals

ted

EvergreenEastman

Blackhawk

Cher

ry

North

Kennedy

934 N. North Branch

909 W. Bliss

700 W. Chicago

DMDIIWrigley Global

Innovation Center

Mercedes-Benz

enterprise rent-A-Car

Hertzrent-A-Car

Kendall College

Chicago Academy for the arts

British Schoolof Chicago

Toyota

Lexus

Apple store

REI

Crate and Barrel

FedExship center

Whole foods

starbucks starbucks

SoNo East apatments840 W Blackhawk st

Petsmart

GOOSE ISLAND HIGHLIGHTSNEW DEVELOPMENTS

AMENITIES

GOOSE ISLAND TECH FOOTPRINT TAKEAWAYS• With high demand for land in Chicago and pressure

from expanding neighborhoods in Lincoln Park, Clybourn Corridor, River North, River West, Bucktown and Wicker Park – Goose Island is at the center of economic development.

• Tech firms, especially start-up companies, are attracted to Goose Island’s existing red brick facades, large open floor plates and historic architectural detail.

• One of Goose Island’s last intact sites for redevelopment is the North Branch River Campus. This campus is home to 909 W Bliss and 934 N Branch, totaling 700,000 sq. ft.

• The 909 W Bliss development by R2 Companies offers a two-building complex with connecting skybridge, with current redevelopment initiatives including a fitness center, on-site restaurant and rooftop decks.

• 934 N Branch is the newest addition to the North Branch River Campus on Goose Island, located right on the Chicago River. R2 Companies plans to build up to 364,661 sq. ft. of office space with floor to ceiling windows and hyper efficient floor plates.

• R2 Companies has also agreed to build a pedestrian bridge connecting the island to Ogden Avenue, one of Chicago’s main roadways.

TECH FOOTPRINT

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BY THE NUMBERS

6.5% RISING AVERAGE ASKING RATE AT AN ALL-TIME HIGH Y-O-Y

2.1M SF+ OF POSITIVE NET ABSORPTION IN THE PAST TWO YEARS, DRIVEN BY TECH TENANTS

15.5% AVERAGE TECH LEASING ACTIVITY OF THE TOTAL CBD LEASING SINCE 2011

IMPLICATIONS Despite a modest footprint, tech tenants accounted for a large percentage of positive leasing activity over that past 4 years, and tenant requirements have gotten larger as they expand their footprint

Office Market

03

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OFFICE MARKET

2015 ended on a positive note in the CBD with 792,337 sq. ft. in positive net absorption. These gains caused the direct vacancy to drop another 60 basis points (bps) from the previous quarter down to 11.4%. The total net absorption for the year reached pre-recession levels at 1,336,729 sq. ft., while the direct vacancy declined by 1% year-over-year. Major market drivers continue to be the growth of tech, financial services, and shared workplace companies, as well as suburban relocations to the CBD. Figure 5 illustrates the positive momentum since 2012. As a result of a tightening office supply and strong tenant demand, landlords have been pushing rents in all building classes. The overall average asking gross rent has risen by $0.60 per sq. ft. quarter-over-quarter, up to $36.79 gross. Class A rents rose to $43.04 from $42.56 in the previous quarter. Rents are at an all-time high in the CBD, rising 6.2% year-over-year.

LEASING ACTIVITYTech leasing activity reflects the industry’s growth pattern. Heightened leasing from tech tenants in 2011 marked the emergence of this industry as a major factor in the Chicago economy and office market. Current tech expansion is led by a new group of start-ups, who have been able to sustain themselves within the marketplace.

Since 2011, a total of 6.8 million sq. ft. of space was leased by tech tenants, peaking in 2015 at 23.8%, of the overall leasing activity in the CBD. In contrast a total of 3.7 million sq. ft. of space was leased over the period leading up to the Chicago tech boom. The most activity was seen in River North, which experienced 37.9% of the tech leasing activity in 2015.

FIGURE 6:

TECH LEASING ACTIVITY 2006-2015

0

5

10

15

20

25

2015201420132012201120102009200820072006

SQ. F

T. ( M

ILLI

ONS)

TOTAL TECH SF

0%

5%

10%

15%

20%

25%

TOTAL TECH PERCENTAGE

-20

-15

-10

-5

0

5

10

15

20

25

30

20152014201320122011201020092008200720062005

SQ. F

T. ( M

ILLI

ONS)

NET ABSORPTION CLASS A CLASS B DIRECT VACANCY

8%

10%

12%

14%

16%

18%

FIGURE 5:

OFFICE MARKET HISTORY: NET ABSORPTION VS. DIRECT VACANCY



TECHBOOK CHICAGO 2016 OFFICE MARKET // 21

TECH FOOTPRINT

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OFFICE MARKET

HISTORICAL DEMANDThe tech landscape has changed significantly since the beginning of 2011. Even though it always had a presence in the CBD leasing market, the tech industry was 50-60% smaller than its current level. As seen in figure 6, from 2006-2010, tech leasing averaged 9% of the total CBD leasing demand, compared to an average of 16% in the most recent cycle from 2011-2015. This can be attributed to a rebounding local economy which helped foster strong start-up activity, leading to growing space demands in the CBD.

CURRENT DEMANDThe tech industry currently comprises roughly 10.3% of the tenants seeking space in the CBD, compared to 19% from legal tenants and 16.7% from financial services. The largest tech requirement is as high as 200,000 sq. ft. by a company currently occupying space in the West Loop. A year-over-year comparison illustrates that tech requirements have gotten larger, as tenants in the market for 50,000 – 100,000 sq. ft. now account for roughly 37%, up from 15% at the end of 2014. This indicates that tech firms are seeking larger blocks of space to accommodate growth.

FIGURE 7:

TECH DEMAND BY SPACE REQUIREMENT


SQ. F

T. ( T

HOUS

AND)

2014 2015

0

200

400

600

800

50,000-100,00020,000-49,99910,000-19,000

RENT GROWTHWhile the market as a whole has experienced rent growth during recent years, submarkets with tech exposure have seen higher than average rent gains. Since the tech resurgence began in 2011, Class B and C (often favored by tech tenants) River North rents have grown 38%, West Loop 21%, while CBD rents in this segment rose by just 14%. Overall rent growth was also robust, and in all classes River North saw an increase of 64%, West Loop 13%, and the CBD grew by 14%.

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TECH FOOTPRINT

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OFFICE MARKET

RIVER NORTH38%

RENT GROWTH SINCE Q4 2011

WEST LOOP21%


OVERALL CBD14%


FIGURE 8:

ASKING RENT GROWTH BY SUBMARKET


TECHBOOK CHICAGO 2016 OFFICE MARKET // 23

TECH FOOTPRINT

24 // © 2016 CBRE, INC.

BY THE NUMBERS

22.6% GROWTH IN TECH SECTOR EMPLOYMENT SINCE 2010

34% OF ADULTS AGE 25+ HAVE A BACHELOR’S DEGREE OR HIGHER COMPARED WITH US AVERAGE OF 29%

5.1% GROWTH OF AVERAGE ANNUAL TECH EMPLOYEE SALARY SINCE 2010

IMPLICATIONS Local tech firms are ramping up their hiring efforts and expanding their space requirements, helping to redefine Chicago’s economy in the process.

Tech Talent

04

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TECH TALENT

Chicago continues to attract talented math, science and engineering graduates and nurture visionary tech entrepreneurs. Employment in high tech industries in Chicago has grown 22.6% since 2010, fueling demand amongst office users in the tech industry. Today, the metro area tech labor pool boasts a total of 156,130 employees, ranking number five amongst US cities with large tech labor pools of over 50,000 people.

Typically, the greatest cost for occupiers seeking top tech talent is wages paid to employees. In Chicago, paying for tech talent comes at a cost that is less than the U.S. average while providing access to one of the largest labor pools in the country. 34% of adults over 24 have a bachelor’s degree or higher compared with the U.S. average of 29% – making the city a hub for higher education. Additionally, tech professionals earn 4% less than the average

U.S. wage – a significant cost savings when compared to cities such as Silicon Valley where tech professionals are compensated 35% above the U.S. average.

More and more, Chicago graduates are choosing tech-related career paths and are receiving support from local universities and city-backed initiatives aimed at developing successful digital ventures. Between 2012 and 2013, Chicago-area universities graduated 5,009 students with tech degrees. Students at top Chicago universities have launched over 300 VC-backed firms since 2009 and raised more than $3.7 billion. Public-private partnerships such as UI Labs – a recently launched research and commercialization collaborative – are choosing to locate in close proximity to expanding tech office markets, amplifying the cluster of innovation and increasing the value of nearby office properties.

TECH OCCUPATION EMPLOYMENT (2014)

EMPLOYMENT GROWTH (2010-2014)

ANNUAL AVERAGE WAGE (2014)

WAGE GROWTH (2010-2014)

SOFTWARE DEVELOPERS/PROGRAMMERS

55,950 32.6% $81,640 -6.4%

COMPUTER SUPPORT, DATABASE & SYSTEMS

78,450 31.4% $83,109 14.0%

COMPUTER & INFORMATION SYSTEMS MANAGERS

11,830 2.3% $126,390 8.3%

TECHNOLOGY ENGINEERING-RELATED

9,900 -28.8% $77,497 4.7%

TOTAL TECH OCCUPATION EMPLOYMENT 156,130 22.6% $92,159 5.1%

FIGURE 9:

TECH EMPLOYMENT BREAKDOWN

Source: U.S. Bureau of Labor Statistics, May 2014.

TECHBOOK CHICAGO 2016 TECH TALENT // 25

TECH FOOTPRINT

26 // © 2016 CBRE, INC.

BY THE NUMBERS

$1.7 B INVESTED IN CHICAGO STARTUPS IN 2015

9% GROWTH IN VENTURE CAPITAL EXITS Y-O-Y

50%+ OF THE HOTTEST INDUSTRIES FUNDED IN 2015 ARE ENTERPRISE TECHNOLOGY COMPANIES

IMPLICATIONS Chicago’s tech industry is gaining momentum, attracting venture capital funding from local and international investors and giving local companies the capital needed to grow without leaving the city

Tech Industry Indicators

05

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TECH FOOTPRINT

27 // © 2016 CBRE, INC.27 // © 2016 CBRE, INC.

Increasingly, venture capitalists are taking notice of Chicago tech firms. In 2015, funding for digital companies increased 9% over the previous year, culminating in the best year ever for local startups, who collectively raised nearly 1.7 billion in debt and equity financing. Investors received massive payouts in 2015 as well, as venture-backed companies exited via IPO or acquisition for over $8.2 billion – representing 17% year-over-year growth.

Chicago firms are finding their niche in enterprise-related technologies, taking advantage of the region’s diverse economic composition and wealth of corporate headquarters. In 2015, companies receiving the most funding included those with a focus on enterprise-related

technologies such as marketing, advertising, enterprise software and financial technology. In particular, financial tech companies raised a total of $805 million in venture capital funding. Over 30% of the companies listed on the Fortune 500 are located in the Midwest and a total of 34 are headquartered in the Chicago metropolitan region – providing a wealth of opportunities for tech firms seeking a market for their software and services.

Economic fundamentals appear strong for the Chicago tech market. The rapid growth of the past has raised concerns over growth sustainability and how the local tech industry will endure business cycle changes.

FIGURE 10:

TECH FUNDING 2011-2015

FUNDING RAISED IN 2015 INCREASED BY 9% MAKING IT THE BEST YEAR FOR FUNDING EVER!

Source: Built in Chicago, 2015 Chicago startup report.

2011

$1,453M

$391M

$1,055M

$1,585M$1,721M

2012 2013 2014 2015

+9%

TECH INDUSTRY INDICATORS

TECHBOOK CHICAGO 2016 TECH INDUSTRY INDICATORS // 27

TECH FOOTPRINT

28 // © 2016 CBRE, INC.

TECH INDUSTRY INDICATORS

While some worry of a growing tech bubble, others like J.B. Pritzker, managing partner of Pritzker Group Venture Capital, the largest technology venture capital investor in the Midwest and co-founder of Chicago-based tech incubator 1871, point to the perception of Chicago startups within the VC community. Recently quoted by tech news outlet, Built In Chicago, Pritzker noted that enterprise tech companies in Chicago “tend to have more meat on them.” He further explained, “ you will tend to see more revenue and potential for profitability among Chicago entrepreneurs, than you will among entrepreneurs anywhere else in the country.”

Not only are Chicago firms viewed as being more pragmatic and stable than their consumer tech equivalents; Chicago’s diverse economy helps to dampen the effects of potential downturns. When compared to cities with a high degree of employment clustering in the technology industry, Chicago markets have a true advantage. Although, both Chicago and Silicon Valley have virtually the same level of tech employment, only 9.2% of office using jobs in Chicago are technology based compared to 39.9% in Silicon Valley – lessening the impact of adverse business cycles.

MARKETING/ADVERTISING

HEALTH TECH

FINANCIAL TECH

CONSUMER WEB

E-COMMERCE

ENTERPRISE SOFTWARE

NUMBER OF COMPANIES FUNDING FOR INDUSTRY

$108M

$176M

$805M

$120M

$50M

$59M

FIGURE 11:

MOST POPULAR INDUSTRIES FUNDED IN 2015

Source: Built in Chicago, 2015 Chicago startup report.

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TECH FOOTPRINT

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TECH FOOTPRINT

29 // © 2016 CBRE, INC.29 // © 2016 CBRE, INC. TECHBOOK CHICAGO 2016 TECH INDUSTRY INDICATORS // 29

TECH FOOTPRINT

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Industry OutlookInvestors are cautiously optimistic about the Chicago tech market. Indicators for the tech industry as a whole are flashing warning signs due to the inflated valuations placed on companies that fail to deliver corresponding earnings. A number of former high profile unicorns previously valued at $1 billion or more, (Twitter, FitBit, Zynga and Box, just to name a few) are now trading below their original IPO price – causing investors to re-evaluate firms with little-to-no profits and questionable value-propositions. Although some companies are drawing skepticism about their actual market capabilities, most analysts agree today’s looming tech bubble is nothing like what the industry experienced in the early 2000’s. The key difference being that in today’s market consumer demand for technology products is more robust and the growing influence of the internet on multiple aspects of everyday life has led to a practical need for enterprise and consumer-related tech products and services. This demand has resulted in employment growth which has a ripple effect on the office market and commercial real estate as a whole.

Indicators for the Chicago tech industry convey a sustainable outlook for continued growth in consumer and business-related technologies for a diversity of local industries; including health, e-commerce, finance, human resources, mobile technology and others. Local support for start-up and early-stage firms, along with investments from venture capital funds, suggests growth is likely to continue.

Additionally, the success of later-stage firms such as Avant, electing to headquarter in Chicago, indicates a solid future for growth in the city. Chicago office real estate can expect strong demand resulting from tech industry growth. Another boost to this industry may be attributed to locally-based and transplant firms choosing to migrate to Chicago for the deep and diverse tech talent pools within its unique urban environment. The tech industry’s influence on the CBD office market will continue to develop as the start-up culture becomes further entrenched and as existing companies mature and put a sharper focus on their space needs.

06

30 // © 2016 CBRE, INC.

Disclaimer: Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CBRE.

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MATTHEW WALASZEK

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Senior Research Analyst+1 312 935 [email protected]

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Chicago Tech Book 2016 FINAL

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