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Richard Stein

Richard Stein, senior managing director of Chicago-based Mesirow Financial, has a simple formula for boosting the lagging commercial office market: create more jobs. Stein talked about this, the future of the office market and the challenges it faces in a recent interview with Midwest Real Estate News.

Midwest Real Estate News: Let’s start off on a positive note: Do you see any signs of hope in the commercial office market right now?
Richard Stein: There is always hope. The thing is this, office occupancy and the demand for new office construction is all about jobs. We need job creation to have the demand for office space increase.

MWREN: That’s what we say when the commercial office market was doing well, wasn’t it, a lot of job growth across the Midwest and the country?
Stein: We were adding before this recession started 30,000 to 32,000 jobs a year in Chicago. And they were good jobs. They were in insurance and the financial industries. They were jobs at the Chicago Mercantile Exchange. That was great. That boosted the demand for new office space. And also, to satisfy all the demand that these new jobs created, condos and rentals were doing well, too.

MWREN: That’s all changed now.
Stein: If you looked at the rentals in new buildings before the recession, I’d say that almost 50 to 75 percent of the people renting in the downtown area come from other places. Let’s take a look at Illinois Center (a mixed-use urban development in downtown Chicago). So many of the people living there were from Indiana, Ohio, Michigan and Iowa, the contiguous states to Illinois. In the last 10 to 15 years, there was nothing left in the metropolitan areas of those states to hold these young people in those cities. They were renting apartments here. Then they were buying houses. It all fed on jobs. It all fed on young people wanting to come here because Chicago is a great 24/7 city and it had the jobs. That’s what revs up the office space.

MWREN: The office market today in the Midwest, then, seems to face some serious challenges.
Stein: I deal mostly with the Chicago market. The office market here has never really been a big margin market. It’s not a high-end market when you compare it to someplace like New York City. In 2007, for instance, rents went up in New York City from $80 a square foot for Class-A office space to $110 a square foot. In Chicago, we were only getting $30 a square foot. That’s a big difference.

MWREN: This is probably very difficult to predict, but when do you think we will see any new office construction in Chicago?
Stein: The good news is that when we do build new office buildings in Chicago, they are quality products. There are a certain amount of folks out there who always want to have first-class space. They may be companies that deal with intellectual capital. As they hire lawyers and accountants, they can’t place them in secondary-level spaces. They can’t put them in B-Class space. They need A-Class space. When a building gets to be older than 10 or 15 years old, it starts to lose efficiencies in heating and cooling. So there is always a market for a limited amount of new office space. When will the next new building be built? I have no idea. With what it costs to put up a new one, you’ll need to have the building pre-leased.

MWREN: Is there any reason, then, for optimism regarding commercial real estate in general and the office market in particular?
Stein: I’m optimistic that as jobs are created, commercial real estate will improve. This is still a very difficult time. But I am optimistic for the future, just not for the immediate future. We’ve got a while to go before we get the economy going again. It’s beyond my expertise to predict when the economy will turn. There is hope here, though. Chicago has a diverse economy. When the economy does return, we have the things that count in Chicago. It’s a 24/7 city. We have O’Hare Airport. We have a great transportation network. We have a lot of rail. We have a central location. Then there’s the great educated workforce here. You have these great institutions for learning here. You have sports teams and museums. It’s a strong city. I’m optimistic about the city, but I can’t predict the future.

Tags | Chicago, Illinois, Indiana, Iowa, Mesirow Financial, Michigan, Ohio, Richard Stein

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