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Maranda Bodas/MEDILL

1871, Chicago's tech-startup community, houses 240 early-stage tech companies.

Chicago’s mid-size startups feel real estate growing pains

by Maranda Bodas
Feb 27, 2014


Maranda Bodas/MEDILL

The WeDeliver team works out of their new space in the River North neighborhood.

Exposed brick, glass-fronted conference rooms, a stocked mini-fridge, and enough open-air space for a growing team—this is the epitome of tech-company dwellings. It’s also what every startup wants when it grows up and out of the traditional communal working spaces where monthly membership is on a per-desk basis.

Chicago’s mid-size tech startups are no exception, but some founders may be setting their real estate sights too high, real estate experts say. Navigating the commercial real estate market after months, or even years, at a shared-space is challenging for startups especially when money is still tight.

1871, a co-working space and hub for entrepreneurs on the 12th floor of River North’s Merchandise Mart, houses 240 early-stage tech companies. The 50,000-square-foot open space was built with the entrepreneur in mind: per-person monthly memberships, public conference rooms, and open-concept work areas.

During the past three years the city of Chicago has dedicated millions of dollars to supporting innovation. The investment appears to be paying off and some startups are gaining traction. In 2013 alone 76 companies raised $1 million or more in funding, according to the 2013 report by Built in Chicago, a web-based platform for Chicago tech startup news.

What happens when a company’s momentum propels it through the seed-round of funding and it needs more space?

It graduates from the incubator.

“There are 26 alumni companies out of 1871,” said Melissa Lederer, the non-profit’s chief marketing officer.

But the transition isn’t always easy.

“They don’t want to sign a long-term lease because they aren’t a full-fledged sustainable business,” Lederer said. “But they don’t quite fit into the shared-space environment here either.”

WeDeliver Inc., an on-demand delivery service, was reluctant to leave the 1871 network but was ready for a move after securing funding to expand its team. “Finding the right place was tough,” said WeDeliver founder Jimmy Odom. “What you want you can’t afford.”

After months of searching, the six-person team settled on a River North space complete with beanbag chairs, a small conference room and enough workspace – for the moment.

The move also translated into more productivity for Odom and his crew. “At some point you get a little selfish about your space,” he said. “Plus when you get an office, you get to galvanize your company’s culture. ”

Real Estate broker Craig McCaw of MB Real Estate helped Odom navigate the fast-paced commercial market.

“You need to be the first to know what’s coming on the market,” McCaw said. “Jimmy’s space was on the market for just three days before we toured it and signed a lease within a couple weeks.”

Entrepreneurs are flocking towards River North with its proximity to public transportation and 1871. The up-and-coming industrial West Loop neighborhood also is popular. Unfortunately with rising demand comes limited supply and higher rents.

According to MB’s fourth-quarter 2013 market overview, the River North neighborhood boasts the city’s lowest vacancy rate at 11.9 percent; the industrial West Loop follows close behind with a vacancy rate of 15.8 percent.

Sublease opportunities, ideal for the mid-stage companies, are even harder to come by. River North experienced a sublet vacancy of 2.8 percent while the West Loop reported only 2.7 percent.

McCaw encouraged founders to think outside the box and explore opportunities within the “corporate” culture of the Loop.

“There is a stigma about the Loop,” McCaw said. “But there are so many spaces that can do creative stuff with traditional office space.”

As a broker, McCaw is willing to take a risk with startup clients, but he knows that they are new to the game and have a lot to learn when it comes to real estate.

“It is a matter of needs versus wants,” McCaw said. “Glass conference rooms aren’t going to get you to the next level but creating that efficient machine of a company and grooming your employees along the way, that sure will.”

McCaw has plenty of competition; many brokers across Chicago are supporting co-working alumni. Jack Kennan of Jones Lang LaSalle Americas Inc. understands the mid-size startup dilemma when workers are bumping into each other but every dollar still counts.

“It is certainly a challenge because their requirements change everyday,” Kennan said. “But I find it very refreshing to be around innovators, creatives and risk takers.”

Some real estate owners are beginning to feel the same way. During the past two years landlords have started to build out offices or even entire floors to accommodate teams of five to 25 people.

“It would be nice to see more landlords continue to expand and take some risks on some of these companies,” Kennan said. “They aren’t going anywhere anytime soon.”

Bob Woods, senior vice president at Spectrum Real Estate, said he is eager to accommodate the new market of mid-size startups but knows that the risks are high.

Woods said the condition of available properties is another obstacle landlords and tenants need to overcome. “If build-outs are required, it demands a long-term commitment,” he said, referring to the money a property owner invests to make spaces move-in ready for each tenant. "That is a risk many landlords aren't willing to make."

Woods is mitigating the risk by signing flexible long-term leases for companies that know they are going to grow within a year or more. He lets the companies move into larger spaces within his portfolio as long as the terms of the lease remain in place. “If a tenant signed a three-year lease, knowing they would outgrow it in a year, we make the commitment to help them find those opportunities.”

A portfolio tailored to collaborative space is key in today’s market. “What we’ve seen is a shift from traditional office space,” Woods said. He believes this is a good problem to have because the demolition required to build out a collaborative space is much cheaper than traditional law offices or other sub-divided models.

For Woods and the Spectrum Realty team, the crop of mid-size startup companies is definitely worth cultivating. Seventy percent of his current portfolio is dedicated to open-area workspaces, ideal for growing startups.