• Redevelopment a Cure for the Chicago Office Market's COVID, Supply-Demand Woes

    Over the course of the past 10 years or so, downtown Chicago office landlords have upped their amenity antes to entice tenants to choose their properties over those in other areas of the city and the suburbs. Breathtaking vistas of Lake Michigan from private company patios, state-of-the-art gym facilities, keyless entry, on-demand elevator calls and perennial happy hours in tenant lounges are all big draws.

    For the most part, it has worked. Corporate hiring and site selection shifted from bucolic corporate campuses in favor of a city vibe to lure younger professionals to employee ranks. The city itself is downtown’s best office amenity. McDonald’s left suburban Oak Brook for the city's Fulton Market district, as Kraft Heinz left Schaumburg for the East Loop. Demand for downtown office space appeared to be unstoppable. By the end of 2019, almost 2.6 million square feet of space was absorbed downtown, while the suburban market languished. Simply put, the employee was in the driver’s seat.

    Then in March 2020, the pandemic’s unforeseen black swan drifted down the Chicago River, unleashing its wrath on the eastern and southern portions of downtown’s office market. Eight quarters later, the urban core endures seemingly endless assaults, posting record-breaking vacancy levels every quarter, with an elevated 18% vacancy rate near the end of the second quarter of 2022. Yet in the suburbs, vacancy appears to have plateaued at 14%, a rate set more than a year ago. Did the winner-loser roles shift due to Illinois’ shelter-in-place orders and social-distancing mandates, or did the pandemic just accelerate trends that were already in place? The answer to both is yes.

    The Pandemic

    To point out the obvious, downtown office buildings emptied at the onset of the pandemic mostly over health and safety considerations regarding mass transit and office density. In the suburbs, it was feasible for workers to drive to their offices, and with higher ratios of square footage to employees than implemented in the city’s urban core, it was easy for them to maintain a safe distance from their co-workers. For employees at smaller companies in suburban Chicago, work readily resumed in mid-June 2020.

    Yet for the large corporations that located their home bases downtown, returning to the office has not been so straightforward. Many of these companies were extremely cautious when it came to bringing their employees back to the office. And after so much time away from the brick and mortar, they learned their staffs could be productive without a physical office. Due to the resulting employee-driven cultural shift, where workers’ preferences for remote or hybrid policies were honored, many companies elected to reduce their future office space obligations. Even more devastating to the downtown office market, many others let their leases expire or plan to soon.

    Suburban tenants faced many of the same safety concerns and space-related decisions as their city peers, except for one large difference: In the suburbs, large tenants are substantially more likely to house their businesses in owner-occupied assets. The business decision to vacate their own premises comes with a lot of inherent risks. Some have vacated, with varying results. Most, however, either plan to weather the storm or try to sell their real estate holdings.

    Supply and Demand

    There is a truth, locally acknowledged by developers, that if the downtown office market has a vacancy rate below its historical average, then it must be in want of increased office supply. The bloated construction pipeline over the past few years created the glut of office space that materialized downtown versus the suburban landscape that we see today.

    From 2014 through 2019, the metropolitan area recorded vacancy rates below the 13% historical average. This spurred developers to draw up plans, fight for zoning approvals and build properties. Even before the pandemic, however, office market observers cautioned supply would soon eclipse demand, as more properties built on speculation increasingly posted higher availability rates across downtown. Large tenants agreed to move in, but mostly the market saw trophy assets poaching the tenant rosters of older properties.

    The new buildings were mostly in areas to the west and north of the Chicago River: River North, Fulton Market and the western boundaries of the West Loop. In other words, as tenants flocked to the other side of the Chicago River in pursuit of quality, the effects of COVID's black swan nested within the longtime financial center of LaSalle Street, exacerbating falling office and retail occupancy trends already in place.

    Make No Little Plans

    Chicago is known for its ability to reinvent itself. If its civil engineers could reverse the flow of the Chicago River, certainly the city can kick this ugly-duckling trend to a distant shore through redevelopment.

    Examples of reinvention can be found in both suburban and urban Chicago. Fulton Market, downtown’s current darling with almost 1 million square feet of office space absorbed over the past 12 months, carved itself into a live-work-play destination from the meatpacking hub it once was.

    Insurance giant Allstate reached an agreement in the fall to sell most of its corporate campus on the North Shore for $232 million to warehouse builder Dermody Properties. In a nod to the vitality of the Loop, less than two months later, Allstate acquired the 10-story building at 29 N. Wacker Drive, which may serve as its future headquarters.

    Prime Group’s Michael Reschke is expected to close soon on his vision to preserve the historic James R. Thompson Center, converting portions of the Helmut Jahn-designed structure to private offices, retail and possibly a hotel.

    Somerset Development is transforming AT&T’s former research center in Hoffman Estates into Bell Works Chicago — a destination for work, dining and entertainment in what it calls a “Metroburb.”

    Taking these ambitious plans to heart, the city of Chicago’s Department of Planning and Development, along with the Urban Land Institute and Chicago Loop Alliance, created panels of commercial real estate developers, architects and land use experts to merge public and private domain ideas to spur redevelopment within the North Michigan Avenue area and southern portion of LaSalle Street. Each reinvention plan plays off the areas' strengths.

    For example, the panel recommended creating a scenic link between Lake Michigan, the Chicago River and North Michigan Avenue, while the plan for LaSalle Street takes cues from its numerous historic buildings, colleges and universities and their student base, and the cultural icon of the Art Institute.

    Over a century ago, Chicago Beaux-Arts architect Daniel Burnham designed many of the office and cultural gems downtown. In 1910, he gave a speech to city planners in London that still rings true:

    "Make no little plans. They have no magic to stir men's blood and probably will not themselves be realized. Make big plans, aim high in hope and work, remembering that a noble, logical diagram once recorded will never die, but long after we are gone will be a living thing, asserting itself with ever growing insistency."

    Source: www.CoStar.com