Five Willis Towers Worth of Office Space is Empty In Downtown Chicago
Downtown Chicago has a record amount of unwanted office space, the equivalent of about five Willis Towers, and the situation could get a whole lot worse in the next two years.
Last year ended with 15.5% of downtown office space, or about 21.4 million square feet, unleased, according to commercial real estate firm CBRE. That’s up from 12.8% a year earlier.
The vacancy rate could climb to 18% by the end of next year, even if tenants begin to move into unused space following COVID-19 in a manner that emulates bounce-backs from previous economic downturns. If unused and under-construction space is slower to be gobbled up, vacancy could climb all the way to 20.3%, according to CBRE.
The situation could get even worse. Those projections don’t include a record 5.5 million square feet available for sublease in the downtown office market, which includes areas in and around the Loop and an area north of the Chicago River.
At stake is the vibrancy of downtown Chicago. With more than 138 million square feet total, Chicago has the nation’s second-largest downtown office market, trailing only Manhattan. Large swaths of unwanted office space would drag down nearby businesses such as restaurants, bars and shops, slowing the path to reestablish downtown’s pre-pandemic bustle.
The speed of the office market’s recovery also could determine whether the waves of construction cranes, which became a common sight over the last decade-plus, will continue their work to alter Chicago’s skyline with new tall buildings. The pace of the recovery will affect construction-job hiring, tax revenues and other areas of the economy.
The current slump stands out from previous downturns in that there’s no modern-day precedent for what happens after a pandemic.
Previous recessions have been followed by real estate booms, but this time there is speculation that work-from-home trends and mass adoption of videoconference platforms will forever change the way office jobs are performed. Landlords are scrambling to adapt to changing preferences of their tenants.
“In 2008 the bottom fell out and the Band-Aid was ripped off,” said Edward McKim, senior vice president of Hearn, a Chicago-based landlord whose properties include the 57-story tower at 70 W. Madison St. and the office portion of the former John Hancock Center. “Companies went away overnight. Now there’s more uncertainty.
“This time around, you have this limbo. Companies are making short-term plans because they don’t know what they’re going to do.”
Vacancy statistics reflect the amount of leased space. Even leased space has been lightly used for the past year because of COVID-19 safety measures.
Most downtown buildings are seeing less than 20% of the office workers that were coming in before the pandemic, said Mark Cassata, a CBRE broker who represents office tenants. Yet with vaccination efforts accelerating, companies are again talking about their space needs, he said.
“Planning has reemerged,” Cassata said. “A focus on re-occupancy has reemerged. From March to December, it was basically pencils down on new deals.”
BMO Tower, at left, is seen under construction March 11, 2021, in downtown Chicago. (Terrence Antonio James / Chicago Tribune)
There’s a wealth of office space coming for tenants to consider. Almost 8 million square feet of space will be available by the end of 2022 because of lease expirations and new developments, according to CBRE.
Space under construction includes the 60-story Salesforce Tower on the Wolf Point site along the Chicago River, the 50-story BMO Tower next to Union Station and several buildings in the Fulton Market district.
It could take two to four years for the office market to stabilize enough to encourage another big construction cycle, but “mid- to long-term we remain bullish on Chicago,” Cassata said.
Recognizing the immediate challenge, landlords are sprucing up their buildings and offering sweeter deals to tenants, such as months of free rent to renew leases or sign new ones, Cassata said. In search of a good deal, many companies could move around town in the months and years to come.
Building owners also are adding safety measures such as improved air filtration systems and redesigned outdoor spaces and improved amenities.
New York-based 601W Cos. has taken on two large outdoor projects that were envisioned, but took on new urgency because of the public health crisis. The Old Post Office opened the nation’s largest private roof deck, at 3.5 acres, in September. The developer is in the process of rebuilding the half-acre plaza in front of another of the city’s largest office buildings, the 83-story Aon Center.
In other moves to meet changing tenant preferences, The Old Post Office and the 28-story tower at 303 E. Wacker Drive, which is owned by Beacon Capital Partners, are among buildings creating furnished, move-in-ready suites available for commitments as short as six months, according to the Telos Group, the leasing agency for both buildings.
Hearn invested “tens of millions” of dollars on upgrades to 70 W. Madison, including a new fitness center, after considering shelving the project during the pandemic, McKim said.
“We saw the fallout when COVID hit and we knew there would be negative consequences,” McKim said. “We figured we needed to go forward with the improvements in order to compete in a challenging environment.”
About 24% of the tower is vacant, but Hearn recently signed one of the largest and longest-term leases during the pandemic when law firm Nixon Peabody committed to 72,000 square feet on three floors near the top of the Loop skyscraper.
Nixon Peabody already leases a larger space lower in the building, so the deal creates a slight increase in vacancy. But signing the deal helped Hearn avoid having a much larger hole to fill if the law firm had moved elsewhere.
Nixon Peabody’s deal is an early example of an employer envisioning a return to office operations similar to those before the pandemic, despite many predictions that remote working — even if only some days per week — is here to stay.
Longer term, professional services firms will need to resume in-person meetings, said David R. Brown, managing partner of Nixon Peabody’s Chicago office.
“I think there will be a huge demand for people to be back in person, meeting with clients and colleagues,” Brown said. “When I’ve had the opportunity to meet with people over the past year, often outdoors, I’ve come away energized by the interaction. I don’t believe that everyone will suddenly decide to be at home behind their computers
From: The Chicago Tribune