Chicago Commercial Real Estate: 10 Things We Watched in 2020
Chicago, IL | December 18, 2020
12 months ago, COVID-19 was barely on America’s radar and had little hold on the development of what we tracked in our previous edition of “Ten Things to Watch.” Now, a year later, some of what we attempted to intuit has been derailed (the Southwest Loop’s expected explosion of incoming workers has fizzled), notes on industry stagnation have multiplied (the Central Loop’s shadow space problems still loom), and some aspects of the industry have proven to be surprisingly resilient (coworking space may have a future after all). On the following pages, we re-evaluate our ten issues against the events of a tumultuous 2020.
WHAT CAN WE EXPECT FROM MAYOR LIGHTFOOT’S SECOND YEAR IN OFFICE?
IN JANUARY, WE SAID: A tumultuous teacher’s strike, a hard look at affordable housing, and approvals for the Lincoln Yards megadevelopment despite City Hall critics are just a few of the notable moments from Mayor Lori Lightfoot’s first year in office. What can we expect from Lightfoot’s office in 2020? One battle she will face, particularly relevant to CRE, is curtailing aldermanic privilege. Aldermen will not give this primary source of power up without a fight, but opponents believe these privileges are linked to the corruption Lightfoot has promised to eliminate. Real estate developers would certainly have her back in this clash, as there is nothing worse than the unpredictability that they face when planning projects subject to the whims of aldermen.
TODAY: Mayor Lori Lightfoot’s initiatives fell by the wayside as she devoted much of 2020 to defending Chicagoans from the wrath of Covid-19. With all tasks sidelined, Mayor Lightfoot took a stern approach to the city’s handling of Covid-19, and then openly embraced and even joined in on the humorous memes that mimicked her watchful stance. As if Covid-19 wasn’t enough, the death of George Floyd in Minneapolis sparked both peaceful protests and unrest at the end of May and the beginning of June. Chicago’s central business district sustained millions of dollars in damages due to the unrest, and Lightfoot’s response left protesters, businesses, and residents alike unhappy—albeit for different reasons.
Mired by pandemic expenditures, Lightfoot was able to get a tough budget passed. The budget included a $94 million property tax increase— painful, but perhaps not as bad some had feared. In 2021, Lightfoot may refinance $501 billion worth of debt. This would certainly close the coronavirus budget debt further but create problems down the road. If she does this, will Lightfoot receive as much criticism as her predecessors?
WILL THE POST-WEWORK APOCALYPSE TRANSFORM INTO COWORKING 3.0?
IN JANUARY, WE SAID: Shining star WeWork has crashed down to Earth, though it is not necessarily out for the count. The company that was once helmed by founder Adam Neumann—who’s essentially been forced to cash out and is now in an advisory role—has stopped its fiscal hemorrhaging by laying off 2,400 employees. SoftBank has also extended a stimulus of another $3 billion in unsecured debt. However, there is still significant concern about their ability to uphold their lease agreements.
Of course, WeWork isn’t the only coworking game in town. Will other coworking platforms be able to profit off WeWork’s missteps? Will WeWork crawl out of the hole they’ve dug? Even though coworking will surely survive, the leasing gravy train is likely to slow down. Do not expect another 600,000+ SF of coworking leasing activity in 2020.
TODAY: There were only two leases signed for coworking space in 2020: WeWork leased 63,000 square feet at 448 N. LaSalle and Industrious signed a 52,000-square-foot lease at 233 S. Wacker. There were also two coworking leases that were broken this year: WeWork pulled out of a pair of leases totaling 110,000 square feet at 1155 and 1114 W. Fulton, which had not yet opened, and Industrious shut down its 12,000-square-feet space at 600 W. Jackson, which has caused the landlord to bring a lawsuit for nonpayment of rent.
Though Covid-19 caused some serious challenges for the coworking industry and WeWork continues to flounder, is possible that coworking will see a boost after the pandemic? Economic uncertainty causes tenants to seek greater flexibility, which coworking is built for. Cushman and Wakefield formed a partnership with Industrious, and CBRE hopes to expand its coworking platform, known as Hanna, by picking up scraps left by the pandemic—at least two CRE big hitters clearly believe coworking has a future.
WILL THE UNCERTAINTY FROM PROPERTY TAX CHANGES LEAD TO MORE INVESTMENT STAGNATION IN 2020?
IN JANUARY, WE SAID: Chicago CRE investment sales took at deep dive off a steep cliff in 2019, primarily due to the uncertainty regarding the future of property taxes. The new Cook County Assessor, Fritz Kaegi, is making much needed, drastic changes to the property assessment process, but this is causing panic for underwriters everywhere. Reassessing every property in Cook County is no small task, and the assessor’s office is not even going to begin looking at commercial real estate in the CBD until 2021—and property owners won’t really know how their tax bill will be affected until mid-2022. However, Mr. Kaegi has responded to the outcry by creating a handy “Property Tax Rate Simulator Tool,” designed to add some transparency and confidence to the current uncertainty. Will it be enough to assuage investors fears? Or will 2020 be another stagnant year in the investment game?
TODAY: 2020 was less than stagnant for investment sales, but you can’t blame it on Fritz Kaegi… Covid-19 has caused more uncertainty than property taxes ever could. However, there is one property type that has overcome both Kaegi and coronavirus challenges: newly constructed, single-tenant offices, particularly in Fulton Market. This type of property continues to attract top dollar from investors.
DOES CHICAGO HAVE TOO MUCH SHADOW SPACE TO FILL?
IN JANUARY, WE SAID: There has been plenty of leasing activity for new office developments in Chicago. Unfortunately, that leasing activity has created over 3.8 million square feet of shadow space in existing buildings. Approximately 1.8 million square feet of that shadow space will be vacated by relocating tenants in 2020. Will the large blocks left behind be snatched up by large tenants looking for immediately available space? Or will it all have to be leased piecemeal by smaller tenants over the years?
TODAY: Leasing activity has fallen off a cliff due to Covid-19–according to CoStar, there was approximately half a million square feet of leasing activity in the CBD in the third quarter of this year, compared to 3.7 million square feet in the third quarter of 2019. Additionally, there are very few tenants in the market, especially for large blocks of space. Unfortunately, it looks like the vast majority of the space that came out of the shadows and onto the market in 2020 will remain vacant for the foreseeable future. That space will now have to compete with the abundance of sublease space, which has increased significantly as companies adjust to the pandemic.
WILL THE CENTRAL LOOP HAVE TO REINVENT ITSELF?
IN JANUARY, WE SAID: Speaking of shadow space, the Central Loop has the lion’s share of it. Tenants moving to new developments will be leaving over 2.3 million square feet of space behind in the Central Loop, approximately 1.1 million square feet of which will be vacated in 2020. The Central Loop submarket has traditionally thrived as Chicago’s financial district, but will have to reinvent itself in the coming years as large banks move to the West Loop.
TODAY: The Central Loop’s challenges multiplied exponentially in 2020. Occupancy at the office buildings were way below the recommended percentages, and months of Covid-19 restrictions have decimated traffic from tourists and residents. With travel restrictions encouraging people to stay home and temporary closures, limited hours, and occupancy restrictions reducing attendance for public spaces even further, tourism revenue fell sharply. Damage to the downtown from multiple incidents of unrest has reinforced negative impressions of Chicago as well. The drop off in demand from tourists and office workers has created daunting challenges for restaurants and retailers in the Central Loop. Now, the Central Loop will have to contend with large blocks of office vacancies and significant amounts of street-level retail vacancies. Additionally, the pandemic has transformed the one of the Central Loop’s biggest strengths, access to public transportation, to one of its greatest weaknesses.
WILL THE THOMPSON CENTER FINALLY GET SOLD?
IN JANUARY, WE SAID: The governor’s office recently announced that a team led by Ernst & Young Infrastructure Advisors will help the state sell the maligned and neglected State of Illinois building, known as the Thompson Center. This will shift the workplace of the many state employees that currently work in the building to somewhere new. The large site in a central downtown location has plenty of redevelopment potential, but expect an outcry from historic preservationists who have been pushing to landmark the postmodern icon despite lack of affection from most of the population.
TODAY: The Governor has not had the bandwidth to even think about selling the Thomson Center and even if his office were devoting time and energy to its sale, the investor demand is presumably at a low point. The deadline to find a buyer has been pushed out more than a year, until April 5, 2022. The Illinois Department of Central Management Services says it plans to ask for proposals from developers in the first quarter of 2021. Chances are Covid-19 and the tepid market will force the plans to be put on hold a bit longer. Meanwhile, Illinois State employees will have to move out of there at some point in the not-too-distant future because the building is in poor condition.
SUBURBS — WILL ANYTHING EVER HAPPEN?
IN JANUARY, WE SAID: There was no suburban office real estate boom in 2019, and don’t expect a big boom in 2020 either. However, with significantly lower rental rates and fears of substantial Cook County property tax increases on the horizon, some suburban office markets are getting extra consideration. Recently repositioned Class A office buildings are likely to see more leasing activity in 2020 than they have in many years.
TODAY: Coronavirus has aided in the residential suburban resurgence as millennials flock to the suburbs in search of more living space, both indoor and outdoor. Commute times don’t matter as much now that we are all working from home. And much of what kept people in the city has been on hold and may not survive: restaurants, theater, nightlife, and public events. We won’t know the true effects these dynamics will have on the suburban office market until the pandemic subsides. However, it is interesting to note that though the suburban office market has seen a steep drop in leasing activity, it has not been quite as dramatic as the drop seen in the CBD. According to CoStar, the suburban office market had approximately 800,000 square feet of leasing activity in the third quarter of 2020, down from 1.3 million square feet in the third quarter of 2019; the CBD went down to approximately half a million square feet of leasing activity in the third quarter of this year, compared to 3.7 million square feet in the third quarter of 2019.
WILL CHICAGO’S TECH SECTOR CONTINUE TO GROW?
IN JANUARY, WE SAID: Tech job openings in the Chicago area grew 22.7% in November year-over-year. Uber, Glassdoor, Google, Salesforce and more have already made plans to expand further in the Windy City. As both the cost of doing business and the cost of living grow to astronomical proportions on the coasts, expect to see more Silicon Valley companies establishing or expanding Chicago offices.
TODAY: Though tech has not generally been negatively affected by the pandemic, it has been the primary industry to embrace the work from home revolution sparked by the pandemic. Google’s expansion plans have been put on hold. There are many tech sublease spaces on the market – Flexport put their brand new space at 333 N Green on the sublease market before ever moving in.
The good news is that it appears that tech’s strong pivot towards work from home is causing a significant amount of talent to venture away from Silicon Valley. In the long run, this trend may favor Chicago, as tech workers move towards lower costs of living and the industry trends of geographic expansion is accelerated. However, Chicago may lose out to the smaller cities in warmer climates.
WILL MEGAPROJECTS THRIVE IN 2020?
IN JANUARY, WE SAID: With plans to begin infrastructure work on Lincoln Yards in 2020, Chicago’s sometimes controversial megaprojects are less of a real estate pipe dream and more of a reality in 2020. The 78 in the South Loop also has the approvals it needs to exit the theoretical stages. Other developments once thought dead, like One Central, are seemingly back on the table as possibilities. However, the one thing they all need to really move forward is a large office tenant. At least one megaproject is likely to land a mega-tenant commitment in 2020 – which project are you betting on?
TODAY: Three megaprojects are focusing their efforts on the concept of the innovation economy, which could do much to boost Chicago’s future. The developers of the megaproject at the old Michael Reese Hospital site has an agreement with Israel’s Sheba Medical Center to build an ARC Innovation Center that would occupy 20-25% of a 500,000-square-foot building. This project would be part of the first phase of what is now being called the Bronzeville Lakefront Development. The developers hope that the center will anchor a health science cluster that would spin out biomedical technologies.
The megaproject known as The 78 moved closer to reality this year after Governor Pritzker released $500 million in funding for the University of Illinois’ Discovery Partners Institute and developers donated land in the hopes that the Institute would attract premium tenants. Sterling Bay, developer of the Lincoln Yard megadevelopment, has redeveloped a nearby property into a life sciences lab center and announced that it is launching Prysm Institute, a life sciences, healthcare and technology business accelerator—all in an effort to incubate tenants for the life science innovation district that it plans for Lincoln Yards.
HOW WILL THE CHANGING SOUTHWEST LOOP CONTINUE TO EVOLVE?
IN JANUARY, WE SAID: Chicago’s Southwest Loop has long been a desolate and mostly forgotten section of the CBD, but all of that is about to change. Tenants are beginning to move into the massive Post Office redevelopment and renovations to the building will include a large riverfront public space. The major renovation of Willis Tower’s base is finally coming to fruition. And the ground has officially broken on the new Union Station redevelopment at 320 S. Canal, the BMO Tower. How quickly and in what ways will the influx of thousands of office workers make the area more vibrant?
TODAY: Unfortunately, the expected influx of workers are unexpectedly working from home this year. Though the Old Post Office is mostly complete and leases there have commenced, not many workers are working yet. The true transformation will not be seen until we can all feel comfortable venturing out into the world again–hopefully sometime in 2021!
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