Surprise: Pandemic Doesn't Slow The Rise Of Trophy Skyscrapers In Chicago
The pandemic brought a number of pleasant surprises to commercial real estate. Corporate leaders learned whole workforces could operate effectively while at home, Amazon and other e-commerce firms kept expanding even in the face of steep economic decline and apartment dwellers kept paying rent, at least for the first few months.
Another surprise was the willingness of some developers to forge ahead with ambitious projects, and Chicago has a hefty share of such developments.
Sterling Bay announced in July it secured $174M in financing for its planned 47-story mixed-use tower at 300 North Michigan Ave., which it will develop in partnership with Magellan Development Group. The tower is slated to have 289 residential units, 25K SF of retail space and a 280-key hotel that citizenM agreed to purchase upon completion.
Considering Chicago’s hotel occupancy plunged to less than 30% during the pandemic, according to research firm STR, it’s an extraordinary time to place a bet on a building with such a large hotel component, but long-term demand for properties like 300 North Michigan still exist.
That will sustain demand for new multifamily units, especially if the desire continues among young workers to settle in dense urban cores like downtown Chicago, Fox added. And even hotel projects like 300 North Michigan could make sense if other long-term drivers, including Chicago’s attractiveness as a tourist destination, outlast the pandemic.
“A project of that scope may not seem practical at first, but if you have the guts, when you finish, you’ll have downtown’s shiniest new hotel,” Fox said.
Houston-based Hines also began construction on its Salesforce Tower after the pandemic hit. The 813-foot, 1.2M SF tower, where Salesforce agreed to lease 500K SF, is rising at Wolf Point along the Chicago River.
The life sciences industry also has retained developers’ confidence. Sterling Bay is getting ready to start construction on a 320K SF building dedicated to life sciences at its Lincoln Yards development on the North Side. Trammell Crow decided to move forward this summer with its Fulton Labs, a 400K SF life sciences laboratory in Fulton Market at 400 North Aberdeen St.
Much of the energy behind these new construction projects comes from simple momentum.
“It’s like turning around a battleship,” Fox said. “If you’ve got commitments to tenants, if your financing is in place and you’ve organized your capital and your design and entitlements are complete, it means the project has been in the works for years and you’ve spent an extraordinary amount of money.”
That leads many developers and lenders to just pull the trigger, get projects underway and hope that when the final touches are put in several years from now, the present crisis will have abated.
It may be easier to garner interest in new properties from tenants leery about the risk of the coronavirus, Fox added, as state-of-the-art HVAC systems, including high-tech sensors that monitor air quality, can be incorporated into buildings still in the planning stages.
“In some respects, it’s easier to move into new space rather than retrofit the space you already have,” he said.
It isn’t as if Chicago’s construction industry hasn’t taken some hits.
Commercial and multifamily starts throughout the Chicago metro area totaled $3B in the first half of 2020, a 9% decline from the same period last year, according to Dodge Data & Analytics. But that was a far smaller decline than ones suffered by the nation’s other top markets, and the firm had predicted in January that Chicago construction would fall 10% this year.
The New York area saw a 24% decline, and the Washington, D.C., and Los Angeles metro areas saw declines of 42% and 18%, respectively.
Chicago’s modest decline was largely the result of a 24% increase in commercial starts, according to Dodge, driven by a near doubling in office starts, including Hines’ Salesforce Tower and the $476M BMO Tower, which Riverside Investment & Development began working on before the onset of the pandemic.
What will happen to the pace of construction in the future is not clear. Developers may still hesitate to greenlight projects where they have yet to invest much time and money. Fox’s North Wells Capital, the investment management affiliate of Urban Innovations, concentrates on the city’s River North neighborhood and recently decided to put a hold on its plan for a 154K SF office building at 311 West Huron St.
“We were set to go,” he said.
But even though the neighborhood is Chicago’s tightest office market, there is a lingering worry that potential tenants won’t appear, especially if the economy continues to sputter or decline further, Fox said.
“Tenants pay the bills, and we can never forget that. If they’re not stepping up, at the end of the day, you don’t have a viable project.”
Fox said he still believes in River North. If a significant potential tenant pops up looking for new space or the overall economy turns a corner, 311 West Huron will get underway.
“If someone comes in, I’d be the first one to say, ‘Let’s go.’ This was put on the shelf, but that doesn’t mean we will be any less ready on the other side of the pandemic.”