LaSalle Street Landlords Adopt New Uses To Fill Gaping Holes Left By Financial Exodus
The flight of major financial institutions from the Central Loop to glittering new trophy towers a few blocks to the west is hollowing out several buildings along Chicago’s storied LaSalle Street, and filling those empty spaces won’t be easy.
But many observers say the downtown has so many demand drivers that even structures that seem like relics from another era may eventually fill up with a mix of tenants, and change how the city’s best-known business district is used.
Bank of America is leading the exodus to the west. This year, it will vacate more than 800K SF at 135 South LaSalle, a 1930s-era building, and move into 110 North Wacker Drive, a 55-story tower under construction along the Chicago River. Northern Trust also plans a 2020 move, and will leave more than 200K SF at 231 South LaSalle, although it is headed east to 333 South Wabash Ave. The financial district will suffer other big exits in the near future, including BMO Harris Bank, which in 2022 will consolidate three downtown locations into BMO Tower, the new 50-story tower going up next to Union Station, leaving more than 400K SF vacant at 115 South LaSalle St.
Those leases alone amount to around 1.5M SF on a few blocks of one street, but other areas of the city have seen once-dowdy buildings, such as the Old Post Office, find new users and get new life after rehabs, and experts say LaSalle Street structures have hidden strengths.
“A lot of these buildings were built in the 1920s and 1930s, and many buildings from that era have perfect floor plates for adaptive reuse,” Cushman & Wakefield Managing Director Susan Tjarksen said.
Unlike office towers constructed in the 1970s and 1980s, which typically use glass walls to provide sweeping views, making many difficult to subdivide, most old Central Loop office buildings have dozens of windows on each floor. Tjarksen said that will allow developers to remake these aging structures into small rental apartments, hotel rooms or coworking spaces.
Cushman & Wakefield estimates that downtown LaSalle Street has about 5M SF, and existing vacancies along the street have already pushed the overall Central Loop’s vacancy rate to 15.8%, a historic high and far above the 7.4% recorded in Fulton Market, the downtown’s most vibrant office submarket. A separate report by the company on the city’s Financial District found that the new construction on the blocks to the west played a role in pushing up vacancy.
“Of the 19 tenants occupying 20K SF or greater that relocated from the Central Loop to other submarkets since 2015, all but one left for a Class-A or trophy building,” mostly in the West Loop, according to the report.
Still, some developers already renovating the street say fears about the upcoming vacancies are overblown.
For one, the financial sector hasn't disappeared entirely. Prominent banks, including Wintrust, Northern Trust, US Bank, Byline Bank and CIBC, retain space on LaSalle Street. And now new groups are moving in.
“I still think LaSalle Street is ground zero for the CBD,” The Prime Group CEO and Chairman Mike Reschke said. “There has been a big draw to the west, but LaSalle Street will always be a key business center.”
Northern Trust decided to keep its global headquarters at 50 South LaSalle, he pointed out, even though most employees will move off the street, and the surrounding blocks will still be densely packed with office users, as well as top downtown attractions, with LaSalle right at the center. To Reschke, that means hotels serving business travelers and tourists could be the highest and best use for much of the empty space.
“You can walk to any business meeting in 10 to 15 minutes, including ones in all the new towers on Wacker Drive, then walk in the other direction to Millennium Park and The Art Institute, and the third-largest theater district in the world after London and New York,” Reschke said.
Reschke’s Prime Group developed in 2010 the 610-key JW Marriott Hotel at 208 South LaSalle, and now plans to open a 232-key, ultraluxury hotel in the same building atop the Marriott. Reschke said the hotel, called The Reserve, will give the Central Loop what it has long needed, a true Five-Star hotel that competes with the ultraluxury hotels that dot River North.
Transforming much of 208 South LaSalle, a renovated landmark constructed in 1914, into hotel rooms was made relatively easy by its 25-by-17-foot bay sizes, each of which makes a perfectly sized luxury hotel room, Reschke added.
“These historic buildings often have very efficient layouts, and not just for hotels,” he said.
One bay at 208 South LaSalle could also become a studio apartment, and two bays combined could be a one-bedroom unit.
Developer CityPads sees the same kind of opportunity in the Clark Adams Building at 105 West Adams, a 41-story office building constructed in 1927 one block east of LaSalle. The company plans to purchase the upper floors of the building and spend about $80M transforming that space into 159 apartments, along with 505 beds in dorm-style co-living spaces, according to a Chicago Tribune report. A Club Quarters hotel occupies the lower floors, and the building’s office space is 50% occupied.
That kind of mixed-use is what Reschke said will be LaSalle Street’s future, after the departures of all those big banks, although it could take three to five years to lease up that space.
“We’re still going to be the financial district, but we will also have arts, entertainment, restaurants and residential all together,” he said.
The Prime Group will open The Reserve in late 2020 or early 2021, and Reschke said it also plans to open two restaurants at 208 South LaSalle, one on the ground floor, and the other on the 21st floor.
One change Reschke does not want to see is the proposal, floated by the Cushman & Wakefield study, for an elevated walkway. Styled after New York City’s popular High Line, it would cover much of LaSalle, and he said he is worried such a project would kill the celebrated views that made this part of LaSalle so popular with Hollywood filmmakers and tourists.
“That is an absolutely crazy idea; we have one of the most historic streets in the U.S., perfectly framed by the iconic architecture of the Board of Trade Building,” he said.
The Board of Trade Building sits at LaSalle’s southern end, and its recent past may provide a template to revive the rest of the street, Glenstar Properties Managing Principal Michael Klein said. His firm, along with then-partner USAA Real Estate, bought the Art Deco structure in 2012 for $152M, when it was about 65% leased, with almost all of the tenants connected in some way to the Chicago Board of Trade.
Companies devoted to that work had been the building’s mainstay since the CBOT began operating there in 1930, but times had changed.
“It was clear that the trading industry had changed, and you saw far less floor trading,” he said.
The partners then set about bringing the building into the modern age.
A $35M rehab opened up the lobby and other historic spaces, provided refreshed corridors, bathrooms, a rooftop deck, new elevators and a tech upgrade that secured a Platinum rating from WiredScore, a company that created an international rating for connectivity in commercial buildings.
The building is now about 80% occupied, and fewer than 50% of the tenants have a connection to the trading industry. The rest are a diverse collection of logistics firms, high-tech startups, law firms and real estate companies, among others.
Klein recognizes not every building on LaSalle Street can follow the same path. The CBOT building’s Art Deco design and location makes it attractive for modern office users, while some of the other buildings, both on LaSalle and the nearby blocks, will need more radical rethinks, and start hosting hotels or apartments.
“It’s going to be a combination of all of these things, with some people doing as we’ve done, while others will do adaptive reuses,” he said.
As the owner of 231 South LaSalle St., a 1M SF building constructed in 1924 and slated to lose Northern Trust this year, Boston-based Beacon Capital Partners faces one of those dilemmas. But Managing Director Greg O’Neal said LaSalle Street no longer depends on retaining the massive financial institutions that historically settled there. Tech firms and coworking companies, among other sectors, have started eyeing spaces, most of which offer better value than the Class-A towers to the west.
According to the Cushman & Wakefield report, on average tenants that left the Central Loop pay $33.70 per SF in their new locations, compared to the $26.40 per SF they paid in the Central Loop.
“That’s a lot of money for small, growing companies, and it’s a big competitive advantage for landlords on LaSalle Street,” Reschke said.
The change can already be seen on the top floors of 231 South LaSalle, where coworking firm Industrious occupies more than 50K SF. Although coworking, tech and other startups have helped make new neighborhoods like West Loop and Fulton Market trendy, Industrious officials said the Central Loop is also a good fit.
“The area surrounding South LaSalle St. is a fairly traditional central business district, but with an up-and-coming cool factor,” according to Industrious Director of Real Estate Doug Feinberg. “It's the marriage of two things Industrious looks for in signing new locations: a prominent business hub and desirability.”
The space Industrious now uses had been unoccupied mechanical floors, but the company built it out into a penthouse-style area with a private outdoor patio for members.
“While we are seeing more of the West Loop is gaining momentum, the market for Central Loop isn't going anywhere,” Feinberg said. “Landlords are adapting and finding new ways to drive traffic and maintain activity.”