The Real Reason Downtown Chicago Office's Booming
Downtown Chicago office isn't just experiencing the strongest fundamentals in a decade as businesses and workers relocate here—though that's true—it's also becoming an entirely different animal, as properties reinvent themselves as open, collaborative space.
A key stat for Downtown office, according to our speakers at Bisnow's 5th Annual Chicago Office Summit yesterday hosted by theMART: suburban companies have leased about 3.3M SF of Downtown office space since 2009, as thousands of residential units have been absorbed. Some of that movement is relocation, but a lot more is major suburban firms opening satellite offices. They've come to realize that young talent wants to be in the city. Companies that offer only suburban workplaces will miss out on that talent pool. Snapped: MB Real Estate EVP Mark Buth, Jenner & Block partner Michelle McAtee, who moderated, Hines senior managing director Tom D'Arcy, NGKF vice chairman Melissa Copley, and Vornado Realty Trust SVP Paul Heinen. The panel also included JLL EVP Chris Cassata.
We snapped Sterling Bay general manager Adam Devlin-Brown with JLL EVP Chris Cassata. Naturally, some parts of Downtown are seeing more robust absorption than others. The West Fulton area has attracted strong tech firm interest since Google announced its intention to occupy the former Fulton Market Cold Storage building (in effect, Google created its own submarket). But other markets are hot, too, such as River North, which has the advantage of being densely packed with urban amenities. Even the East Loop is attracting more attention now, our speakers noted, because as more workers live Downtown, being near the commuter stations isn't quite as important as it was once was.
As companies and workers flock Downtown, creative build-outs are the norm now, simply because that's the way companies compete for the best talent, explained Patrick Healey, head of real estate for commercial markets in North America at Zurich North America, who also spoke at the event. Though tech was instrumental in starting the trend, it's gone well beyond that sector. Building owners are increasingly taking the initiative to reconfigure their space to meet the rising demand. And creative isn't just for Downtown: Zurich's new 735k SF HQ in Schaumburg will follow the open-floor, amenity-laden pattern.
The event was held at 200k SF raw space in theMART (aka the Merchandise Mart, one of the event's sponsors), which itself has been attracting more office tenants lately. These days, the 3.6M SF building, in which showroom used to predominate, includes about 2M SF of office and 1.6M of showroom, and tech and other tenants are interested in the possibilities of its large open floors. In fact, the event space is being converted into open plan office space (with a few amenities already in place).
It's been a long hiatus for major development of Downtown office space, but now work is underway on new projects as conditions are ripe again. Part of that is the influx from the suburbs, but after years of downsizing and slow growth Downtown companies finally need more room to grow. Development is focusing in the West Loop and River West, where tech wants to be. Snapped: CohnReznick partner Jason Burian, who moderated, Sterling Bay founding principal Scott Goodman, Fifield Cos CEO Steve Fifield, and The John Buck Co president Blake Johnson.
Still, there's no real risk of overbuilding Downtown. In fact, compared to historic norms and some other hot markets (say, Houston until recently), new office development in Chicago's quite modest, our speakers said. A little less than 1M SF will be coming on line this year, compared with non-recession averages of about 2M SF a year in past decades. The Büder Group, a furniture maker in theMART, provided some pieces for the raw space.
As usual, there are caveats to a future of growth and creative office space, our speakers added. One headwind in the Downtown market—any market in Illinois, actually—is the prospect of much higher property taxes because of the state's fiscal crisis. The question isn't whether they'll rise, it's how much. Also, construction costs are going up, which might put a pinch on some development. Finally, creative office space might be the norm now, but not quite everyone wants it. Law firms, which are major users of Downtown space, generally have no plans to go full open office—though they seem to be adopting some elements of it, such as more amenities for their workers.