The Urbanization Trend Will 'Re-Emerge With A Vengeance' After The Pandemic, CRE Experts Say
The city of Chicago faces a long winter with diminished economic prospects, but conditions are set to improve with a vaccine and a return to something resembling normal life next year, according to experts. The strengths that transformed Chicago into a destination for so many corporations should allow it to revive, even if memories of the coronavirus pandemic bring a few permanent alterations to the office environment.
“I don’t see the demise of people coming into cities or coming into the office,” World Business Chicago President and CEO Andrea Zopp said last week during Bisnow’s Chicago State of the Market Digital Summit.
What has remained constant is the desire to visit restaurants and the city’s many cultural institutions and to interact with colleagues face-to-face during working hours, she added. Those desires are just waiting to be uncorked when it’s safe, Zopp said. Others agree.
“This is not going to last long, and Chicago will go back to being the preeminent city it was and continue to grow exponentially,” Level-1 Global Solutions CEO Thomas McElroy said.
Rutledge said he believes workers and managers will still want to collect themselves into the large, dense groups that facilitate conversations and the exchange of ideas and create deep, easily accessible labor pools. That trend helped fuel the migration of companies from isolated suburban campuses into places like Chicago’s Central Business District, and interacting with colleagues over Zoom calls can’t replace it.
“That urbanization trend is real, and eventually, it will re-emerge with a vengeance,” Rutledge said.
“A lot of companies are missing the collaboration they used to have,” Fifield Cos. CEO Steve Fifield said. “I hear a lot of frustration from CEOs that their firms are not as productive as they used to be.”
Chicago’s downtown acquired momentum in recent years that, while it definitely hit an obstacle this year, should continue in the pandemic’s aftermath, he added. Since the end of the last recession, roughly 200,000 people moved into the central core, an area that stretches out about 3 miles from the intersection of State and Madison streets. A high percentage have undergraduate and graduate degrees, an irresistible attraction for many downtown companies.
“They can still hire kids with great educational backgrounds and don’t have to pay them $200K a year, like in New York or other places where the cost of living is so high,” Fifield said.
Creative responses to the pandemic may also leave a few positive marks on the city and even make it more attractive, Rutledge said. The shutdown of indoor dining led many restaurateurs, including at Oxford’s Godfrey Hotel Chicago and London House Hotel, to establish outdoor dining, and customers raved about the experience.
“We have a winter wonderland going on there, where you can literally eat and have a dining experience outside, but in an igloo, or adjacent to a heater, and we’re going to do that all winter long,” he said. “It’s been a nice development for the restaurant industry that helped it survive, and it’s created a nice vibe on the street that’s more European.”
The office environment will have to change, the panelists agreed. This could involve a mixture of de-densifying traditional office space so social distancing is possible, along with the permanent use of work-from-home technologies for some workers, at least for part of the week. But that isn’t expected to injure the overall economy. It may even provide a boost by increasing demand for new offices and renovations of existing spaces.
“As someone who builds office buildings, de-densifying would be fine with me,” Clark Construction Senior Vice President Mark Eames said.
But no one really knows yet what that will look like.
“I’d love to say we have a blueprint, but overall, most [Chicago] tenants have not made long-term decisions about what they’re going to do,” Glenstar Managing Principal Michael Klein said.
What’s happening in Dallas office buildings may provide clues about what will happen in Chicago, he added. His firm has portfolios in both cities, and even though office occupancy in downtown Chicago still hovers around 12%, with the suburbs not much higher, in Dallas, average occupancy recently hit about 40%, and one Glenstar building there is at 50%.
“We are seeing our tenants there spread out,” Klein said.
Typically, that means removing workstations and letting workers sit far enough apart to meet social distancing guidelines.
“The idea of providing 80 SF or 90 SF [per] person is not the future, given how long the pandemic has lasted and given the toll it’s taken,” Klein said. “Communal space is still going to be something people want — that’s not going away — but you’re not going to see people crammed into small lounges.”
It’s going to take some time before Chicago hits any of Dallas’ milestones, McElroy added.
“In Texas, the schools are open,” he said. “There is not going to be a recovery and a return to the office until schools reopen, because parents are not going to leave their children at home.”
Decreasing downtown’s density could provide a needed boost to the regional economy, Zopp said. Mayor Lori Lightfoot has made enticing investors to neighborhoods beyond the downtown a hallmark of her administration, she pointed out. That may help firms still nervous about packing too many employees into the Loop establish operations in outlying areas.
Investment firm Mansueto Office and Chicago-based developer IBT Group recently broke ground on The Terminal, a $50M creative office project in the West Humboldt Park neighborhood, Zopp said. It’s part of the mayor’s Invest South/West program, which aims to bring hundreds of millions in new investment to underserved communities.
“It’s bringing additional development into areas that need it,” she said.
“We need the core to be strong and vibrant, but we need vibrancy out in the neighborhoods as well,” Rutledge said.
But just as the waning of the pandemic allows Chicago’s strengths to once again become apparent, its lingering problems are also coming back into view. That includes escalating levels of crime and the persistent threat of higher taxes needed to pay for city and state pensions.
“I was on the phone with a client from San Francisco the other day, and the first thing he alluded to was gun violence,” Eames said.
“That is both a perception and a reality,” Rutledge said, but he believes Lightfoot’s Invest South/West program may help address the challenge by rebalancing the economy in favor of high-poverty areas. “Jobs is what it’s all about.”
The state’s pension crisis may be an even stiffer challenge, he said. The total pension debt of the state and its local governments now totals $241B, according to Moody’s Investors Service. In April, Moody’s downgraded the state’s credit outlook from stable to negative, citing the debt and the economic turmoil touched off by the coronavirus pandemic.
“That ultimately is a brutal, slow leak that will sink the ship if we don’t address it,” Rutledge said.
Illinois Gov. J.B. Pritzker recently attempted a partial solution. He proposed a “Fair Tax,” a graduated income tax to replace the present flat tax, which would have boosted the amounts paid by wealthier state residents. The measure was rejected by voters in the November election.
“The governor hoped to have a simple fix,” Fifield said.
But a solution to this problem may be at hand.
Now that Pritzker’s preferred strategy has been rejected, he may be open to a plan that instead of just raising taxes uses a combined approach that both increases revenues and reduces the state’s long-term expenditures on pensions. There is even a model that can put the state on a path to financial stability and garner support from the business community, he said.
“A decade ago, everybody thought California was going to go bankrupt, and then [Gov.] Jerry Brown got in, and everybody thought, ‘he’s just going to raise taxes even more,’” Fifield said.
Brown instead used his Democratic supermajority in 2011 to tackle the state’s $27B budget deficit with a package of taxes and spending cuts. By the time Brown proposed a budget in 2018, the state had a $9B surplus and was ready to start reinvesting in higher education and child care services.
“You don’t hear about California going broke anymore,” Fifield said. “It’s possible that in two years we will be looking back, like we did in California, and say, ‘OK, the state is solvent now.’ Will we have some increased taxes? Probably.”
“I think most people would be open to a fair tax as long as it’s paired with a restructuring on the cost side,” Rutledge said. “That would allow us to climb out of the fiscal hole we’re in.”
“I think [Pritzker] will find a pathway to resolve this,” Zopp said. “But there will be shared pain across the board. That’s inevitable, but it’s not going to break us.”