Chicago CBD Office Market in the Groove, Even Property Taxes Unlikely to Bring It Down
Despite recent concerns of an imminent market correction, the Chicago central business district (CBD) still has room to run. There are many signs of optimism in the market, including continued healthy fundamentals and a wealth of redevelopment projects injecting new life and vibrancy into various submarkets.
In the second quarter, downtown Chicago wrapped up its busiest quarter for office leasing since 2016. Additionally, the downtown office vacancy rate of 11.6 percent was the lowest it had been since 2016. To top it off, Chicago is experiencing historically high annual levels of net absorption, which potentially could put upward pressure on rents, and sublease space is relatively scarce. It’s hard to find stronger evidence of a robust CBD office market.
Market statistics aside, noteworthy redevelopments have Chicagoans genuinely excited as they look forward to a new crop of influential spaces that will drive the next iteration of the Chicago office market.
The real estate fairy tale that has real estate aficionados entranced — not only in Chicago but nationally — is 601W Cos.’ Old Post Office project at 433 W. Van Buren. More than 1 million square feet has already been leased at the 2.8 million-square-foot space, largely thanks to Uber’s recent 463,000-square-foot lease. The project is expected to be 90 percent leased within the next six months. It’s a happy ending — or better yet, call it a happy beginning — for the long-vacant historic gem with a true Chicago personality.
Meanwhile, other significant redevelopment work is underway. Just north of the Old Post Office, a $1 billion plan is underway to redevelop Chicago’s Union Station and surrounding Amtrak property. This project, led by Riverside Investment & Development and Convexity Properties, calls for a new 1.5 million-square-foot office tower to be built a block south of the train station.
Brookfield plans to redevelop space above the State Street Macy’s department store into 650,000 square feet of creative office space that is rumored to have significant interest and will undoubtedly lead to new leases in the coming months.
Optimism for the downtown market is not limited to redevelopment, however. There is also healthy leasing demonstrated by activity in new trophy towers such as 110 N. Wacker, and by Salesforce’s 550,000-square-foot relocation to Riverside’s brand new 1 million-square-foot tower. Additionally, Google and Facebook are in talks to expand their Chicago offices with leases that could reinforce some high-profile downtown spaces.
With so much interest from big tech names, many believe (and hope) that Chicago could be seen as an advantageous location for technology companies to call home.
While technology companies have enjoyed rampant growth in Northern California, they’ve been bidding up the price of talent and the cost of living to an unfeasible level. Austin and Seattle seem to be on the same path. And Chicago? It has the sixth-largest pool of tech workers, falling just behind Seattle. It’s also one of the most affordable big cities in the United States, and unlike Silicon Valley, Chicago isn’t confining tech companies into one dedicated district. Instead, Chicago is advancing different hubs in Fulton Market, River North and The Loop.
The proof is conclusive. In 2019, we’ve seen Google’s cybersecurity spinoff, Chronicle, choose Chicago to grow its engineering operations; Stripe, an online payments company based in San Francisco has opened a Chicago office at 515 N. State; and software company ServiceNow opened an engineering office in Fulton Market last year. And that’s only a few.
All this feels so good we sometimes forget the very real threat that could stop this momentum: taxes. Chicago’s triennial assessment in 2021 resurfaced well-founded concerns about the tax burden for property owners. There’s no doubt that tax increases would impact landlords and, ultimately, tenants through higher gross rents.
That said, the new assessor methodology is a net positive for current real estate owners and future investors alike. Here’s why: the new process will provide much-needed clarity to the way that Chicago office buildings are taxed and, after an initial adjustment period, will put Chicago on the same level as other large office markets such as New York, Los Angeles and Boston.
The new tax assessment method should give the capital markets a boost of confidence as investors that have historically bypassed Chicago — due to infamous assumptions about tax treatments — look to underwrite acquisitions looking forward.
Although a recession would likely slow growth here as it would nationally, downtown Chicago will remain highly sought after by investors looking for stable returns, owners looking for quality product and tenants looking to tap into a well-educated and growing workforce.
Chicago’s appeal is only heightened by the ability to live, work and play within a 30-minute (or less) commute via a variety of transportation options.
— By Jeff Dowdell, Senior Vice President, Transwestern. This article originally appeared in the October 2019 issue of Heartland Real Estate Business magazine.