New Chicago Office Markets Shape Perception of the City
It’s an exciting time to be part of the action in Chicago’s real estate market. While Illinois remains an “outflow” state, construction cranes dot the Chicago skyline and the city’s inflow numbers remain positive. Large employers are considering Chicago for campus-like headquarters operations and exciting markets are continuing to grow.
In particular, west side blight continues to be replaced by residential growth in the West Loop, with retail services finally gaining momentum despite slow adoption by soft goods merchants. The West Loop’s immediate neighbor to the north, Fulton Market, maintains its buzz as the popular new kid in town, demonstrated by its ability to attract office tenants. Yes, office tenants.
Transportation for workers, the primary objection to Fulton Market that has previously knocked it out of contention, will continue to be a challenge as public options slowly catch up to the development in the area. Employers will have to be creative in providing alternatives for new talent not within reasonable cycling or ride-sharing range.
How did this happen when a decade ago the notion of office space west of the expressway was thought to be an absurd one? Because Chicago is not landlocked to the west by any natural barriers, it now seems an obvious conclusion that expansion would only continue to spread. Then, Google planted its flag in Fulton Market and the potential for the area became real. McDonald’s having taken up residence to the south only solidified the image for both West Loop and Fulton Market as legitimate office markets.
How rents are trending
In the traditional central business district (CBD) office arena, there have been both signs of landlord- and tenant-favorable conditions. Landlords often joke that the “landlord-friendly” window for negotiating is a very short one. However, concessions like free rent and construction allowances have, for the most part, corrected from where they were post-recession.
Despite an increase in vacancy due to new developments, the CBD average gross asking rent has increased to just under $40 per rentable square foot. While this may seem high to Chicagoans, it is still a relative bargain when compared to the coasts. For example, rent rates in the San Francisco area have increased by over 60 percent in the last decade. Apartment rents have kept pace, too.
Chicago, with its historically abundant expansion capacity, has experienced office rent percentage increases in the low single digits during the same period. While vacancy is likely to rise in 2018 to 2019 as more square footage is introduced to the market and subleases are becoming plentiful again, gross asking rents will likely “correct” once again. And, as previously mentioned, because Chicago lacks natural barriers to expansion to the west and south, the city’s boundaries continue growing, keeping pricing relatively stable.
One property on the edge of the CBD that has languished for decades and has seen repeated, failed attempts at redevelopment is the former U.S. Post Office. At 2.5 million square feet, the property has suffered from an image problem — too old, too big and too far west.
In reality, the building is mere steps away from the western edge of Wacker Drive, just around a walkable corner from Willis Tower, 311 S. Wacker and 300 S. Wacker, not to mention suburban commuter trains.
Design, construction and leasing are well underway at the office project, and it is a widely anticipated redevelopment in the city. The 601W Companies-owned property will be a game-changer for that end of town. Large-block tenants will enjoy state-of-the-art amenities, and certain sections of the building will welcome the public with exciting entertainment and dining options, as well as never-before-seen public views of the city.
Yes, it is an exciting time to be in Chicago. For users of office space contemplating tenancy here, the options are widely varied and offer opportunities never before seen in the city.
— By Kimberlyn de Buhr, Senior Vice President, and Stephen Sevenich, Associate, Transwestern. This article originally appeared in the June 2018 issue of Heartland Real Estate Business magazine.