By Allen Rogoway, Cresa Chicago
Over the past seven years, the Fulton Market office submarket has changed the landscape, and boundaries, of Chicago’s central business district (CBD) and what a “live-work” ecosystem can look like. Whereas the River North office submarket evolved over 30 years to become a low-cost alternative to the Loop for creative, boot-strapped companies requiring mostly small footprints, Fulton Market was developed for tech-centric, multinationals willing to pay “Trophy Tower” prices to attract and retain the very best talent.
Allen Rogoway, Cresa Chicago
Employees didn’t mind adding a Chicago Transit Authority (CTA) transfer or 20 extra minutes to commute times each way in order to be in a neighborhood that was developed by big money yet felt authentic. Much of the architecture was preserved, and new construction was held to standards whereby the new mostly blended in with the area’s former produce, cold storage and century-old warehouses that had been converted for office use.
Then old-guard companies and industries from accounting, consumer products and even law, started to set up shop in buildings that provided people with a very different workplace experience than what they were used to. Ownerships thoughtfully invested in tenant amenity spaces and retail pairings that matched with what employees wanted (thanks but no thanks for the dry cleaner), which meant the hottest restaurants, rooftops and coffee shops were around every corner.
Other submarkets were limited in what they could do to keep pace with a district that began with a blank canvas and had the city’s support in fast-tracking infrastructure and project approval with the explicit purpose of enticing companies to commit to Chicago and hire from its expansive and talented university pool.
Pandemic effect
Then the music stopped. COVID-19, work-from-home, government-then-corporate dictates and economic disruptions caused companies to reassess workplace safety and the cost of operations. Fulton Market landlords and tenants were in the same boat as those in other submarkets, yet (possibly) even more affected by the rapid changes. Vacancies in Fulton Market more than doubled since fourth-quarter 2019, up to 31.6 percent, while other submarkets have seen only single-digit increases during the same time.
When the pandemic hit, a good number of Fulton Market tenants were in the early stages of long-term leases at premium rents. Space programs had been developed to match density metrics with space features similar to their competitors — and with private equity backers measuring the correlation between headcount growth and rentable square feet at every quarter. Some companies had yet to even step foot in their recently built-out space when stay-at-home orders were issued — and they may never occupy those same offices built out at premium construction costs.
So, while many of these companies have put space on the sublease market that will compete with direct vacancies — there is now 455,614 square feet (5.3 percent) of sublease space available, with 146,996 square feet (1.8 percent) of this vacant — these same entrepreneurial developers and landlords are showing resiliency and a willingness to work with lenders on adjusting leasing parameters and short-term returns.
They are starting to convert raw, vacant space into fully furnished spec space with certain “enterprise” concepts brought to market by shared-office providers. Tenants and landlords are working together in more of a partnership to market space for sublease with certain direct lease features offering flexibility in term, and of course, at a significant discount.
Looking ahead
Predicting the future of a submarket is about as easy as planning for a picnic in Chicago in May. But there has been too much investment made in Fulton Market, and excitement to be part of this community, to bet against its resurgence. While rents will compress — rents are currently down nearly 2.5 percent across all classes since this same time last year — and creative concession packages will be offered to attract tenants that are re-setting long-term space needs, Fulton Market landlords will no doubt lease up existing space.
Fulton Market has become a destination, a part of the city where locals and out-of-towners experience the old meeting the new. It is firmly established as a submarket, one that all downtown tenants will consider or at least compare with more traditional Loop options when considering new space.
Corporate users of office space will weigh the pros and cons of the market the way they do with other more fluid boundaries looking at commuter scores, inventory, property/space features and rents to determine if the area gives them an advantage in attracting and retaining the best tenants and talent, while creating and maintaining company culture.
So, get the lawn chairs out and Yeti coolers ready. Before we know it, this submarket will stretch again to re-purpose more of the same inventory, creating more demand in parts of the city never imagined.
Allen Rogoway serves as managing principal with Cresa Chicago. This article originally appeared in the March 2021 issue of Heartland Real Estate Business magazine.