CHICAGO - Corporate moves from the suburbs, record tourism and booming real estate development are fueling downtown Chicago's economy, but the good times have produced one big unexpected challenge.
Office owners are staring down a wave of upcoming large vacancies that could alter how the city's core works in the decades to come.
Part of the problem is due to changing tenant preferences, competition from sparkling new skyscrapers along the Chicago River and the emergence of entirely new office markets such as the Fulton Market district.
At the same time, an unusually large number of office towers on and around the LaSalle Street canyon - for decades the center of Chicago's financial sector - are up for sale. Among properties that could change hands are the James R. Thompson Center and the Chicago Board of Trade Building.
The future could rest in the hands of new building owners and their efforts to stem the exodus from the Central Loop.
"This is the heart of the city," said Kevin Purcell, a longtime real estate executive and investor in downtown office buildings. "This is the economic engine. I would hate to see that lost."
"The perception is, this is old-school," adds Purcell, president of leasing and management services at MB Real Estate. "How do we change that?"
New York-based AmTrust Realty Corp. earlier this month hired Eastdil Secured brokers to sell a seven-building, 6.3 million-square-foot office portfolio. Five of the buildings are in the Central Loop, including two on LaSalle, adding to the sense of flux in the area.
The Central Loop office market, roughly bounded by CTA elevated train tracks as well as the Chicago River north of the tracks, is the most established area of Chicago real estate and the easiest to access. The Loop, which got its name from the shape of downtown train routes, once teemed with suited office workers on their way to trophy towers.
But as companies increasingly focus on their office spaces and surroundings to differentiate themselves in recruiting, older-generation buildings in the Central Loop have faced unprecedented challenges.
One of the biggest examples: Bank of America's scheduled move from 827,000 square feet in the 85-year-old tower at 135 S. LaSalle next year for a skyscraper under construction along the river at 110 N. Wacker Drive.
Other landlords in the area also face defections, including BMO Financial's plan to leave more than 700,000 square feet in three buildings on and around LaSalle in 2022. BMO in December confirmed plans to anchor BMO Tower, a 50-story office tower that will be constructed next to Union Station.
Northern Trust, meanwhile, will leave behind 255,000 square feet in a building at 231 S. LaSalle, as part of a move to CNA Financial's red former headquarters building on South Wabash Avenue next year.
Many of the large upcoming vacancies are on lower floors, which have less desirable views and command lower rents.
The Central Loop vacancy rate remains slightly below that for downtown as a whole, according to commercial real estate brokerage CBRE. Yet Central Loop asking rents have grown more slowly than hotter submarkets, and impending move-outs are likely to strain the area.
Since the previous real estate boom peaked in 2008, the area mostly has been bypassed for big developments and high-profile leases - some of them in areas that previous generations of developers and employers never would have considered for office workers.
There are 17 office buildings larger than 200,000 square feet built or now under construction downtown since 2008, according to CBRE. Just one - the office portion of Block 37, completed in 2008 - is in the Central Loop.
Meanwhile, among the 28 largest new office leases during that same time, just three took place in the Central Loop.
Development sites are rare in the Central Loop, but there are plentiful opportunities to buy into the market.
AmTrust's properties joined a for-sale market that already includes the Chicago Board of Trade Building at 141 W. Jackson Blvd.; the Burnham Center, home to Grubhub's headquarters at 111 W. Washington St.; and the 40-story tower at 190 S. LaSalle.
Montreal-based Ivanhoe Cambridge has hired HFF brokers to find a buyer for the 38-story tower at 180 N. LaSalle, but it has yet to formally go on the market for sale, according to people familiar with the building.
Also, Gov. J.B. Pritzker recently renewed long-discussed plans for the state to sell the Thompson Center. A buyer could redevelop the Helmut Jahn-designed building or demolish it and replace it with a skyscraper, pending zoning approval from the city.
Some of the buildings for sale already have been upgraded and filled with new tenants.
AmTrust's buildings will require a landlord with pockets deep enough to invest hundreds of millions of dollars beyond the purchase price to spruce up the decades-old properties and sign new tenants, real estate experts say.
But it may take more than swank tenant amenities like a gym and rooftop deck to attract companies into the Loop because, as CBRE office tenant broker Kyle Kamin said, "There's almost no center of gravity anymore."
The properties attracting large tenants include ground-up developments along the river and in Fulton Market and big existing buildings such as the Merchandise Mart along the north bank of the river and The Old Post Office redevelopment at the south end of the established office market.
East of CTA trains, huge investments in Prudential Plaza and the Aon Center have primed the pump on new leases.
Meanwhile, megadevelopments such as Related Midwest's The 78, a $7 billion project planned along the river between the South Loop and Chinatown, and Sterling Bay's planned $6 billion Lincoln Yards on the river along Lincoln Park and Bucktown, are vying for tenants to anchor huge urban campuses.
"There are shinier objects in the Chicago office market right now," said Ari Klein, an office tenant broker at Cushman & Wakefield.
In a tight labor market, many companies have placed a greater premium on factors such as river views and proximity to neighborhood amenities like restaurants, entertainment and open space. Real estate has become a key element in recruiting and retaining top employees, brokers and investors say.
"Fulton Market's got restaurants and excitement, and it's different than any other area of Chicago," Klein said. "I would like to see the Central Loop get livened up a little bit."
Challenges faced by office landlords come despite some wind at their backs. While workers are leaving, residents are moving in, which has led to new restaurants, food halls and stores.
From 2010 to 2018, private-sector jobs downtown increased by 23.5%, compared with an increase of 14.8% for the entire metro area, according to a new study by the Chicago Loop Alliance. The study covered the area of downtown bounded by Lake Michigan, the river and Congress Parkway - an area larger than just the Central Loop.
The Loop added 21,258 residents from 2013 to 2018, a 29% increase, according to the study. The increase has come from new construction, such as the addition of an apartment tower atop the Block 37 mall, as well as conversions of older buildings to homes. A record 57.7 million tourist visits in 2018 helped support a growing number of hotels and restaurants downtown.
But Central Loop office buildings, many of which are several decades old, have struggled to keep pace with their modern competitors. Several of them have been converted to other uses, such as hotels, while others are in need of extensive upgrades.
Kamin said he expects more office buildings to find a second life as hotels or residential towers. "I don't think there's a successful path for some of these functionally obsolete buildings as offices," Kamin said.
If they don't convert to another use, landlords must choose between investing heavily in new amenities or lowering rents in order to compete.
The high cost just to acquire a property presents relatively few opportunities for major overhauls, said developer Craig Golden of Blue Star Properties.
"A lot of developers don't have the money or the foresight to think differently than they've done in the past," he said. "Those vacancies that occur in the Loop will force owners to focus on their vision. You don't need to do those things when it's going well."
Blue Star and partner Wolcott Group took a creative approach after buying the Daniel Burnham-designed building at 125 S. Clark St. from Chicago Public Schools for $28 million in 2015.
The venture took out a nearly $100 million construction loan in 2016, and converted the 20-story building into modern offices, branded as The National - a reference to the property's 1907 opening as the home of Commercial National Bank.
The developers added the type of distinguishing feature that has helped properties thrive in recent years, creating the sprawling Revival Food Hall on the ground floor. The food hall brings in lunch crowds from throughout downtown, adding to the building's vibrancy. Office tenants include co-working firm WeWork and the headquarters of Paper Source.
Blue Star in November sold the building to German investment management firm Commerz Real for more than $196 million, pocketing a sizable profit.
The food hall is an example of the type of calling card Loop office buildings will need to thrive. More broadly, Purcell hopes landlords can collaborate on strategies to enliven the Loop, such as seeking more festivals, after-work events and experiences for employees.
"The focus has been, 'How can I improve my building?'" Purcell said. "Which is right. But there's not enough focus on why tenants are moving to River North, the West Loop and Fulton Market.
"Building owners are smart, sophisticated, well-capitalized investors. They need to get together to figure out what we can do to help the neighborhood. We need to stop with the old-school ways and work together."
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