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January 4, 2018

2018 Predictions

By Jonathan Zimmerman

Happy New Year! As we dig into 2018, it is time once again to pull out the crystal ball and predict what events lie ahead. Before we start, let’s look back and see how I did in 2017:

1) With the increased supply caused by new construction and resulting shadow and sublease space, the total vacancy will rise by approximately 1.5%. Close. It actually went up 2.3%.

2) Average rents will increase slightly in the first half of 2017, then begin to plateau for the second part of the year. Average tenant improvement allowances, rent abatement, and other incentives will remain about the same as last year. Generally true.

3) The Old Post Office will land a significant anchor tenant who will occupy over a quarter of the building. Other smaller tenants will commit as well over the course of 2017, as this notable redevelopment becomes a quick success. Not yet. Could Amazon be the first and only?

4) The bloom will be off the Fulton Market rose just a bit, as several of the new office buildings either planned or under construction will struggle to fill space.This will lead to a slowdown of new development projects for a while. Wrong. Not only is the space briskly being filled, even more buildings are planned.

5) The sales market will remain quiet for most of 2017. In the fourth quarter, however, things will begin to loosen up just a bit and price expectations will be dialed back a notch. This will allow for some of the investors who had been sitting on the sidelines for the past few years to start getting back in the game. The market did remain relatively quiet for much of the year, but there has been no loosening up yet.

6) Just when we thought Loop office development would be on hiatus for a few years, the market will be shocked by one more announcement: a new tower located on the General Growth site at 110 North Wacker Drive to be anchored by a well-known, Fortune 500 tenant who will take occupancy in early 2021. Yes! Thanks, Bank of America for making me look good.

7) In spite of the planned redevelopment of the Tribune Tower, CIM Group will decide to keep floors 3 – 7 for office use and sign WGN Radio to a long-term lease. As part of the new deal, they will be forced to abandon their ground floor studio, which will be leased to a national retailer for $300 per square foot. Wrong. WGN is off to 303 East Wacker and development plans for the Tribune Tower have yet to be announced.

8) Leasing activity will remain slow in Goose Island. However, the city will announce a series of notable infrastructure improvements that will make this sector much more accessible to prospective users long term. Success will come, just not as fast as most hoped. Activity did remain slow, but the infrastructure improvements are still in the discussion stages.

9) As part of the City of Chicago’s astonishing decision to legalizing sports gambling, plans will be announced to construct a land-based casino on the site of the former Michael Reese hospital, kicking off a billion-dollar development which will include hotels, retail and housing. Wrong, but still a good idea.

10) Let’s try this one once more: A grocery store will sign a lease in the East Loop this year to cater to the rapidly growing residential population in the central business district. Still, no. I am giving up on this one, which means it is certain to happen in 2018.

Overall, not too bad. Can I top my performance in 2018? Here are my best guesses:

1) The market will keep marching forward at a slow and steady pace. Average rents will remain consistent with 2017 levels. However, modest vacancy increases will help put tenants on a more level playing field as and might even lead to an advantage in certain circumstances. For the most part, though, we will be at equilibrium.

2) Sales activity will start to slightly pick up towards the end of 2018 due to lowered seller expectations and prices creeping downward. Those who have been sitting on the sidelines will start to get back in the game.

3) The Tribune Tower redevelopment plans will be announced and feature luxury apartments on the upper floors and a hotel on the lower half. The first two floors will be leased to a significant (and surprising) national retailer which will continue to accelerate the shift in retail activity towards the Chicago River and Millennium Park.

4) As part of the ongoing Willis Tower renovation, Willis will give up its naming rights. Will the Sears name be restored? Nope, instead, the building will be rechristened after its largest tenant. Welcome, United Tower.

5) No new office developments will be announced, as there is more than enough going on now to satisfy every tenant currently in the market for the next few years.

6) After being declared a finalist, Amazon will ultimately not select Chicago for its HQ2. Atlanta will be declared the big winner.

7) As a strong consolation prize, Chicago will attract a significant corporate headquarter that will relocate here from another Midwest city. This tenant will become the anchor of the Old Post Office.

8) With Amazon out of the picture, Goose Island, the River District, and believe it or not, Fulton Market will struggle to find tenants. Of course, Lincoln Yards will not, because Sterling Bay.

9) Plans will be announced to shut down and demolish the Thompson Center by the end of 2019. No firm redevelopment plans will be announced and the site will end up sitting vacant for an extended period of time. However, the State of Illinois’ search for new office space will provide a nice little boost to the market towards the end of the year.

10) Take two on this prediction. Spurred on by the legalization of sports betting, plans will be announced for the former Michael Reese Hospital site to be redeveloped into a casino and entertainment complex…… which will include a grocery store.

Best wishes for a happy and prosperous 2018!