The 2015 Top Ten Events In Downtown Chicago Commercial Real Estate
2015 has been a wild and crazy year in Downtown Chicago commercial real estate. In my 20 years in the industry, this is the most active phase that I can ever recall.
In tribute to the great David Letterman, from the home office in Chicago, Illinois, here are my Top Ten Chicago commercial real estate highlights for 2015:
10) Block 37 finally emerges as a significant destination. After decades of futility, the former “hole in the center of the Loop” transformed from a sleepy mall into the anchor for the State Street retail district. The recent additions of Latinicity and the AMC Dine-In movie theaters have complimented the existing retailers and substantially increased foot traffic. Upcoming additions include The Dearborn Restaurant on the corner of Dearborn and Randolph and a 690-unit, luxury apartment building currently under construction above the mall.
9) Advances in public transportation. The overwhelming desire of so many office tenants wanting to be close to Union Station and Ogilvie Transportation Center has been a key factor in the growth of the West Loop and the systematic decline in popularity of the East Loop. In response to this, construction has just concluded on the Loop Link express bus service which is designed to tie the East Loop with the West Loop more closely by cutting down on the commute time by several minutes. Recent sizable leases with Kraft Heinz, Oscar Meyer and Cision may have been influenced by this new service. Additionally, using the highly successful new Morgan Street El station which helped spur the rapid growth of Fulton Market, the CTA opened a new station at State and Cermak in 2015 to help generate activity in the planned entertainment district in nearby Motor Row.
8) Growth of co-working spaces. The combination of a limited supply of small office space and a plethora of start up businesses who crave flexible, move-in ready suites led to the brisk expansion of co-working and shared office facilities. Led by We Work and 1871, these facilities have leased a significant amount of space in A and B class properties and seem to have filled a void in the market.
7) Continued conversions of C-class buildings. The trend of alternative uses taking over C Class buildings was well on display in 2015. Hotel openings in former office buildings include Hyatt Centric The Loop at 100 West Monroe, the largest Residence Inn at 11 South LaSalle and a Hampton Inn at 68 East Wacker Place. More hotels are scheduled to open soon at 360 North Michigan, 39 South LaSalle and 32 West Randolph and residential conversions are slated for 29 South LaSalle and 330 South Wells.
6) Space utilization. After an industry wide shift to primarily open configurations several years ago, 2015 started to see the return of offices and private work spaces. Enough time has gone by to evaluate open office configurations and many firms have concluded that it is not an ideal fit. The work world is now gravitating towards a happy medium where offices are starting to reappear, albeit fewer in number and smaller in size than in the past. Many are being placed in the interior of the space with glass fronts to bring in more natural light and to allow those in workstations to enjoy the window line. Small private rooms called “phone booths” are being used to allow those in the work stations to have a private area to make calls or concentrate when working on an important project.
5) Upcoming property tax hike. Thanks to the ongoing pension and budget crises, the City of Chicago has passed a huge property tax increase that will take hold next year. While the total impact is not yet known, more than likely it will be used as a convenient excuse to raise rents. In most cases, the increases will be passed through directly to tenants. How this impacts leasing activity will be one of the key questions of 2016.
4) Office building amenities. In order to remain competitive, many buildings are starting to act more like hotels in terms of the amenities being offered to tenants. Features such as fitness centers, food courts, Wi-Fi lounges, conference facilities and roof top decks are becoming the norm and something prospective tenants have come to expect.
3) Emergence of new markets. Thanks to Google, the Fulton Market district is one of the hottest in the entire city. Rents are skyrocketing and developers are scrambling to create new office space in order to keep up with the demand. Retail and residential growth is also blossoming as well. Several developers are now focusing on finding the next big thing, with Goose Island and Motor Row the likely candidates.
2) Rent increases. Rents have ascended across the board in all submarkets. Fulton Market has seen rents grow by as much as $12.00 per square foot in some cases, while most other markets have seen more modest hikes in the $2.00 – $6.00 per square foot range as compared to 2014. The Class C market has tightened quite a bit and it has become difficult to find deals under $25.00 per square foot.
1) Sale prices. Downtown office buildings of all sizes sold at record levels in 2015, both in terms of price and number. Total sales exceeded $6 billion, far and away a record. Leading the pack was the Willis Tower, which sold to the Blackstone Group for $1.3 billion. Other noteworthy transactions include the AON Center selling for $712 million, 333 West Wacker trading for $320 million and 111 North Canal for $304 million. Each transaction represented a sizable profit for the previous owner. In order to justify these prices, the new owners typically will upgrade common areas, add amenities and then raise rents in order to justify the prices being paid.
In my next blog, I will put forth my predictions for 2016.