This time of year, analysts in various business fields publish views about the state of their markets and what they see for the months ahead. Understandably, many try to find a unique theme or a “grabber” of a headline to dress up what can be a dry topic.
When looking back at 2022 in office real estate trends, the folks at Cushman & Wakefield resorted to the Yogi Berra-ism, “It’s déjà vu all over again.” You could hear their frustration in that line. It was a way of saying that nearly three years after the pandemic turned that part of real estate upside down, they are still puzzling over the same questions.
Will companies change how they use or design offices? Will employee lounges, free food, private outdoor space and other assorted perks induce employees to return to daily commutes? Or, as some staffers may ask themselves, will the boss fire me if I don’t show my face more?
If it seems the market is somehow stuck and bland, it’s anything but, said Mason Taylor, executive managing director at Cushman. He sees a lot of future movement by companies gravitating to more modern space. Some will switch addresses for employee convenience or to save money. He even uses the term “exciting” for some changes, such as Google’s pending move into downtown’s Thompson Center and what that might mean up and down La Salle Street.
“You have to look at what employees want. Priorities have shifted,” he said. “One priority is that access to commuter trains is now paramount.” Taylor said an easy commute helps people with maintaining work-life balance, another expressed goal of today’s workforce.
That could bode well for a pickup in leasing in the Loop and near the Metra stations. Perhaps in time, there will be less emphasis on Fulton Market and the Near West Side, although those markets are still the hottest places going. The Cushman analysis said the average Fulton Market rent has hit $67.65 a square foot, while most of the Loop is somewhere in the $40s.
Cushman reported at the end of 2022, the office vacancy rate in the central business district — most everything from Oak to Harrison streets and from the lake to Ashland Avenue — was 22.3%, compared with 20.3% 12 months before. Leasing slowed dramatically in 2022, and the report said for two straight years, more vacant space has hit the market than has been absorbed via leases.
Space that’s out for sublease, whether occupied or not, is a big factor downtown. Cushman said 6.9 million square feet is available for subleasing, equal to one-and-half Willis Towers. It’s the highest number Cushman has recorded.
The situation is different when it is a new so-called Class A building, so named because it has up-to-date amenities and mechanicals and can offer customized floors for big tenants. Examples of such towers finished in 2022 include the home of BMO Harris Bank at 320 S. Canal St. and developer Sterling Bay’s 345 N. Morgan St., anchored by Havi Group and Wellington Management. More are in the works.
Developer Related Midwest likes new offices enough that it jettisoned plans for an apartment tower at 725 W. Randolph St. It now wants it to be 1 million square feet for offices and fitness space. It would have a rooftop pool, among other lures to coax workers out of the house.
Interest in new buildings is so strong that one developer, asking not to be named, said there are really two distinct markets now — the Class A buildings craved by tenants with great credit and the older stuff, categorized as Class B or C, that needs work or a costly conversion to residential to stay viable.
Those places are where the interesting possibilities dwell.
“We heard a lot of talk about the flight to quality. We think a flight to value will be a new trend,” said Matt Garrison, CEO of developer R2 Cos. “The rent delta from Fulton Market to the Loop has become mispriced, making the Loop a relative value. Google recognized this and others will likely follow suit.”
Garrison’s company has been hired to figure out what to do with the Chicago Board of Trade Building, a statuesque symbol of the central Loop’s dilemmas.
Taylor said many of downtown’s classic buildings will find new office users once landlords spring for improvements. “It’s really the companies that will continue to value Chicago for its talent pool that is deep and diversified,” he said.
Any guesses on which alleged Berra-ism is used in next year’s commercial real estate reports? I’ll go with, “When you reach a fork in the road, take it.”
