Some employees have returned to their Loop offices, but many are still working remotely. This could be the trailhead for a long-term trend, with more corporate users giving their employees wider latitude to work from home. It may also augment the progression of Chicago’s central business district into a mixed-use neighborhood.
According to research compiled by Colliers International’s Chicago office, the vacancy rate in the CBD soared during the second quarter, rising 100 basis points to 13.9 percent. That’s the largest quarter-over-quarter increase since 2009 and, as it stands, the submarket’s highest rate in more than eight years.
And it’s not as if Class A buildings are immune. There has been a bevy of new space in recent years—a cumulative 3 million square feet just with Hines’ River Point at 444 W. Lake Street, John Buck Company’s 151 N. Franklin and Riverside Investment & Development’s 150 North Riverside—that has drawn users away from aging, Class B properties in the Loop. This category of premium office space, according to Colliers data, saw an 80 bps increase last quarter, rising to 12.2 percent. With other projects set to deliver, such as Bank of America Tower, BMO Tower and the remainder of the massive, redeveloped Old Post Office—all dreamed up in the halcyon days before COVID-19—Class A vacancy will likely only increase in the quarters and years ahead.
Consider further that even as supply goes up, demand may go down. It’s too early to tell how strong this trend will be, but one theory suggests that corporate tenants suddenly forced to experiment with their employees working remotely will decide that they can maintain productivity with a smaller office footprint. In the O’Hare submarket, for example, tech firm The Clarity Group recently downsized from 9,000 to 1,200 square feet, citing the success of their own work-from-home model.
All of that sets the stage for what may be a true transformation of the Chicago Loop. Once defined by office users, with some hotel, retail and cultural uses sprinkled in, the submarket’s evolution has been a long time coming. But as more and more residential developments began to pop up in the Loop—and new office hot spots emerge in River North, the West Loop and elsewhere around the city—a co-mingling has occurred. The Loop has slowly modified into a live-work-play environment that many young professionals desire.
The pandemic may be the shot in the arm to kick that trend into higher gear. As evidence, consider the $174.5 million in financing that co-developers Sterling Bay and Magellan Development Group recently secured for the construction of 300 North Michigan Avenue.
“This development will serve as a striking new addition to Chicago’s Michigan Avenue,” said Andy Gloor, CEO of Sterling Bay. “We are extremely proud that financing has successfully crossed the finish line despite the pandemic.”
Designed by bKL Architecture, this 47-story, 523-foot-tall tower will rise on one of the city’s most sought-after blocks. What’s truly amazing is that in addition to 289 residential units, the mixed-use project will include 25,000 square feet of flagship retail space and a 280-key hotel—two sectors that have been bludgeoned by the pandemic. None of the project’s space will be set aside for office use.
The project was announced well before COVID-19 reared its head, but this new financing shows that capital sources are optimistic on non-office, mixed-use developments in the Loop. Bank OZK provided financing for this project and Pearlmark Real Estate and Monroe Capital supplied mezzanine financing. Nearly $12 million in equity was also sourced from more than 260 investors on CrowdStreet.com for the project.
“Securing a construction loan of any dollar amount in today’s business climate is a feat, but to secure financing of this magnitude—especially for a property that includes significant involvement of a hotel operator—is almost unheard of,” said Stephen Quazzo, CEO of Pearlmark.
The outlook for office space in Chicago’s Loop (or anywhere in the country, really) is still murky at the moment. Colliers data shows that asking rents in the Chicago CBD fell for the first time in eight years during the second quarter and there were no less than 33 large blocks of space available, adding up to over 7.3 million square feet cumulatively.
Is this a momentary blip in response to COVID-19? Only time will tell but the $250 million 300 North Michigan Avenue project is indicative that even a once-in-a-century global pandemic can’t stop the Loop’s transformation into a true live-work-play community.