Chicago’s Financial District, centered on historic LaSalle Street, is ripe for redevelopment as Chicago’s hot new live/work/play (LWP) neighborhood, according to a newly released report from Cushman & Wakefield.
“Many of these historic buildings are rich in character and yet virtually obsolete due to deferred maintenance and other issues that have pushed up office vacancy,” said Susan Tjarksen, managing director, Cushman & Wakefield’s strategic capital markets. “Yet with thoughtful modifications and, in some cases, entirely new uses, there’s an opportunity to create the kind of fun, livable neighborhood that’s emerged in Fulton Market and the greater West Loop, leveraging the CBD’s unparalleled access to transit and proximity to the river.
According to the Cushman & Wakefield report, entitled “What’s Next for the Central Loop?”, the recent or impending departure of firms such as Bank of America (524,000 square feet), Northern Trust (404,700 square feet), cars.com (158,200 square feet) and more from the Financial District will result in a net loss of 700,000 square feet of office space, even after accounting for new leases. The Central Loop—which is bordered by Wacker Drive to the North, Harrison Street to the South, State Street to the East and Wells Street to the West—currently has a 15.1 percent vacancy rate, compared to a 12 percent rate for the CBD overall.
“The newest generations, Millennials and Gen Z, are gravitating more to CBDs due to proximity to transportation and cultural preferences,” Tjarksen said. “They are demanding that these core urban areas reflect their needs and interests, which clearly tilt toward live, work, play environments.”
Other notable findings from the report show that 78.4 percent of Financial District firms relocated or are relocating to trophy or under-construction buildings, with 71 percent moving to the West Loop. On average, departing tenants are paying 128 percent more for their new space—equting to $33.70 per square foot net versus $26.40 per square foot net. The average year built of office properties in the Central Loop is 1964, while the average year of renovations is 1993.
Financial District stalwarts are leaving the office buildings on LaSalle Street and nearby streets for more open, collaborative space in new or redeveloped buildings in the West Loop and other downtown submarkets, the report says. These state-of-the-art workspaces are viewed by employers as a key recruiting tool for millennials, who will comprise the majority of the workforce by 2022. This younger generation also prefers to live near the workplace, not be reliant on cars and have the best of retail, restaurant and entertainment close at hand—all of which opens the door to a creative re-visioning of the Central Loop that will keep it vibrant for many years to come.
“Projects on the periphery of the Financial District—including the office-to-hotel conversion of the space above the Nederlander (formerly Oriental) Theatre and retail-to-office conversion of the top seven floors of the Macy’s flagship store—show how these older buildings can be preserved while finding new life as multifamily, hospitality, office, retail or a combination of uses that support 24/7 activation,” said Gregory Kirsch, executive managing director and Midwest retail leader in Cushman & Wakefield’s Chicago office.
Architecturally speaking, the city center has a cool all its own. Buildings like The Rookery and the Board of Trade are a timeless source of inspiration for Chicago developers. With thoughtful modification, LaSalle Street can become the live-work-play nucleus of the Central Loop. Activating Central Loop streetscapes for all Chicagoans would involve providing more open ground level spaces, establishing more green and open space, as well as engaging multiple levels of uses that attract the passerby. In different contexts, New York City’s High Line, which welcomes 4 million visitors annually, as well as Miami’s Lincoln Road, San Francisco’s Transbay Terminal, Seattle’s Alaskan Way waterfront and Chicago’s own Riverwalk illustrate how thoughtful pedestrian arteries can activate urban spaces to a higher density of retail, multifamily and office.
Chicago’s Riverwalk has been an incredible success story of the past decade, drawing huge numbers of both tourists and locals during the city’s warmer months. There are currently 1.5 million users of the Riverwalk, and in 2017 Riverwalk businesses took in $11.6 million. Connecting to this high-throughput pedestrian area would be key to driving foot traffic towards the Central Loop.
The Central Loop’s superior public transportation options and walkability make it ideal for apartment growth. The submarket reported 94.4 percent occupancy in stabilized new construction and/or renovation delivered between 2010 and 2018 and 2.2 percent year-over-year rent growth as of Q1 2019. That is not to say there are not still requirements to make the Central Loop a thriving multifamily submarket. Improvements would be needed to fulfill the range of other renter preferences including a large-format grocer or marketplace, physical fitness centers, layered outdoor-to-indoor experiences, mixed-use buildings that include office, residential, hospitality and retail combined and active uses that extend through day and night.
Office use will always be the driving factor on LaSalle Street. Smaller startups, nimbler and more entrepreneurial in approach and funding, have emerged up and down this prestigious half-mile of Chicago’s Central Loop. Class-B office space, which accounts for 60 percent of total Central Loop inventory, is an economic option for these young and quickly growing companies, which may be years away from paying premium rents in submarkets like River North and the West Loop. Since 2015, Chicago technology companies such as Snapsheet, ActiveCampaign, SpotHero and ReviewTrackers, have accounted for 7 percent of all Central Loop leasing activity and 17 percent of Class-B leasing activity in the Central Loop. Consulting firms show similar growth in Class-B activity accounting for 13 percent of overall leasing activity in the submarket and 23 percent of Class-B leasing activity.
Retail must grow organically in the Central Loop with one discrete investment at a time and is dependent on the office and multifamily markets to bring in more consumers. Moreover, it relies on Chicago’s convention business, which is bolstered by new hotels and steady tourism growth year-over-year. The Central Loop added over 1,100 keys since 2013, and tourism grew at an average rate of 3.7 percent annually. New hotels such as Kimpton Gray and Hyatt Place and established ones such as JW Marriott enliven the area, but there is room for growth. It is likely that as we see more office use in the Central Loop, we will also see adaptive reuse of Class-C assets into restaurants catering to these workers. Today’s average retailer footprint on LaSalle Street is 2,700 square feet, dominated by banks and quick-service restaurants.