The downtowns of major cities have taken a hit these last 13-plus months. A combination of the COVID-19 pandemic, the restrictions that came with the pandemic and the social unrest that came in the wake of police shootings across the country have combined to keep visitors and workers away from the central business districts of cities.
But now that vaccines are rolling out and states are loosening their COVID restrictions, what happens now in downtowns across the Midwest? That’s what we wanted to find out, and to do so, we’ve interviewed commercial real estate professionals who are working these urban markets. This is the second part in our series on the post-pandemic future of downtowns, and this time we are looking at the state of downtown Chicago and the hopes for its future after COVID-19 fades.
To get a feel for what’s happening now in downtown Chicago, we spoke with three commercial real estate professionals from the Chicago office of JLL, Christian Beaudoin, managing director of research and strategy; and Keith Largay and Jeff Bramson, who are both senior managing directors and co-heads of the Chicago and Columbus, Ohio, offices of JLL.
Beaudoin had the statistics that showed just hard the last 14 months have been on downtown Chicago. He said that office buildings in downtown are now about 20 percent full.
The good news? That figure is on the rise. Beaudoin said that as the distribution of vaccines increases, it’s expected that the office occupancy rate in downtown Chicago should rise to 40 percent to 50 percent by Memorial Day. The larger occupiers should follow, too, with the expectation being that office buildings in downtown Chicago will be at 70 percent to 75 percent capacity after Labor Day.
Bramson said that he only has to look out his office window to see that downtown Chicago is waking up again. There are cars driving down Wacker Drive. People are milling about the River Walk. That wasn’t happening in the fall and winter of this year.
“We’ve been back in the office since late June, early July. Things looked a lot different back then,” Bramson said. “Back then, you didn’t have to look before crossing the street. Now we have to stop at the crosswalks and look both ways. I drive from the suburbs. The parking garage I use is full again.”
Public transportation, though, is a different story. Bramson said that most people who are working in downtown Chicago are driving into the city today, preferring to avoid the El or Metra trains. This, too, will change, though, Bramson said. As vehicle traffic into the city increases, many of the people who are driving today will grow frustrated and will return to public transportation.
And as far as office occupancy goes? Bramson said that the company managing the building that houses JLL’s downtown Chicago office provides a good indicator: That manager expects most of the other tenants in that building to return to the office starting this summer. And by September 1? That’s when the building manager predicted that most companies will have at least the majority of their workforces back in their offices.
Largay said that the downtown multifamily market provides a good indicator, too, of what will follow in the office sector. And the news in the downtown multifamily market is good right now.
“Apartment leasing velocity was exceptionally slow during the fall and winter,” Largay said. “Starting in the middle of February and continuing now, leasing velocity has picked up tremendously.”
This isn’t a surprise to Largay. During the earlier days of the pandemic, and during the winter surge, most everything that is fun about living in downtown Chicago was shut down. Restaurants were only providing carry-out or pick-up service. Bars weren’t open. Theaters were closed. Museums weren’t allowing visitors.
“Living in a dense urban city in the north in the winter, when you have small average units, and everyone is stuck at home, that’s really hard,” Largay said. “Everything the city had to offer didn’t exist. All that was left was the higher cost of living in the units.”
And because most office workers were working remotely, there was little reason for many people, especially younger people, to continue renting in downtown Chicago. That’s why so many young people left their apartments and moved back home during the pandemic.
That is starting to change now that people are getting vaccinated in higher numbers, Largay said. Those young people who moved out are now tired of living with their parents. Restaurants and bars are reopening. The city’s museums and cultural centers have opened their doors again.
“The under-35-year-olds are coming back,” Largay said. “They are planning to be in the city and they are planning to spend some of the money they’ve saved during the pandemic.”
And what about the future of office work in downtown Chicago? Will companies provide employees more flexibility? Will some workers come into the office three days a week and work from home the other two?
Beaudoin said that this flexibility seems to be a key for office workers. He said that recent research from JLL found that 74 percent of employee respondents wanted to return to the office but also wanted flexibility in their work schedules. Some, for example, said they wanted to work three to four days in the office but also wanted the opportunity to work remotely on the other days.
But fully remote workforces? That won’t happen for most companies, Beaudoin said.
“Most offices will come back close to normal. That’s what we are forecasting,” Beaudoin said. “But flexibility will remain important. Even pre-pandemic, many companies will moving toward a more flexible work model of people coming into the office three to four days a week and working remotely the rest of the week. The pandemic has only accelerated that trend.”
As Bramson says, employees want flexibility while employers want accountability. Employees proved that they could be accountable when working from home. This has earned them some flexibility from their employers.
But this doesn’t mean that most companies will want their employees working from home full-time. There’s just too much of the office experience that can’t be replicated when employees are working from home, Bramson said.
But many workers have also realized that while they might not want to go into the office every day of the week, they do miss some of the benefits that come with that environment. Because of this, it’s unlikely that most employees will want to work remotely full time either, Bramson said.
“Part of the charm of being in an office is the social nature of work,” Bramson said. “People didn’t realize how important that piece of work is. The fear of missing out will come into play, too. If you are the one person not coming into the office, what are your prospects for a raise and advancement?”
What remains uncertain, though, is how much downtown office space companies will need. As employees look for flexibility, will companies lower the amount of office space they use once post-pandemic life arrives?
The answer? It depends.
“In major markets, the real estate occupancy cost is a small percentage of doing business,” Largay said. “You can’t let the tail wag the dog. The fundamental purpose of the office is to get people together to collaborate. So companies won’t be reducing their space so much that they’ll need an ‘A’ team of employees that come in on certain days and a ‘B’ team that comes in on others. The purpose of the office is to have everyone there sharing ideas at the same time. If someone needs the flexibility to work from home on a Friday, that doesn’t lessen the need dramatically for space.”
Beaudoin said that according to JLL research, many companies, when you factor in the need for social distancing, are planning to reduce their office space by about 5 percent. As Beaudoin says, that’s not a dramatic number, and shouldn’t be overly disruptive to the office markets in major cities.
Beaudoin said that many companies are now making long-term plans. This is important: During the worst days of the pandemic, most companies put their long-term planning for expansion and growth on hold. They instead focused on the day-to-day of getting through the pandemic.
In the last quarter, though, office leasing activity has picked up in downtown Chicago, Beaudoin said. Touring activity has risen, too.
“Tenants are starting to get back to evaluating what they really need for office space,” Beaudoin said. “Essentially, the market was frozen for a year, from March of 2020 to March of 2021. Now we are getting signals that things are unlocking.”
Largay, for one, expects far brighter days ahead for downtown Chicago.
“There is a reason why cities have existed for hundreds of years and why the GDP concentrates in cities,” Largay said. “There is a concentration of people, talent, culture, activities and amenities in the cities. That’s why people come to Chicago. There’s the lakefront, the river, the nightlife, the theaters and the bars. There’s the ability for people to socialize and be together. We have all been lacking that this past year. The need for all that will bring people back in.”