Chicago’s real estate market is booming
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In 2017, for the first time in eight years, Chicago will see tenants move into two brand-new office buildings. The launches of these towers – located next to each other on a picturesque bend in the Chicago River – are seen as a major sign of economic recovery in the third-largest US city, of the resurgence of Chicago’s downtown area, and of the changing tastes of young workers across America. Their delivery in three years will, according to local developers, be the first in a string of new buildings welcoming tenants, as the Windy City’s commercial property market rebounds from the recession.
Last year, the city saw 217 “major business expansions”, comprising 4.6m square feet of added space, over 21,000 new and retained jobs and $3bn in investment, making it the second-most active central business district office market in the country, according to World Business Chicago, an economic development organisation.
In recent years, major corporations including United Continental and Hillshire Brands have moved from sprawling campuses in the suburbs into the city, where Archer Daniels Midland, a $32bn food processing and commodities trading company, is also set to move this year. According to Real Capital Analytics, commercial property sales volume is on pace to hit its highest annual level since a record $22.5bn in 2007.
“By the time [the two new buildings] deliver in 2017, Chicago’s overall vacancy rate should be single digits for the first time in a long time [since about the late 1990s],” says Dave Hendrickson, a manager at JLL. He led a $300m debt financing round for one of the two forthcoming properties announced earlier this month – the 53-storey 150 North Riverside. The other new-build will be called River Point, and is under development by Hines. During the second quarter of this year, downtown Chicago saw a 13.9 per cent vacancy rate, compared with 23.7 per cent in the suburbs, according to JLL data.
The financial crisis arrived as companies across sectors continued to increase their use of open plan layouts, reducing the number of square feet dedicated to each employee. When times got tight, those companies “jammed more people into the same space to the point that they can’t do any more”, says Hendrickson.
Now those companies need new space that can accommodate their increased headcounts, as well as manage energy costs more efficiently, and include the latest in amenities and technology – the sort of elevators, HVAC, wiring, windows, health clubs and restaurants that they cannot find in the generation of buildings that topped out in the 1980s. As a measure of just how in-demand more technologically advanced offices are, Hendrickson notes that those built since 2001 – which include the latest technology that Chicago’s office buildings currently have to offer – are 95 per cent occupied.
John O’Donnell developed the 1.2m square foot new-build at 150 North Riverside. He says the growing momentum in downtown Chicago is a reflection of trends being seen throughout major US hubs. “Chicago, like many other cities around the country, is going the way of Europe, where people want to live closer to the centre – particularly the young people,” says the veteran Chicago developer.
Young, talented workers are starting families later in life, eschewing the suburbs in favour of the city and driving less as a result – a reversal of the trends seen during the 1980s and 1990s. Now the best new talent is demanding more central locations, with easy access to public transport.
Nowhere is that more evident than in Chicago’s burgeoning technology sector, led by Groupon, the $5bn ecommerce deals company. That also includes 1871, the tech innovation incubator that anchors the local start-up scene, and has created more than a thousand jobs in two years. Its headquarters are on the 12th floor of the iconic Art Deco building the Merchandise Mart, which was historically the home of Chicago’s wholesale goods business. Now it houses the likes of Motorola Mobility and the tech-based trading firms Jump Trading LLC and ThinkorSwim, while the online reviews giant Yelp is due to move in soon; the building boasts a 3 per cent vacancy rate. The same is true for buildings throughout the River North and West Loop neighbourhoods, once thought to be either too industrial or too seedy (River North was once the city’s red light district), which have recently become home to the city’s start-up scene.
Developer Sterling Bay is the leader in refurbishments geared at the tech world, repurposing industrial warehouses into loft-style spaces crammed with the sort of amenities new tenants such as Uber, Twitter and Google expect for their Midwestern HQs – and are used to in their native Silicon Valley. “It’s extremely competitive for engineering talent, so employers have to make sure they’re in the right location with the right amenities,” says Andy Gloor, manager of Sterling Bay.
That is one of the main reasons that Gogo – which provides the technology for in-flight WiFi – will be moving into the West Loop section of the city, just west of downtown, says Steve Nolan, a spokesman for the company. “It’s really to attract and retain high-tech-type employees and engineers, front-end developers – those whose preference it seems nowadays is to be located centrally in downtown Chicago,” says Nolan. The office will also be near two of Gogo’s key partners – Boeing and United Continental.
Steve Fifield, another local developer, says the emergence of Sterling Bay in the tech space has forced other players to up their game. “We have good tech job growth, but more importantly than that, it’s influencing how others are using their space,” he says. “The existing landlords in Chicago [are] putting balconies in, roof decks; our lobbies look like hotel lobbies, with WiFi and couches.”
Fifield has created around 8m square feet of office space in the past 30 years, although no new-build since 2007. “The market was very slow,” he says. “But the fact that there are two buildings ready to go … portends more new construction and development.”