River North tower’s looming vacancies show that in Chicago office market, youth is not always enough

A modern Chicago tower is about to lose its two largest tenants, testing the value of youth in the city’s office market, where newer buildings have better weathered the pandemic that has driven up vacancy rates.

Boston Consulting, a major tenant at the Irvine Company-owned building at 300 North LaSalle Street, is set to sign a lease at a new Fulton Market building in development at 360 North Green Street, according to a source familiar with the negotiations, while the law firm Kirkland & Ellis has already committed to leaving its 660,000 square feet on LaSalle for a massive new lease in the Salesforce Tower set to open in 2023.

Their departures show even relatively new office buildings aren’t totally insulated from serious threats, even as analysts warn older buildings in the nation’s largest office markets of New York, San Francisco and Chicago will bear the brunt of the pandemic’s damage.

How the 13-year-old River North building responds will indicate just how deep landlords are willing to wade into the amenities arms race to maintain property values and the cachet that draws top-tier tenants.

“There is going to be another large hole,’’ said Ben Cleveland of Stream Realty, who represents Vornado in leasing offices at the Merchandise Mart adjacent to the LaSalle property.

“There are few large holes in assets of similar quality.”

Companies are increasingly downsizing their urban footprints when their leases expire, and deals have been concentrated in brand new buildings with amenities like lounges, bars, gyms and rooftop decks in hotspots like Chicago’s Fulton Market.

Whether Irvine decides it needs to invest even more into such perqs – it already features a 5,600-square-foot fitness center with locker rooms and retail including a steakhouse and coffee service – will be a signal to other landlords. Should its answer be yes, it will mean even newer properties that fetched premium sales prices a few years ago aren’t enough to compete with the latest development wave without substantial upgrades.

“A building like this staring down the barrel of a gigantic vacancy that is effectively a new building, if anything, they will spend some money on even more lavish amenities,” said tenant representative Michael Pink, who leads MAP Real Estate.

Irvine didn’t respond to requests for comment.

Buildings like 300 North LaSalle still have an edge even without renovations over many other Chicago offices. Moves like Kirkland’s and Boston’s from young properties to the latest development sites will give other tenants a chance to upgrade into something built this century on LaSalle, perhaps spelling trouble for older Loop properties just across the Chicago River.

“It’s a chance for [Irvine] to reassess its value proposition and improve the asset to cater to today’s tenant needs,” Cleveland said. “I am very optimistic that building will re-lease after that reassessment. It’s as much of an opportunity from a tenant standpoint as it is a detriment to the market.”

He pointed to the turnaround that nearby River North office highrise 321 North Clark underwent in the early 2000s, when it was the same age as the LaSalle building as it lost anchor tenant Quaker Oats and a series of others, and its occupancy dropped to just eight percent from full.

Hines and a partner bought it for $147 a square foot in 2001, invested in adding amenities and floor space, and sold it in 2006 for double its purchase price, the developer said. It was 80 percent leased last year when it landed a $296 million loan.

After the LaSalle building was completed in 2009, it was bought in 2014 for a then-record price of $850 million by Irvine, and value looks to have been left intact so far, showing how much timing matters.

Tenant departures have the potential to impact that, though. It’s still 96 percent occupied with the big tenants in place. Boston’s lease ends in 2024 and Kirkland’s in 2029 with an option to terminate in 2025, and DBRS Morningstar last reported Irvine’s $475 million loan set to mature in 2024 on the LaSalle property remains investment-grade.

“There’s no reason the borrower has to worry about defaulting yet, but it’s one everyone has their eye on,” Manus Clancy of Trepp said. “This new partly remote work week will weigh on office values for older stuff and it doesn’t have to be that old. Delinquencies will tick up over time slowly. The market will come back but it will take time in New York and Chicago.”

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