The search to solve Chicago’s office woes can’t end with Google.
Local players are clear-eyed about the significant impact of the tech giant purchasing and renovating the James Thompson Center to occupy the entire building.
It’s a huge win for the city’s struggling office market, but too soon to know if the deal has done anything beyond rally local excitement. Brokers and developers still expect a pullback from tech companies in the next year, while Google renovates its 1.2-million-square-foot compound ahead of its 2026 move-in.
Even Mike Reschke, the developer behind the deal who will spearhead the renovations, senses the near-term needs of the tech sector are shrinking.
“The tech world has slowed down a little bit on their hiring,” Reschke said. “At least for this coming 12 months.”
Tech firms had been among the few bright spots during the pandemic for office owners. That’s changing quickly across the country, as the stock market slowdown has hit tech hardest. Meta and Amazon both backed away from planned expansions in New York, Netflix paid $80 million to exit some of its leases and Twitter scrapped a new lease in Oakland, California.
Chicago’s tech startups are even more cautious. Most have leaned into remote work and are unlikely to sign leases until their businesses mature.
“We previously had a lot of growth from the startups,” said Lisa Davidson, a broker at Savills. “Now it’s the startup community that is taking less space. They’re being cautious with their dollars for obvious reasons. They’ve embraced work from home probably more than anything.”
Chicago landlords are focusing on other prospects, including finance and law firms, as well as life science companies.
But even some in those sectors are downsizing space, so there’s more pain ahead for landlords. Chicagoans have trailed the average pace in returning to offices. Kastle Systems data show employee card swipes are at just 43 percent of full occupancy for the week of July 18. Yet the 10 cities it tracked grew to an average of nearly 45 percent during the same week.
Davidson is working with tenants who are exploring early termination by cutting back on square footage. By extending leases in smaller spaces, the tenants can avoid costly early termination fees.
“I don’t think they’ve seen the worst of the market hit yet,” Davidson said.
Last month, the difficulty in finding an anchor tenant likely contributed to Tishman Speyer abandoning plans to redevelop 850 West Washington Boulevard into Fulton Market offices.
That wasn’t a referendum on the entire office market, though, said Alex Najem, CEO of developer Fulton Street Cos., and instead perhaps a miscalculated use of the property. “That’s a residential site in nearly everyone’s opinion.”
He’s among the few bulls on office assets, as tech’s pullback on real estate has no chance of deterring his ambitious plans.
“Tech tenants are always a plan B for me,” Najem said.
He opted not to compete for Google in one of his development projects in Fulton Market’s burgeoning office district when rumors spread that it was on the hunt for more Chicago space. Instead, he locked down a lease with Norton Rose Fulbright, the neighborhood’s first deal with a law firm.
“We said, ‘Forget Google,’ and went with a sure thing,” Najem said.
His company is in talks with tenants in other industries that will allow his 530,000-square-foot development planned for 917 West Fulton Market Street to break ground this year.
“Tech only does so much for the Fulton Market area, especially for the new builds,” said Evan Djikas, a longtime Colliers Chicago office broker who recently joined Hertz Investment Group. “You’re seeing a lot of new industries go in there.”
Google’s move to the Thompson Center in the Central Loop also creates a hole in a Fulton Market building with capacity for laboratories. The company had been eyeing a lease for as much as 200,000 square feet in Trammell Crow’s 425,000-square-foot development at 400 North Aberdeen Street. However, it’s no longer moving forward with those plans, a person familiar with its plans said.
While a loss for Trammell, which declined to comment, it’s welcome news for real estate players who are working to expand the life science sector inside the city. Some had concerns that Google’s search for more space could have further dented Chicago’s limited potential lab space inventory, forcing tenants to explore other cities.
Still, the broader economic slowdown is leaving tech startups thirsty due to a drying well of venture capital. That’s also hitting the life sciences sector, where real estate growth is dependent on private equity investments.
“I’ve made the bet to go in the life sciences direction,” said Mark Goodman, whose eponymous development firm paid nearly $16 million for a Fulton Market site where he’s planning a 500,000-square-foot lab. “But I’m going to be constrained by the same factors of the market that I don’t control. There are some reasonable prospects in the market for life sciences in Chicago. But leasing has yet to occur in a significant way that makes capital comfortable.”
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