Chicago’s long road to commercial real estate recovery

Office players get creative as “daunting” vacancies persist

Chicago mayor Lori Lightfoot and Accenture Tower (Photo-illustration by Kevin Rebong/The Real Deal)
Chicago mayor Lori Lightfoot and Accenture Tower (Photo-illustration by Kevin Rebong/The Real Deal)

Mayor Lori Lightfoot put some political muscle behind Chicago’s return-to-office campaign as she posed for selfies with Accenture employees last month at the consulting firm’s new 264,000-square-foot office in Chicago’s West Loop.

I don’t know if we’ve arrived at what our new normal is, but the fact of the matter is we missed being together, and you can’t build culture and teams being apart,” Lightfoot said at KBS’ 500 West Madison, now dubbed Accenture Tower. “Your neighbors have missed you, the small businesses that have been built up in this tower and around the area that really depend upon you being here.”

MBRE’s Mark Buth is among a horde of Chicago leasing brokers eager to show off new perks at buildings they represent. One of those buildings, the 2 million-square-foot, two-tower Michigan Plaza complex, hosted an Oktoberfest celebration in late September on its sprawling new outdoor terrace, which includes a bocce court, putting green, firepit, TV and lounge.

Tenants in other buildings are envious. There are definitely some jealous neighbors,” he said.

It’s unclear whether envy is enough to drive people back into downtown Chicago on a more consistent basis or stabilize the city’s commercial real estate market. The central business district was still experiencing near record-high vacancy of 19.2 percent at the end of the second quarter, and tenants are marketing more downtown space for sublease than at any time in history — a cumulative 6.4 million square feet, according to brokerages.

We have to backfill this,” said Bradford Allen broker Andy DeMoss, who represents downtown landlords. “For the owners, that’s one of the most daunting things hanging over them like a dark cloud.”

Office landlords and brokers are still plagued by tenants’ indecision nearly three years since the pandemic scattered workforces, and the weeks after Labor Day passed as the new target for ramping up the return to office.

We need to be excited and anxious to get people in, but patient to see the results,” said Savills tenant broker Robert Sevim.

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Commercial real estate players say they’re waiting for tenants to make determinations about how their workspaces will be used. Until they have a better idea of what their employees need and want, leasing volume will be limited. For now, Sevim said, companies are making moves for a “more finite” number of reasons than they did before the pandemic, such as the desire to upgrade to a newer building — or an older one that’s been overhauled with amenities.

That’s tightened supply in trophy high-rises and the city’s newest buildings in Fulton Market. But it’s the buildings that are a step below in quality where juicy negotiations for rent discounts and tenant improvement costs are playing out.

When you look at the rest of the market, the more commodity products, you can take a longer time to decide,” Sevim said. “There is more likely to be space in a second-generation, renovated Class A building where some really, really aggressive deals can be had.”

Calculated bets

Both developers and their lenders have responded to that dynamic. John Buck in June altered its plan for a 1.5 million-square-foot skyscraper at 655 West Madison Street, shifting from a single skyscraper to two towers that will combine for a similar amount of space. This way, the developer can launch them one at a time, pre-leasing less than half the space it otherwise would have needed in order to get construction financing.

In August, Mark Karasick’s 601W Companies scored $215 million in financing from Bank OZK and Fisher Brothers-affiliated Lionheart Strategic Management to rehabilitate 801 South Canal Street, which was fully vacated by financial firm Northern Trust. It’s a bet that the 30-year-old building will draw tenants with upgrades and new amenities, and reflects the greater faith lenders have in renovations as opposed to ground-up construction. 

Because of the less expensive nature of renovating a building compared to constructing a new one, 601W will be able offer more competitive rents than recently opened trophy properties, while still upping the building’s quality.

One factor that attracted us to the deal was, frankly, the basis both they and we would be in to make sure the economics worked,” said Lionheart’s Sang Kim, who along with colleague Andy Klein arranged the project’s $68 million mezzanine loan. Bank OZK issued the first mortgage of $148 million.

Even if the return to office gains steam and tenants have a clearer sense of their needs for downtown space by the end of the winter, there won’t be an immediate reaction that leads to more leasing deals, Sevim predicted. Companies still have to gauge what kind of environment they want their employees to have for the long term.

It’s not a knee-jerk response, where all the sudden you have real estate decisions made on a dime,” Sevim said. “Leasing will be driven by human resources priorities other than simply figuring [out] what amount of space is required because you have a certain headcount to accommodate.”