Downtown property lags as pandemic’s threat revives
The office markets are hurting the most, and far more than industrial or retail space, as the Delta variant scrambles employers’ plans to reopen.
Late summer has become the season of the Delta variant and employers have gotten nervous all over again.
Many had wanted to reopen offices in a few weeks. A great rethinking has begun. Microsoft has put off its fall reopening schedule and Amazon is saying its corporate staff needn’t come back to the office until next year. Tech companies tend to be the first movers with these announcements.
If more employers follow suit, it will cause further short-term pain in commercial real estate, a broad marketplace that, like the economy as a whole, has seen some parts suffer from the pandemic and others do well, even prosper. The most damage has been in the office market, especially downtown, which happens to be the Golden Goose of the Chicago economy. Downtown accounts for a large chunk of the taxable value of all Chicago property.
Reports from leading brokerages that assess the market as of midyear differ in some statistics but make the same overall point: that goose isn’t feeling well. The firm CBRE said downtown’s office vacancy rate stood at 17.7% at the close of the second quarter, the highest in its 15 years of record-keeping. Its report said you could add nearly 4 percentage points to that figure if you count space available on a sublease.
Experts with long memories think the vacancies are the highest since the early 1990s when developers gorged on easy credit and built towers almost without regard for who could fill them. That caused only brief trouble, however, and the market became a lot tighter later that decade.
The CBRE report cited several examples of companies that have trimmed their space allotments, including Bank of America, which has anchored a new building at 110 N. Wacker Drive. but left behind nearly 700,000 square feet at its old home, 135 S. LaSalle St. Others vacating space included Grainger at 500 W. Madison St., Merrill Lynch at 225 W. Wacker and Ernst & Young at 155 N. Wacker, CBRE reported.
The firm also published a national survey of office tenants that might cause its staff to worry. Fully 81% of large space users, companies with more than 10,000 employees, said they expect to reduce their office footprints over the next three years. Smaller companies were evenly split on whether they expect to cut or increase their space. It’s a sign that hybrid schedules — part work from home, part in the office — are gaining quick acceptance.
CBRE said that despite all that “well-positioned landlords continue to hold firm on face rents while offering competitive concession packages.” A separate report from another brokerage, Cushman & Wakefield, discerned a slight decline in rents compared with the first quarter.
On the positive side, analysts noted that leasing interest in Fulton Market remains intense. Some of it comes from demand for labs that serve the life sciences, a previously underserved niche that’s now getting 1 million square feet of new space in the city.
In the suburban office market, there’s a pulse. A Cushman analysis put the vacancy rate at 25.5%, up from 24% in the first quarter, but said new leasing activity perked up after being “anemic” since early in the pandemic. If the infection is causing city employers to move to airier suburbs, there’s no sign of it.
Meanwhile, industrial real estate is humming — not like a well-oiled machine, more like a swift conveyor belt since it’s mostly about warehouse space, not factories. Companies want to put goods closer to population centers. “Chicago’s industrial pipeline showed no signs of slowing and is already on track to outpace 2020’s robust figures,” a Cushman report said. New developments include Ferrara Candy in DeKalb and Target’s controversial warehouse in Little Village.
The last property segment is retail like we used to know it, actual stores. It’s doing well despite Amazon. CBRE cited declining vacancies here and rising consumer confidence. Recent deals include a Steinhafels furniture store planned this fall in Downers Grove and a Floor & Décor coming to 87th Street and the Dan Ryan Expressway.
If retail is all right, maybe the Magnificent Mile will catch up. North Michigan Avenue has lost Macy’s, Gap and others, and last week Uniqlo said it’s leaving. Longtime retail broker Allen Joffe, principal at Baum Realty Group, said there may be a “herd mentality” at play in the decisions to leave the premier, and sky-high rent, district. Some investors can’t shake images of the looting from a year ago, he said, but the street still has top fundamentals.
“The foot traffic is great. People are dining out and shopping. You go to Gibsons, Hugo’s, these places are packed, and the people are coming back to the hotels,” he said. “The city needs to figure out how to do better PR.”