Chicago Commercial Real Estate: 10 Things to Watch in 2021
Chicago, IL | January 25, 2021
2020's problems may continue to linger, but the office space market is far from dead. In fact, we see several trends on the horizon for the Chicago central business district and suburban market. What have we identified for the year ahead?
Right now, we've got our eye on the suburban market due to millennials finally leaving urban life—will they soon fill suburban offices? We've also examined the life sciences industry, with multiple megadevelopments shifting to accommodate the growing industry, along with new office worker schedules for the post-pandemic world. Read our full list of the Top 10 Things to Watch in 2021 below!
HOW MUCH LONGER WILL COVID-19 KEEP PEOPLE HOME, AWAY FROM THE OFFICE??
The road to recovery remains elusive, with many factors up in the air. America is currently dispersing multiple coronavirus vaccines, but timelines remain muddled, and other uncertainties (how many people will refuse the vaccine, for example) remain. There is also the Covid-19 variant, prominent in the UK and beginning to make its way through the US, which may further affect fully reopening the nation.
Every new development appears to be met by new roadblocks. Still, the CRE community, building owners in particular, have proven resilient in the ways they have pre-emptively prepared office spaces for their eventual reopening.
WHAT WILL THE CRE WORLD LOOK LIKE AFTER COVID-19 IS DEFEATED?
Experts seem to agree that all work-from-home strategies will not go by the wayside once the virus is gone. In the immediate years following coronavirus, this could take several forms: continued meetings via apps like Zoom, larger parts of the workforce become permanently work-from-home, some employees switch off between working from home and going into the office, among other changes.
Individual employers will likely mix and match the methods that work best for their specific needs, creating a much less homogenous office space world. And many employers are likely to give employees the power to decide how much time they want to spend in the office in the future, putting pressure on building owners to appeal directly to employees. Suppose office workers decide to adhere to even a modest balance between being in the office and working from home. In that case, that could translate into significant changes in the square-footage needs of the average business. However, those changes could be minimized by the decreased density and increased collaboration space the new office environment will require.
WHAT WILL HAPPEN TO THE SUBLEASE SPACE CREATED BY THE PANDEMIC?
2021 is starting the year with more available sublease space than the CBD has ever seen before. If the vaccine and other efforts do nullify coronavirus, will companies continue to add sublease space to the market? And how many companies will be interested in the abundance of sublease space? And, finally, how much of this sublease space will disappear as the world becomes safer and companies take it off the market and return to the office?
Despite the uncertainty, the sublease space has some immediate effects on the market. For one, landlords competing with a large amount of sublease space will have to be more flexible than ever when it comes to short lease terms and other stipulations, leading us to…
WHEN WILL RENT PRICES FALL?
Rents are widely expected to go down, but many landlords are trying to wait out the pandemic before they get too generous with their deals. The office market is slow-moving and always has a delayed reaction to an economic downturn; it will subsequently take a while for rising vacancy rates and negative absorption to prove the pandemic's real toll. For tenants who can wait on the sidelines, deals will eventually hit the market. Ultimately, with little leasing activity in the immediate, it is difficult to determine the current office space's accurate market rates.
WILL THE CRE INDUSTRY HAVE A ROBUST OR SLOW AND STEADY REBOUND?
Once the worst of Covid-19 is over, leasing activity will begin again—but on what scale? The sudden drop-in leasing activity this year is unprecedented. On a practical level, it has been challenging to get out into the market and see space. With everyone working from home and uncertainty about the future necessity of offices, there is a lack of urgency for decision making. Once we all crawl out of our hidey-holes and emerge into a post-coronavirus world, will there be pent-up demand that leads to a leasing bonanza? … Or will we see a protracted rebound as everybody waits to see what their needs will be in the new reality? If market uncertainty is slow to dissolve, the office market will still rebound, it will just be a slow and steady revitalization. The investment market is also likely to remain stagnant until there is more certainty about the future of demand and rent levels.
WHAT DOES THE FUTURE HOLD FOR RETAIL, RESTAURANTS, AND HOTELS?
The hospitality and tourism industries were the hardest hit by the pandemic. With indoor dining off-limits during Chicago's long, brutal winter, we are sure to see a dismaying number of restaurants close doors for good. Hotels are also in distress as tourism reaches unfathomable lows. Retail was already facing unprecedented challenges before the pandemic, and coronavirus has pushed many past the point of no return. Once it is safe to travel again, tourism is sure to experience a renaissance, but it will be too late for many hotels, restaurants, retailers, and entertainment destinations. What will it take for these industries to be able to rebuild? And will they look the same after the recovery? Some believe the recovery may be a chance for more diversity among small-business owners, something Chicago has been criticized for in the past. Of course, this is dependent on how recovery aid from the government develops and is distributed.
IS THIS THE END OF THE SUBURBAN EXODUS?
Just before the beginning of the pandemic, the stampede of suburban companies following the coveted millennial workforce to downtown Chicago had just started to subside. An uptick in suburban residential sales and a glut of downtown apartments and condos suggests that Covid-19 may have inspired aging millennials to give up their city slicker dreams for a more spacious life in the 'burbs. Will corporate tenants now pick up and follow them back to the suburbs? We will not know until coronavirus settles down enough for office leasing activity to restart. A suburban CRE revival is a possibility, though.
HOW WILL THE GOVERNMENT AID RECOVERY?
Covid-19 has exacerbated the already dire financial situations of the State of Illinois and the City of Chicago. Governor Pritzker has warned state agencies to prepare for "nightmare scenario" budget cuts. Public entities such as the CTA and CPS will face unprecedented challenges in the coming years. Perhaps the incoming Biden administration will be more willing and able to help local governments through these trying times?
HOW HAS THE PANDEMIC CHANGED THE FUTURE OF COWORKING?
The coworking industry is about to undergo a massive transformation as the most successful platforms align themselves with traditional commercial real estate entities to survive. Some coworking platforms will not make it through the pandemic, and those that survive are likely to do their best to shed any underperforming spaces, leaving many landlords holding the bag. The true test of coworking will come once the Covid-19 dust settles. It is conceivable that tenants searching for flexibility will turn to coworking to combine old office needs with new habits picked up during the pandemic.
WILL CHICAGO'S LIFE SCIENCES INDUSTRY EXPLODE?
Chicago's life sciences sector has renewed aspirations amid the pandemic. Though Chicago's pharma industry lost its luster due to longtime regional leaders, such as Takeda, leaving for the coasts, many see biotech and life sciences as key to the city's future. Chicago has all the ingredients needed for the sector to thrive: world-class research institutions, a highly-educated labor force, university hospitals, and existing pharma and medtech companies. Until now, life sciences has been lacking the real estate infrastructure to support industry growth.
Enter the pandemic, a situation that has made space more abundant and inspired developers to invest in the type of lab space the industry needs to thrive. The three mega-developments with the most momentum (Lincoln Yards, The 78, and Bronzeville Lakefront) have all pivoted to a focus on life sciences. In Fulton Market, a new lab development is being built, and an office development is being converted to lab space. Sterling Bay recently launched a business accelerator for companies in life sciences, healthcare, and technology.
Check out our 2020 recap here!
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