Chicago Commercial Real Estate: 10 Things to Watch in 2022
Chicago, IL | January 19, 2022
With an abundance of the supplies, tools, and knowledge that were lacking in 2020 and early 2021, the commercial real estate industry is prepared to weather the elongated pandemic as it becomes a potential endemic. The Omicron variant was a setback, but it has not proven to be earth-shattering. In fact, we’ve identified several exciting trends to follow in both the Chicago central business district and suburban market throughout 2022.
In this, our Top 10 Things to Watch in 2022 list, we discuss what may or may not happen in the Chicago CBD and suburban CRE markets in 2022. Issues like workers’ demand for hybrid work models, how hybrid work models change office space needs, the future of Chicago’s mega developments, the growing trend of adaptive reuse, and more are discussed below.
HOW WILL CRE CHANGE IF COVID-19 CAUSES AN ENDEMIC?
The pandemic’s lightning-speed needs have proven that the CRE industry, traditionally slow to change, is nimbler than anyone would have previously guessed. In the past, there were no health requirements to enter office buildings. But the industry has made massive shifts before—consider the quick increase in security measures after 9/11.
Over the next year, we will be watching how the city, state, and federal mandates affect the professional world’s attitude towards offices. Overwhelmingly, hybrid schedules are the tool of choice for companies attempting to mitigate virus exposure and retain employees. Hybrid offices, with nuances from company to company, may become a permanent tool as the pandemic becomes an endemic. Other tools companies may utilize for the office include vaccine requirements, mask requirements, and social distancing. Maybe the pandemic can’t be defeated in 2022, but annual or bi-annual booster shots and hybrid work strategies could prove effective in office settings.
HOW WILL WORKERS’ DEMANDS FOR HYBRID WORK MODELS IMPACT OFFICE SPACE NEEDS?
Instead of expanding space to accommodate social distancing and a tight labor market, companies have maintained hybrid schedules, ensuring fewer employees in the office at a time. Considering the possibility of a coronavirus endemic, not to mention the costly nature of employees calling off sick during cold and flu season, will social distancing of workspaces become a norm? Will the cramped aspects of open office layouts—shared bench seating, for example—remain dead after the pandemic?
We will be interested to see if pre-pandemic and post-pandemic space needs remain relatively unchanged as employers double down on hybrid schedules that require fewer employees occupying more space in the office. Conversely, suppose vaccines and boosters prove effective. In that case, employers that keep hybrid programs may see fit to reduce space for the reduced workforce—social distancing may be deemed unnecessary in an endemic. A third scenario: companies’ intent on bringing everyone back to the office full-time may expand their space needs to give employees more space. Ultimately, companies will come up with varied plans, leaving brokers to appeal to the needs of their clients in more nuanced ways than ever before.
WHAT IS THE FUTURE OF CHICAGO’S DEVELOPMENTS AND MEGA DEVELOPMENTS?
The pandemic has not canceled development or mega-development plans in Chicago, though it has altered some in several ways—smaller floorplates, for example. This October, the first building in Lincoln Yards, an ambitious mega-development project from Sterling Bay, broke ground. The initial focus will be life sciences, with nascent plans for mixed-use office buildings, residential space, parks, and entertainment venues over the next four years. The 78 is another budding mega development. Intended for office and residential space, The 78 has signed a deal to build out 500,000 square feet of space for the Discovery Partners Institute, which has dubbed itself as a future hub for tech talent development and applied R&D. Using both The 78 and Lincoln Yards as examples, developer Bob Dunn seeks city and state approvals for his $20-billion-dollar mega development, One Central. The mega development would span the space between the Field Museum and McCormick Place, and Dunn is seeking state financing for an ambitious transit center. Additionally, residential mega developments like Southbank Park and One Chicago already have space built and plans to build more. Also, Onni Group plans to demolish the Greyhound Bus facility on the southern tip of Goose Island, with plans to construct a five-tower, residential mega development.
Stray from mega developments and you’ll find that office development in Chicago is doing just fine. A significant example is the more than $1 billion valuation of Bank of America Tower. Furthermore, over the past six years, many new office developments in Chicago have quickly signed leases. 360 North Green Street, which has yet to break ground, is reportedly close to signing a deal with Boston Consulting Group for 200,000 square feet of space. Under-construction 345 North Morgan Street, which will be 230,000 square feet in office space, has already signed a large lease with HAVI Group. These examples likely indicate that there is tenant interest in new Class A buildings with high-end amenities.
WHAT TYPES OF OFFICE BUILDINGS WILL FARE BETTER THAN OTHERS IN 2022?
While coronavirus recovery for the commercial real estate industry is challenging to predict, one thing remains clear: all buildings won’t fare the same. Building class, neighborhood, and amenities are all factors that will affect each building’s unique recovery. In 2022, we might see tenants with hybrid work models seek smaller, higher-quality space—a balance between work-from-home flexibility and amenities that entice employees back to the office. It’s possible that asking rents in Chicago’s newest, most-desirable Class A buildings won’t significantly decrease—landlords may instead incentivize space through tenant improvement allowances and rent abatement. In this scenario, Class B and C buildings will likely have to lower rents to compete.
The unprecedented amount of empty space in the Chicago central business district, combined with an increase in TI and rent concessions, might lead to a significant number of signed leases in 2022. But many tenants remain reticent to make big decisions in the immediate future, making the near future difficult to predict. Another factor we’ve yet to mention: distressed buildings. Being distressed says nothing about the building itself, just the financial situation of ownership. Buildings categorized as distressed do not necessarily have a quality issue, and therefore we will be interested to see if distressed buildings sign fewer leases in 2022.
WILL SUBLEASE SPACE RISE, FALL, OR PLATEAU IN 2022?
Many new tenants are benefiting off the opportunities provided by subleases, but companies continue to put sublease space on the market in the Chicago CBD faster than tenants can lease it. Despite promising indications that sublease space was decreasing in the second half of 2021, market buzz indicates that sublease space will continue a slow growth in at least the first half of 2022.
Sublease space is something we’ve paid close attention to throughout the pandemic, publishing regular reports from MBRE Research on sublease space, and we will continue to pay close attention in 2022. We are standing by to see if sublease space will grow, plateau, or shrink, as we believe it is a good indicator of overall business health and office space demand.
WILL TENANTS FLOCK TO THE SUBURBS OR CHICAGO’S DOWNTOWN IN 2022?
Companies, especially tech companies, continue to sign new lease deals in the Chicago CBD, particularly Fulton Market. In the immediate, it’s safe to say that downtown remains the overwhelming preference for many companies looking for space.
What could change the balance? Before the pandemic, it was predicted that city-loving millennials would finally flock to the suburbs for cheaper homes. During the pandemic, many wondered if the cheaper and spacious offices in the suburbs would lure companies away from the city. Thus far, both theories have not gained any ground. United Airlines is moving 900 employees from its Willis Tower headquarters to the suburbs. Will other companies follow United’s lead, or are they an outlier? And will the factors mentioned above inspire a suburban boom in 2022? There are no indications that will happen, but we will be watching, nonetheless.
WILL 2022 ELECTIONS BRING CHANGE TO THE CHICAGO CRE INDUSTRY?
While Governor J.B. Pritzker is running for another term in November, and Mayor Lightfoot is up for reelection in early 2023, all eyes in Chicago CRE are focused on Cook County Assessor Fritz Kaegi’s reelection bid in November. He won his office in 2018 by arguing that residents face an unfair tax burden due to low appraisals of commercial space. To fulfill his campaign promises, Kaegi has committed his office to the daunting task of finishing the triennial reassessment process for all of Cook County this year while utilizing a new integrated property tax system.
In short, a lot is going on with property tax assessments right now. Once the dominoes fall, it is difficult to say how Fritz Kaegi’s reelection bid in November of 2022 will go. Recent studies support Kaegi’s accusations that commercial properties have been under-assessed. A 2018 study performed by the International Association of Assessing Officers (IAAO) found that 2018 assessments by Kaegi’s predecessor, former Assessor Joseph Berrios, significantly undervalued commercial properties—a previous 2017 investigation by the Chicago Tribune and ProPublica Illinois came to similar conclusions. A more recent IAAO study commissioned by Kaegi’s office examined Kaegi’s 2019 initial assessments of north suburban Cook County and found his work to meet industry standards for accuracy. If Kaegi’s new initiatives prove accurate and lower residential taxes, he may hold on to his seat. What could jeopardize Kaegi’s reelection bid? A significant tax deadline delay due to the pandemic and Kaegi’s new system is one potential roadblock for Kaegi. An overwhelming number of Cook County Board of Review appeals from commercial properties could also hurt him. But how much will increased property taxes for commercial buildings affect rent prices and development? It’s hard to say. We may not have our answer until after 2022.
WILL FULTON MARKET CONTINUE TO EXCEED EXPECTATIONS IN 2022?
As previously stated, the CRE revival won’t happen at equal speeds across all neighborhoods and industries. River West, the submarket Fulton Market is nestled within, was the only part of the CBD to experience overall positive absorption in 2021. River West remains a desirable spot for tech industry tenants, and tech companies will likely continue to lead the way for new leases in Fulton Market in2022. In 2021, Fulton Market continued to sign big deals and complete large developments. Notable 2021 deals included the largest office investment sale total (1000 W. Fulton), the highest price-per-square foot for an office investment (1100 W. Fulton), and the largest completed office development (800 W. Fulton) in the Chicago central business district—read our full “Best of 2021” deals list here. Even if CRE recovery proves to be slow, we will likely see these impressive trends continue in Fulton Market through the end of 2022.
ARE RESTAURANTS, HOTELS, AND RETAIL SPACES READY TO FLOURISH?
Despite widespread news reports about crime and vacant storefronts due to the pandemic, foot traffic remained strong throughout the holiday season on Chicago’s Magnificent Mile and other popular retail spots downtown. Also, Chicago Loop leaders have been brainstorming ways to reinvigorate Mag Mile and other parts of downtown as we exit the pandemic. Among the ideas is a special property tax on Mag Mile to help keep the area secure and even assist with storefront displays—this would fight to reverse recent crime-related perceptions.
Another proposed idea: a prominent architectural feature to connect the Mag Mile with the lakefront. In 2021, tourism downtown saw a significant boost from Chicagoans and suburbanites alike, along with visitors from neighboring states. Expanding Mag Mile’s tourism potential couldn’t hurt, and downtown hotels would appreciate the effort. Although Ace Hotel is leaving 311 North Morgan following its sale to Onni Group, the hotel industry remains patient and confident that business will return as the pandemic wanes. It’s too early to say what strategies the city and local business owners will choose. Still, these ideas indicate that leaders aren’t content to let Chicago’s Mag Mile fall into further disarray.
WHAT KINDS OF ADAPTATIVE REUSE WILL OCCUR IN 2022?
Large pieces of property, from former suburban malls and big-box retail stores to office campuses and downtown office buildings, are ripe for adaptive reuse. In the Chicago CBD, the Thompson Center appears to be on the precipice of adaptive reuse. Despite the Thompson’s Center’s high maintenance costs, Prime Group is in the process of purchasing the Thompson Center from the state, and they hope to preserve and develop it as mixed-use office and retail space. Meanwhile, 333 S. LaSalle, which previously housed CME Group’s trading floor, is being sold to Commonwealth Edison. ComEd plans to turn the five-story building into an electrical substation. One completed example of adaptive reuse is Macy’s, inside the old Marshall Field’s building. Brookfield Asset Management purchased and spent the last few years developing 650,000 square feet of office space in the top six floors of the building. Downtown Chicago’s aging office properties have been particularly ripe for office-to-apartment conversions. One recent example is Millennium on LaSalle at 29 South LaSalle, which transformed 13 floors of offices into apartments.
Adaptive reuse is thriving in the suburbs, too. Allstate is selling its Northbrook, Illinois campus to Dermody Properties, a Nevada-based industrial developer that plans to build approximately 3.2 million square feet of warehouse space. Like Allstate, Sears is selling its Hoffman Estates, Illinois campus due to employees moving permanently to a hybrid schedule. The former McDonald’s campus in Oak Brook, Illinois was bought by billionaire John Paul DeJoria and is being redeveloped by Hines Interests. The former Hamburger University training center at 2715 Jorie Boulevard is being redeveloped into office space and has even signed its first tenant: BDO Digital. These examples signify that the world of adaptive reuse is full of potential and possibilities, and it is a trend that will continue across all types and classes of real estate. We wouldn’t be surprised to see more examples of adaptive reuse in 2022, as the only limitations are developers’ imaginations.
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