This +5 million square (msf) of space contributes to a historically high 15.7% vacancy rate for the submarket, which is also one of the highest in the CBD. As Chicago unemployment reaches an all-time low of 3.8%, and companies compete for top talent, tenants are engaged in flight to class and games of follow the leader as they market themselves to the new workforce whose demands contrast what LaSalle Street provided for previous generations.
While some buildings bustle with activity, others struggle to keep up — it’s a tale of two cities. How will the city center reinvent itself to meet the live-work-play needs of the modern workforce? And what will be the impetus for the Central Loop’s revitalization? Cushman & Wakefield Chicago’s new report, What’s Next for the Central Loop, explores these questions and more.
Flight to Class
The Central Loop’s old, and often inefficient, office inventory contributes to the migration out of the submarket. Flight to quality is real as employees and company decision makers demand newer, more efficient office space. The average year built for buildings in the Central Loop is 1964, and the average year of building renovations is 1993, which is behind the 1999 CBD average. Over 34% of office square footage in the Central Loop was built prior to 1941. Pristine, new skyscrapers with improved amenities, river views and floorplates offering more collaborative space have lured tenants out of their older buildings. Trophy buildings or properties currently under construction or redevelopment such as 110 N Wacker, 150 N Riverside, The Old Post Office, Union Station Tower and Willis Tower captured 78.4% of tenants relocating from the Central Loop since 2015.
The New Workforce
As Millennials and Generation Z now make up most of the workforce, the perception of the Central Loop as having “old-school” financial building facades with marble columns and fewer amenity options is becoming more prevalent. This is not your parents’ workforce anymore, and their desired workplace environments reflect that.
So, the question becomes, can yesterday’s buildings support today’s workforce? The answer, in many cases, is no. Therefore, owners are retrofitting buildings or converting them to other uses and configurations. Within these projects, the traditional layout of cubicles surrounded by corner offices is disappearing in favor of open architecture and collaborative work areas. Exposed brick and timber replace formal glass and steel finishes. Technology and systems are being upgraded to the latest, fastest and most efficient standards.
The shift to a live-work-play environment and adaptive reuse trends have given rise to projects that have been a driving force in the Chicago office market over the last decade. As we have seen in Fulton Market, Millennials and Gen Z want integrated lifestyles that are less dependent on their cars and embrace the genuineness that older, rehabbed buildings can provide compared to ground-up construction. They are more interested in the repurposed authenticity and sustainability of adaptive reuse.
Architecturally speaking, the city center has a cool all its own. Buildings like The Rookery and the Board of Trade are a timeless source of inspiration for Chicago developers. With thoughtful modification, LaSalle Street can become the live-work-play nucleus of the Central Loop.
Activating Central Loop streetscapes for all Chicagoans would involve providing more open ground level spaces, establishing more green and open space, as well as engaging multiple levels of uses that attract the passerby. In different contexts, New York City’s High Line, which welcomes 4 million visitors annually, as well as Miami’s Lincoln Road, San Francisco’s Transbay Terminal, Seattle’s Alaskan Way waterfront and Chicago’s own Riverwalk illustrate how thoughtful pedestrian arteries can activate urban spaces to a higher density of retail, multifamily and office.
Chicago’s Riverwalk has been an incredible success story of the past decade, drawing huge numbers of both tourists and locals during the city’s warmer months. There are currently 1.5M users of the Riverwalk, and in 2017 Riverwalk businesses took in $11.6 million. Connecting to this high-throughput pedestrian area would be key to driving foot traffic towards the Central Loop.
The Central Loop’s superior public transportation options and walkability make it ideal for apartment growth. The submarket reported 94.4% occupancy in stabilized new construction / renovation delivered between 2010 – 2018 and 2.2% year-over-year rent growth as of Q1 2019. That is not to say there are not still requirements to make the Central Loop a thriving multifamily submarket. Improvements would be needed to fulfill the range of other renter preferences including a large format grocer or marketplace, physical fitness centers, layered outdoor-to-indoor experiences, mixed-use buildings that include office, residential, hospitality and retail combined and active uses that extend through day and night.
Office use will always be the driving factor on LaSalle Street. Smaller startups, nimbler and more entrepreneurial in approach and funding, have emerged up and down this prestigious half-mile of Chicago’s Central Loop. Class-B office space, which accounts for 60% of total Central Loop inventory, is an economic option for these young and quickly growing companies, which may be years away from paying premium rents in submarkets like River North and the West Loop. Since 2015, Chicago technology companies such as Snapsheet, ActiveCampaign, SpotHero and ReviewTrackers, have accounted for 7% of all Central Loop leasing activity and 17% of Class-B leasing activity in the Central Loop. Consulting firms show similar growth in Class-B activity accounting for 13% of overall leasing activity in the submarket and 23% of Class-B leasing activity.
Retail must grow organically in the Central Loop with one discrete investment at a time and is dependent on the office and multifamily markets to bring in more consumers. Moreover, it relies on Chicago’s convention business, which is bolstered by new hotels and steady tourism growth year-over-year. The Central Loop added over 1,100 keys since 2013, and tourism grew at an average rate of 3.7% annually. New hotels such as Kimpton Gray and Hyatt Place and established ones such as JW Marriott enliven the area, but there is room for growth. It is likely that as we see more office use in the Central Loop, we will also see adaptive reuse of Class-C assets into restaurants catering to these workers. Today’s average retailer footprint on LaSalle Street is 2,700 sf, dominated by banks and quick-service restaurants.
The Path Forward
Going forward, the Central Loop could reflect the next generation’s mindset of urbanism and sustainability, combining the old with the new. “Work” would be extended to a live-work-play environment that reflects today’s Millennial and Gen Z’s desire for everything they do to be within a 20-minute walking radius. This convenient and sustainable approach leaves a better carbon footprint by repurposing existing buildings instead of tearing them down and starting over. Because of the age and historic nature of LaSalle Street buildings, optimal zoning will be required to allow for the adaptive reuse needed for a live-work-play environment. The commercial real estate community and the City of Chicago will need to work together to revitalize the Central Loop, and it will be exciting to see what’s next for the heart of our city.
What do you think is next for the Central Loop? Share your thoughts.