Will Office Stay Flat?
The office market has been fairly flat for a while (saying something's been "fairly flat for awhile" is how people usually break up with us), but now we're seeing the return of new construction like Hines' River Point and John O'Donnell's 150 N Riverside. Will this mean a 180 turn for the market? We’ll explore that question and more at our Office Summit next week; meanwhile, here are other key trends impacting the sector:
1) It's a bifurcated recovery.
Just like the economy at large, high-end, Class-A office is performing extremely well, while Class-B and C remain rather tepid, MB Real Estate EVP Andy Davidson, an event panelist, tells us. (He’s headed to Vegas later this week. Itinerary classified.) Tenants are opting for 30% less space to afford higher rents, and the efficiency trend is here to stay, he says. The suburbs are set for a long struggle with two big chunks of the workforce, Millennials and empty nesters, moving downtown in droves. Rent growth in Class-A is offset by downsizing, and Chicago office vacancy still sits around 15% with minimal true absorption, Andy points out.
2) Tech is returning to the Loop.
Tech used to be all about edgy space in up-and-coming ‘hoods, but large contiguous blocks of creative loft space are getting harder to come by, Andy says. The price discrepancy isn’t what it used to be (some loft spaces have hit $30/SF gross rents), and many tech firms can now afford more upscale and conventional properties. (Many of which have high ceilings just asking for a creative space makeover.)
3) Conversions are slow and search boundaries growing.
Last year, we heard lots of talk about low-demand, Class-B and C office properties converting to alternate uses, but few are left to renovate (especially in terms of multifamily), Andy says. Though you’re still seeing office turn into hotel at properties like 360 N Michigan (above), 100 W Monroe, and 65 E Wacker, he points out. On the tenant side, you’ll notice firms expanding their space search boundaries, especially as technology leaves them less tied to a particular location. Law firms are inching closer to hipper ‘hoods (like McDermott in River Point); speed traders are digging the Apparel Center; and Google (as we know) is leading what will likely be a mass exodus from River North to the West Loop.
