Fulton Market Office Has Been Going Strong, But Dwindling Supply Could Limit Its Growth
Report after report has shown Chicago’s Fulton Market defying the broader city’s lackluster office performance, with Transwestern citing it as the “single bright spot” in the market in its first-quarter office analysis. The former meatpacking district was one of only two metro submarkets to see positive absorption in Q1, and it posted some of the highest rents and lowest overall vacancy rates — 16.8% versus 25.1% for the Central Loop and 23.1% for both the East Loop and River North.
Fulton Market is riding a high as “a lot of the city gets a bit tired,” Madison Rose Vice President Adam Pines said at Bisnow’s Future of Fulton Market event earlier this month at the 1045 on Fulton development.
But there are challenges ahead. Those high rents are disqualifying many would-be office tenants, a lack of certainty about space needs emerging from the pandemic is holding back office decisions, and the financing challenges impacting every sector of commercial real estate are limiting new product.
“These are all top-of-market rents, and it's probably under 10% of the market that qualifies for deals in this submarket to begin with,” Pines said of Class-A rates that surpassed $50 per SF in Q1, the highest in the city.
That is just one way the district has suffered from its own success. Panelists said an influx of new people, drawn to live near their office buildings, means transit options are beginning to suffer. Stress on infrastructure in general is keeping projects from getting off the ground quickly, W.E. O'Neil Construction Project Executive Brian Barry said, citing power needs in particular.
But Fulton Market’s biggest hurdles are the same ones facing the office sector as a whole: difficulty estimating headcounts amid a remote work revolution that shows no signs of abating despite executives’ best efforts, plus financing drying up as lenders tighten the screws on capital.
“The challenges we see every day from occupiers are the struggle to either defend or get money for a build-out … and commitment to term,” WeWork Head of Business Development Julian Pearlman said. “Seven years out, 10 years out, 15 years out, how can anybody project what their headcount is going to be? What their business needs are going to be? It's a difficult time.”
For many, the answer has been to scale back footprints for now. But an even bigger damper on Fulton Market’s future is the capital market hesitance that is limiting new product, according to Fortem Voluntas founder and CEO Joy Jordan.
Despite plentiful developable land and a number of new apartments going up, just one office building is under construction in Fulton Market, she said. Only two more are planned over the next 36 months, which Jordan attributed to the cost of capital.
That issue isn’t limited to Fulton Market. Across the city, just 2M SF of offices were under construction at the end of Q1, more than two-thirds less than the 7.1M SF under construction in 2019. But it does highlight that even one of the nation’s hottest office markets isn’t immune to the forces icing deals everywhere.
“I think that's really the biggest challenge that the office market has, is really not being able to build any new office buildings, period,” Jordan said. “And, you know, the lack of capital is really due to the fact that 98% of Class-B buildings are going back to lenders, if not 100% of them, especially in cities where you still have abilities to develop on land.”
Luckily, those holding Fulton Market properties originally marked for office use can easily pivot to residential or hotel uses, Fulton Street Cos. founder and CEO Alex Najem said.
“You're not locked into a specific asset class with really any piece of land,” Najem said. “In this neighborhood, they all hold high values, so the challenge has, in my opinion, only been a benefit to the full market.”
Despite the dip in new office construction, panelists said tenants would continue to be drawn by Fulton Market’s plethora of new and recently renovated office space and expanding retail options.
About 15 new office developments totaling more than 3M SF have opened in Fulton Market since the turn of the decade, making it one of the most successful office markets in the nation. That has paved the way for other sectors to thrive.
“Multifamily is flourishing now in Fulton Market,” Luxury Living CEO Aaron Galvin said. “And the reason is because office came first, restaurants came first, retail came first, and now we see multifamily. There's no other submarket in the city that has had that benefit, because candidly, those office buildings would not have been built if all of the people who are already living in apartments were there.”
