Fulton Market's Office Sector May Recover Faster Than The Rest Of The CBD

Big office leasing deals returned to Fulton Market this year, but like the rest of downtown, the neighborhood may have a long way to go before it fully recovers. Developers and landlords across downtown were caught by surprise when Covid shuttered offices, but the timing was worse for those active in Fulton Market, which was in the midst of a building boom.

Developers delivered more than 2M SF since the beginning of 2020, in a neighborhood that started that year with about 5.5M SF of total inventory. And with leasing efforts basically shut down, the vacancy rate for Class-A buildings in Fulton Market soared from less than 15% in Q1 2020 to more than 34% by May of this year, according to a May market beat report from MBRE.

That’s by far the highest Class-A vacancy rate of any downtown Chicago submarket, but as the office sector picks itself up off the floor, Fulton Market may have a few advantages over the Central Loop and other downtown areas. With some luck, it may even recover more quickly.

“Fulton Market is not a typical office market, it’s the smallest by a large margin, and we’ve always seen big swings in the vacancy rates,” MBRE Vice President Craig McCaw said. “It’s a couple of big deals away from being right back on track.”

Recovery could be as short as two years, he said. Other downtown submarkets may not fully return to normal for nearly a decade.  

Significant Fulton Market deals have recently been signed, even during the coronavirus pandemic. Aspen Dental Management took 197K SF last year at 800 West Fulton Market, a new development by Thor Equities Group. This spring, Aspen agreed to expand its footprint in the building by more than 10K SF. In addition, last year CCC Information Services leased 133K SF at 167 North Green St., a recently completed, 17-story tower developed by Focus and Shapack Partners. This year, several more leases were completed, most notably Kimberly Clark’s deal for 87K SF at 1155 West Fulton St., a 100K SF building recently renovated by Domus Group and Barnett Capital.

In total, Fulton Market buildings accounted for about 40% of the large new office deals signed so far in 2021, according to MBRE.

And the neighborhood is coming back to life.

“I have definitely seen an uptick in foot traffic in the area in the last several weeks, particularly in the last week,” West Loop Community Organization President Damone Richardson said. “What I’m seeing now are places at nearly their full capacity, including people packed into bars and dining outdoors at restaurants.”

“It’s not just residents,” he added. “The West Loop is drawing in people from a number of neighborhoods.”    

Now that the public health crisis has eased, Fulton Market still has the same advantages that kept its office building boom in high gear, McCaw said. In addition to the new, amenity-rich, Class-A properties and the neighborhood’s top-notch dining options, it’s also a much easier commute than much of downtown. And after more than one year of working from home and not having to battle traffic congestion, office workers may have less patience with rush hours, so firms choosing Fulton Market will gain an advantage in recruiting.

“We are already seeing one-hour commutes from O’Hare to downtown, and that’s with offices only 20% occupied, but if you’re going to Fulton Market, that can cut 20 minutes off your commute, and that’s a big benefit,” McCaw said.

But high vacancy in Fulton Market does remain a problem, and new buildings keep opening. About 40% of the Fulton Market space delivered in 2020 remains vacant, according to MBRE. 800 West Fulton Market and 1100 West Fulton St. were delivered this year before MBRE published its market report, and 55% of the total 471K SF of office were leased. After the report was published, 320 North Sangamon St. and 1045 West Fulton St. were delivered, with a total of 429K SF, none of which had been leased yet.

Fulton Market will keep seeing wide swings in its vacancy until more buildings rise and the market matures, McCaw added. There is no shortage of developers hatching plans. According to MBRE, 25 developments, totaling about 6.6M SF, none of it pre-leased, have been proposed for Fulton Market.

That amount of space on drawing boards for a relatively new submarket transitioning from industrial to office use is not unusual, McCaw said. It’s also hard to predict how many projects will end up breaking ground, or how much new square footage the area will need before it’s considered mature.

“A lot of that will eventually depend on the city, what projects it approves and what its vision for Fulton Market becomes. But there’s always going to be a lot of projects proposed, and maybe 50% will be built in the next 10 years.”

Fulton Market’s eventual look is especially hard to predict because McCaw expects many available properties will change hands several times before an owner comes up with a timely project that scores an anchor tenant and financing.

One aspect that probably won’t change much for Fulton Market tenants is the rental rate. Leases signed in 2020 had average net rents of $37.38 per SF, MBRE found, compared to $29.45 for Class-A properties across the downtown.

“Landlords can only go so low due to their loan agreements, and with development costs still so high, including the recent spike in the cost of construction materials, they really can’t cut rates at their new developments,” McCaw said.     

That’s true for the rest of Chicago, not just Fulton Market, he added. The same conditions prevailed in Chicago during the Great Recession, when rental rates declined very little, especially when compared to New York and other coastal markets, which saw significant declines.

“In Chicago, it’s with rent abatements and tenant improvement projects where landlords are able to get aggressive,” McCaw said.