Gen. Z, Widespread Growth And A Rainy Day: Takeaways On Chicago’s Office Market

When trying to predict the market's future, commercial real estate professionals always ask, "what inning is it in?" But after one of the longest economic recoveries in history, experts at Bisnow's Chicago's State of Office event Thursday said there is no longer a simple answer to that question. Some now think we're playing a double-header, and others fear the possibility of a rain delay.   

"This is a very interesting cycle, because it's not being driven by one thing," McCaffery Interests Senior Managing Director Clayton McCaffery said. 

A growing economy did naturally lead to office jobs growth, but low unemployment also helped fuel intense competition for workers, especially millennials, which in turn increased tenant demand for new trophy office buildings that provided unprecedented levels of amenities.

Millennials have already transformed the American workplace in ways unthinkable just 10 or 15 years ago, and what happens when the latest generation, dubbed Generation Z, arrives in the workplace this spring is the most unpredictable factor, McCaffery said. They have had different tools and workstyles than past generations.

"They've never not known what a smartphone is."

He believes that deep tech savvy could change office culture in profound ways, creating demand for even more new or renovated spaces.

CoStar market economist Brandon Svec believes Generation Z could drag the office market down, if only because their numbers are few.

Growth in the U.S. working age population will begin shrinking as the huge baby boomer generation retires, and the far smaller Generation Z begins to take its place, he said. Chicago will suffer more from this demographic change than any other city.

Still, Chicago retains a lot of strengths.

Its office market is just beginning to spread out beyond the traditional central business district, as landlords and developers seek new, walkable submarkets appealing to millennials, McCaffery said.

Fulton Market, where developers moved on from renovating old industrial structures and started breaking ground on new office towers, is the best example, he said. The development of other new or proposed neighborhoods such as Goose Island, The 78 and Lincoln Yards has only begun.   

Hines Senior Managing Director Tom D'Arcy believes growth outside the Loop will continue over the long term, since it is part of a national phenomenon. 

His firm is active in other markets around the Midwest, and millennials in these cities have also driven growth by clustering near downtowns to both live and work.

"Everything that is happening in Chicago is happening in Omaha, just on a different scale." 

What sets this era apart from others is not just the remarkable level of speculative construction underway, around 4M SF, but where it is located, several panelists said.

D'Arcy said in the past, if the market hit that level, it meant developers were at work exclusively on a group of massive downtown towers. Today, the construction sites span an arc that bends around the CBD, including 2.5M SF of spec in the South Loop's Old Main Post Office. 

"It's in River North, it's in Fulton Market, as well as a tower or two downtown," he said. "As a developer, I think we're going to see more of that." 

What could bring all this expansion to a halt, or at least slow it down, is unknown, but D'Arcy said his firm is making preparations for that rainy day. 

Hines officials are looking at the loans coming due over the next 12 to 24 months, and considering restructuring deals, he said. That does not mean the firm has gone on the defensive; it just decided to be a bit more cautious.  

Uppermost in the minds of the panelists is the political future of Chicago and Illinois. Several praised the steady hand of Mayor Rahm Emanuel, and lamented his upcoming departure.

Svec believes the business community's confidence has been shaken for years by the perilous state of city and state finances, and possible tax increases could make matters worse.

McCaffery remains optimistic that the Chicago region has enough strength to weather any changes. He pointed out that other cities, such as London, have much higher tax rates than Chicago ever will, and still manage to thrive.  

"What's creating all the uncertainty is we don't know how big the increases are going to be," McCaffery said.