20 West Kinzie in Chicago’s River North neighorhood.
by Matthew Ward, the Alter Group
As we look back at the Chicago real estate sector in 2013, one of the key words for the year was “river.” First, there was the Chicago River, which became the fourth-quarter star of the market with a flotilla of new riverfront towers either planned or underway. 150 N. Riverside and the River Point office project will join the blockbuster apartment complexes Wolf Point West Tower and 111 West Wacker as new additions on the skyline. In all, there is 8 million square feet of new downtown towers planned in Chicago.
At the same time, we saw the $361 million sale of 10 and 120 South Riverside Plaza, a two-building, 21-story Class A office property totaling more than 1.4 million square feet by TIER REIT, Inc. to Ivanhoe Cambridge advised by Callahan Capital Properties. Clearly, the emergence of bankside projects (most of them are surrounded by plazas with boardwalks and retail amenities) is a result of young knowledge workers cherishing experience and environment in their workspaces, a shift from the old days of being cooped up in land-locked buildings in the financial district or Wacker Drive.
The second “river” is River North, the city’s most coveted office location and still its tightest submarket. According to MB Real Estate, since the end of the recession, River North has seen its direct vacancy rate drop 730 basis points from 16.4 percent to 9.1 percent. This year, River North further sealed its reputation as the Midwest’s Silicon Valley with the tech sector powering a boom in new construction and leasing.
First we saw a migration from the suburbs represented memorably by Google Inc.’s 572,000-square-foot lease at Merchandise Mart for its Motorola Mobility unit, which relocated from Libertyville. In the third quarter, software firm, GoHealth signed a 90,000 square foot lease at 222 Merchandise Mart and expects to bring 500 employees to the area by 2015. More recently, we are seeing a flood of startups taking space in stylish office buildings like 20 West Kinzie (site of Google’s Chicago headquarters) or 353 North Clark or in incubator spaces. Large blocks of space are now the rarity in River North. There are only six contiguous spaces of greater than 50,000 square feet.
As we look ahead, we will see developers in trendy areas like River North repurposing office floors to create more co-working spaces where entrepreneurs can rent a desk or an office. Industrious Office, for example, has created a 17,000-square-foot co-working space at 320 West Ohio, and the company’s brochure copy gives you a sense of its strategy: “Offering reserved seats in our co-working area, you will find Industrious to feel like your favorite neighborhood coffee shop. From solo entrepreneurs to small law firms, freelance designers, financiers, and growing startups, Industrious offers the ideal environment.”
Similarly, Microsoft Management is buying the seven-story 405 West Superior to create tech incubator space. In November, it was announced that Lightbank, the venture fund and startup lab, is launching a co-working space called the Warehouse inside its offices at 600 West Chicago, a former Montgomery Ward that has become one of the city’s primary tech addresses. The building’s tenant roster is a litany of quirky names, from Snapsheet, Fooda, Benchprep and Belly to Groupon Inc. and InnerWorkings Inc. The Warehouse will seat 100 entrepreneurs at $300 a month on month-to-month leases. All these tech incubators join 187, the 50,000-square-foot high-tech facility in the Merchandise Mart which is home to 240 startups and is now expanding to create larger suites that can accommodate five to 15 people. For the landlord, the challenge is that the prospective startup tenant may not have an established credit history, may have trouble anticipating its space requirements and leans toward short-term leases. As a consequence, we need to be creative and flexible, as well as well capitalized, to realize the opportunities.
The dearth of space in River North was a boon to the West Loop which has become its principle rival for tech firms. Comprising one third of CBD inventory, the West Loop submarket accounted for almost half of the market’s year-to-date absorption. Due in part to space constraints in River North, tech firms such as I Tech, and PC Mall have moved to the West Loop. On the investment side, the Harbor Group sold the 512,000-square-foot 300 South Wacker to Beacon Capital Partners for $112.7 million or $220 per square foot, which would equate to a capitalization rate of 6.3 percent.
The ascendancy of the hip districts has hurt older markets like the Central Loop, which has seen two quarters in a row of negative net absorption; on pace for its worst year in eight years, according to MB Real Estate’s 3rd Quarter report. Bright spots were the sales of 161 North Clark (for a blockbusting $312 million) and 180 North LaSalle (for $126 million). Similarly, the South Loop has struggled because much of its building stock is Class C. On the bright side, North Michigan Avenue, not traditionally seen as an office market, experienced its strongest year since 2002 with positive absorption of 124,000 square feet.
On the investment sales front, rooftop decks have become the value-add play of the season. A Sam Zell venture sold 200 S. Wacker, a 40-story 754,751-square-foot building that is 95 percent leased for $215 million after adding a rooftop deck. Further east, Berkley Properties sold 111 West Jackson, a 24-story tower for $135 million. The notable thing here is that the company acquired the building for $35 million when it was 29 percent leased and added $45 million in improvements including a rooftop deck.
When you put it all together – riverfronts, co-working, 24-hour places and rooftops — you can legitimately say that 2013 was a year when millennial tastes dictated the facts and features of office development. That’s no surprise: we are witnessing a generational shift as the 78 million baby boomers pass the torch to 80 million millennials. They are the largest generation with the greatest combined purchasing power in history ($2.45 trillion worldwide by 2015, according to Forbes) and how they work and live will set the tone for our industry for years to come.
Matthew Ward is Senior Vice President of Chicago’s The Alter Group.