The search for solving Chicago office problems can’t stop with Google.
Local players are lucid about the significant impact of the tech giant’s purchase and renovation of the James Thompson Center to occupy the entire building.
It’s a huge win for the city’s struggling office market, but too soon to know if the deal has done anything more than rally local excitement. Brokers and developers still expect tech companies to pull back over the next year as Google renovates its 1.2 million square foot complex ahead of its move in 2026.
Even Mike Reschke, the developer behind the deal that will spearhead the renovations, feels the tech sector’s short-term needs are dwindling.
“The tech world has slowed down their hiring a bit,” Reschke said. “At least for the next 12 months. »
Tech companies had been among the few bright spots during the pandemic for office owners. This is changing rapidly across the country as the stock market downturn has hit tech the hardest. Both Meta and Amazon walked away from planned expansions in New York, Netflix paid $80 million to exit some of its leases, and Twitter dropped a new lease in Oakland, Calif.
Chicago tech startups are even more cautious. Most have turned to remote work and are unlikely to sign leases before their business matures.
“We used to have a lot of growth from startups,” said Lisa Davidson, broker at Savills. “Now it’s the startup community that takes up less space. They are careful with their dollars for obvious reasons. They’ve embraced working from home probably more than anything. »
The Chicago owners are focusing on other prospects, including financial and legal firms, as well as life sciences companies.
But even some in these sectors are shrinking space, so there’s more pain ahead for homeowners. Chicagoans have followed the average pace of returning to the office. Data from Kastle Systems shows that employee card swipes account for just 43% of full occupancy for the week of July 18. Still, the 10 cities he tracked averaged nearly 45% in the same week.
Davidson works with tenants who are considering early termination by reducing square footage. By extending leases into smaller spaces, tenants can avoid costly early termination fees.
“I don’t think they’ve seen the worst of the market hit yet,” Davidson said.
Last month, the difficulty of finding an anchor tenant likely contributed to Tishman Speyer abandoning plans to redevelop 850 West Washington Boulevard into Fulton Market offices.
It was not a referendum on the entire office market, however, said Alex Najem, CEO of developer Fulton Street Cos., but rather perhaps a miscalculated use of the property. “It’s a residential site in the opinion of almost everyone. »
He is one of the few bulls on office assets as the tech pullback on real estate stands no chance of deterring his ambitious plans.
“Tech tenants are always a plan B for me,” Najem said.
He opted out of competing for Google in one of its development projects in the booming office district of Fulton Market when rumors spread that he was looking for more space in Chicago. Instead, he locked in a lease with Norton Rose Fulbright, the neighborhood’s first deal with a law firm.
“We said, ‘Forget Google,’ and we went with a sure thing,” Najem said.
His company is in talks with tenants from other industries that will allow its planned 530,000 square foot development at 917 West Fulton Market Street to open this year.
“The technology isn’t doing much for the Fulton Market area, especially for new construction,” said Evan Djikas, a longtime desktop broker at Colliers Chicago who recently joined Hertz Investment Group. “You see a lot of new industries coming in there. »
Google’s move to the Thompson Center in the Central Loop also creates a hole in a Fulton Market building with lab capacity. The company was considering a 200,000 square foot lease in the 425,000 square foot Trammell Crow development at 400 North Aberdeen Street. However, he is no longer moving forward with those plans, a person familiar with his plans said.
While it’s a loss for Trammell, who declined to comment, it’s good news for real estate players working to expand the life sciences sector in the US. side interior. Some worried that Google’s search for more space may have further reduced Chicago’s limited potential inventory of lab space, forcing tenants to explore other cities.
Yet the broader economic downturn is leaving tech startups thirsty due to a drying well of venture capital. It also hits the life sciences sector, where real estate growth depends on private equity investments.
“I made a bet to go in the direction of life sciences,” said Mark Goodman, whose eponymous development company paid nearly $16 million for a Fulton Market site where he is planning a lab. of 500,000 square feet. “But I’m going to be constrained by the same market factors that I don’t control. There are reasonable prospects for the life sciences market in Chicago. But leasing has yet to happen in a meaningful way that makes capital comfortable. »