Why tech companies are flocking to legacy real estate

John Rosin

October 25, 2018 · 5 minutes read

LaSalle Street is facing an identity crisis. A century after the Central Loop thoroughfare was established as Chicago’s financial district, three of its largest financial tenants are planning to leave, punctuating a shift from its image as a hub of traders and banking giants and forcing landlords to reinvent several grand but outdated buildings.

Bank of America is on its way out of the corridor to anchor a new tower at 110 N. Wacker Drive in 2020. BMO Harris Bank is in talks to move off LaSalle for a proposed tower at Union Station in 2022. And Northern Trust is poised to leave its 231 S. LaSalle St. offices behind for a consolidated East Loop office in 2023. As a result, landlords in the “canyon” of the Loop are staring down more than 1.8 million square feet of empty offices over the next five years.

Those looming vacancies highlight the struggle for many older Central Loop buildings that have relied for years on high-credit, institutional tenants but must now compete with new glass-and-steel towers with designs and amenities companies crave. For vintage buildings on LaSalle Street, staying in the game will require significant investment to either attract new tenants and reshape the street’s persona or repurpose buildings for new uses.

LaSalle Street “is characterized by older buildings and smaller floor plates—two things that are really not the trend these days,” says Andy Davidson, a Chicago tenant broker at MB Real Estate. That lack of appeal is one reason why office towers at 150 N. Riverside, 444 W. Lake St. and 151 N. Franklin St. have plucked about 600,000 square feet of tenants from the Central Loop, and more than half of the space left behind remains vacant, according to MB. Many landlords on LaSalle Street “are going to have to do some big overhauls” to reel in new tenants, Davidson says.

FINANCIAL HUB

LaSalle Street rose to prominence as a hub of financial institutions magnetized there by the Federal Reserve Bank of Chicago, which opened near its intersection with Jackson Boulevard in the early 1920s, as well as the Chicago Board of Trade Building that debuted at 141 W. Jackson Blvd. in 1930. As recently as 20 years ago, trading firms so dominated the southern portion of LaSalle Street that they would shut down a full block once a year for a fundraiser.

But the rise of electronic trading, consolidation among firms and banks putting a higher premium on attractive office spaces has changed the face of LaSalle Street.

New construction has stolen tenants from older buildings, and the competition is getting more fierce with the emergence of new campuses proposed farther from the city’s core, at Lincoln Yards along the North Branch of the Chicago River and along the South Branch at Related Midwest’s planned 13 million-square-foot mixed-use campus between Roosevelt Road and Chinatown. Plus, 6 million square feet of offices are under construction or in planning phases in the Fulton Market District—more competition Central Loop landlords will need to outplay.

“It will take time for owners to readjust and redefine what their (tenant) prospect base is as tech firms in River North grow up and maybe don’t want to pay Fulton Market rates,” says CBRE Senior Vice President Sara Spicklemire, who handles leasing for several prominent downtown office buildings, including Bank of America’s future home. LaSalle Street landlords “are going to take the biggest knock on the chin because they’re going to have to evolve from leaning in to law and financial services as their tenant base.”

Several big financial names may stick around LaSalle Street, as CIBC just extended its lease by six years, through 2029, at 120 S. LaSalle, and Northern Trust owns its headquarters at 50 S. LaSalle. Rosemont-based Wintrust Financial has a 180,000-square-foot lease at 231 S. LaSalle through June 2035, according to real estate information company CoStar Group.

But it’s unlikely that big tenants will fill the gaps left by those who leave. The Central Loop, where many older buildings have been converted into hotels and other uses, hasn’t seen a new office lease larger than 200,000 square feet in the past eight years and has landed only seven new deals larger than 100,000 square feet, according to MB. Offices leased by Bank of America and BMO Harris are also on the lower floors of their buildings, which is typically less desirable and more difficult to lease.

TECH SECTOR DEMAND

The good news for some LaSalle Street landlords is that creative and tech companies have shown they will lease space in revamped loft office buildings around the city, attracted to their vintage brick-and-timber feel.

After plowing $35 million in recent years into technological and other upgrades at the Board of Trade building, Chicago developer GlenStar Properties has attracted a mix of tenants from sectors including tech, real estate, consulting and public relations.

While trading firms accounted for almost all of the building’s tenants before the redevelopment, 60 percent of its users today are from other industries, says GlenStar Managing Principal Michael Klein.

At the landmark 47-story tower at 1 N. LaSalle, a venture led by Northbrook-based investor Hilco Real Estate spent $4 million upgrading and adding amenities, completed 245,000 square feet of new and renewed leases and last month sold the building for $113 million, or 36 percent more than it paid for it just two years ago.

For companies that want to attract young talent and make it easy for employees to get to work, the Central Loop and LaSalle Street are still attractive even if the buildings are older, says Mike Dolski, chief financial officer at Tampa, Fla.-based third-party logistics firm BlueGrace Logistics, which opened a downtown Chicago office at the Board of Trade building in May and is now expanding it to 15,000 square feet.

“I think you’re going to get a different collection of tenant types” on LaSalle in the next few years, Dolski says. “You’ll see less and less navy blue suits with ties and wingtips and maybe a little more office casual look.”

 

Originally Published by Danny Ecker, Crain’s Chicago Business

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