Medill Newsmakers: Chicago Loop struggling amid global real estate distress

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Trophy office buildings were once the landmarks of the Chicago Loop, but now many are empty. (Ophelia Deng/MEDILL)

By Ophelia Deng
Medill Reports

The pandemic has put the Chicago Loop in distress. Vacant office buildings have lead to closed storefronts. What will the future of the Loop hold?


[Medill Newsmakers Open]

Ophelia Deng, Medill Newsmakers: Hello, Welcome to Medill Newsmakers. I’m Ophelia Deng. The pandemic is officially over, but its aftermath isn’t. The slump in the commercial real estate market is one of the many residual problems that impact the world and our Chicago.

Reports show that the global real estate market is facing $175 billion in debt, ranking as the top industry with the most distressed bonds and loans. The Chicago Loop is home to many trophy commercial buildings. And it’s struggling because of office vacancies. People are hesitant to give up remote working and return back to offices.

Michael Edwards, president and CEO, Chicago Loop Alliance: Office drove the market in downtown for years. We had 350,000 people a day coming to the Loop, we have a little over half that now. So but 180,000 people makes a big difference.

Deng: According to the real estate company Avison Young’s latest report, the office vacancy rate at Class A trophy buildings is 7.5%, but Class B and Class C buildings are doing much worse. The total vacancy rate is up to 20%. Downward office demand and dramatically rising interest rates have put pressure on mortgage security loans in Chicago. Only 50% of the loans are in good standing. Twenty-eight percent are watch-listed. Nine percent have been special serviced, and up to 13% of the loans are delinquent.

Long story short, not enough people are using the offices, and companies don’t want to or cannot afford to pay for the empty spaces. The market demand is at its lowest.

Damla Gerhart, principal and managing director, Avison Young Chicago: Companies are, when they’re making a decision about a lease expiration, they’re still choosing to sign an office lease, but they’re reevaluating how much space do we really need. And how do we make sure that we design the space in a way that meets the needs of our employees?

Deng: Lower demand will eventually lead to a decrease in the value of office buildings.

Gerhart: Uou need to have demand for an asset for that asset to have value. And so if it’s an office building, and there’s no demand for that space because people are not returning to the office, it’s going to impact the value.

Edwards: Those offices need to continue to generate revenue, or they’re going to be taken back by the banks. If they’re taken back by the banks, somebody’s going to lose a lot of money. But those buildings, as all office buildings, will then be resold at some lower amount, which might enable them to be converted into housing because the cost of the building itself will be so much less than an office building.

Deng: Fewer people in the office means fewer customers who are going to restaurants and stores in the area. Experts say many stores barely survived the pandemic, and they will have to struggle a little longer.

Edwards: We counted 35 vacant storefronts on LaSalle Street. And that was an excellent whole street, it was just really the southern half of the street.

Deng: Loop storefront vacancies stood at a 20-year high in 2022. Now in 2023, more people are coming back to the Loop. The situation is recovering slowly.

Edwards: Tuesdays, Wednesdays and Thursdays, Loop feels just like it used to be Mondays and Fridays, not so much. But what is great is that Friday, Saturday and Sunday are much busier than they used to be people are coming down.

Deng: Nonetheless, we can still see empty storefronts and closed restaurants on the street. And, the health of the storefront economy is tied to office vacancies.

Gerhart:  A big driver for employees is, is there something to do after work?. Is it located in a neighborhood or an area where there are restaurants, bars, and shops? Because that can also be a driver for how people return to the office if there’s something to do afterward.

Deng: To revitalize the store-front economy, in 2023, the government has released funds to help small businesses.

Edwards: Just announced was the city Small Business Improvement Fund, which is actually giving some major money to $250,000, maybe even $300,000, depending on your business, or whether it’s a business or cultural institution, or, you know, even a small cafe on LaSalle Street.

Deng: To relieve the pressure of the commercial real estate market and make the area vibrant again,. Chicago also launched the LaSalle Street Reimagined project to turn vacant office buildings into residential buildings.

Chicago government selected three projects in 2023 to turn three landmark office buildings into residential living. The selected finalists are 111 West Monroe St, 207 South LaSalle St. and 135 South LaSalle St. More than 1.6 million square feet of vacant space will be remodeled as apartments, hotel, and retails, including nearly 320 affordable housing for people with at least $45,000 in household income. The project represents $550 million dollars in total investments.

Edwards: We found out in the Loop, not just LaSalle Street, but the entire Loop that they’re that residents, there’s 45,000 residents higher than it was before the pandemic, that they spend about $400 million a year disposable income on food, entertainment, things of that we all spend money on daily living, not including the cost of their housing. So there’s a real economic value to a resident if you have the kind of services and products and entertainment that they want.

Deng: Chicagoans are supportive of the project and hope it could revitalize the neighborhood.

Joshua Bloom, Chicagoan: It’d be great to have more people living in the Loop and really have it be more of a vibrant neighborhood.

Bob Hutmatcher, Chicagoan: I believe that’s one way of bringing more people down here to the central business district, also to its shopping and restaurants.

Ron B., Chicagoan: Getting them filled up is going to help the economy no matter what it is.

Deng: However, some voiced their concerns about the costs of living here.

Douglas Paige, Chicagoan: The reason why they’re vacant is because of the cost of being in that building. I mean for how expensive it is to be there. And I don’t see how it would be any less expensive for someone to have a residential area.

Deng: The Loop still has a long way ahead to recover from the hit of the pandemic. Experts say they expect to see things turn around in the middle of next year. Thanks for watching. I’m Ophelia Deng.

Ophelia Deng is a graduate student, specializing in video & broadcast. Connect with her on LinkedIn