Chicago's empty offices threaten its future

Major buildings are gathering dust.

​In the heart of Chicago’s financial center, a seven-story building occupying much of a city block was once home to the world’s largest options exchange. Now, it’s collecting dust. 

The property, for decades home to the floor where options traders jostled and screamed orders at each other, has been on the market since 2019, but owner Cboe Global Markets Inc. can’t find a buyer.

The Chicago Board of Trade building, once a key commodities hub, has fared even worse, with lenders handing the keys over to Apollo Global Management Inc. Over on the Magnificent Mile, the famed shopping strip that runs north of the Chicago River on Michigan Avenue, empty storefronts dot the streets, with vacancies at a record.

CME Group Inc. Chief Executive Officer Terry Duffy said in an interview that he’s prepared to leave Chicago if the city and state take steps that are perceived as “ill-conceived.” 

Hollowed-out downtowns are a depressing characteristic of American cities right now, whether it’s Market Street in San Francisco or Wall Street in New York. But Chicago, the third-largest city in the US, faces its own challenges that threaten its status as one of the main global financial hubs.

Not only has the Midwest’s commercial center been struggling with the slow return of workers — the region’s office attendance is about half of pre-pandemic levels, according to security firm Kastle Systems — but the departure of major companies including Citadel and Boeing Co. stands to leave a tough-to-fill void.

Guggenheim Partners, a large financial employer in the region, has kept its offices largely shut, while companies including Cboe and Allstate Corp. aren’t mandating that all workers return to the office. Against that backdrop, the city is grappling with a surge in crime, including carjackings and robberies, that cost Mayor Lori Lightfoot her job this year.

Now it’s up to her replacement, Brandon Johnson, a progressive who is taking office Monday, to turn around the city’s flailing fortunes, including reversing the decline of downtown.

Things aren’t looking up for the commercial real estate market, with the city’s office-vacancy rate reaching a record 22.4% in the first quarter. Even tech companies, once seen as a bright opportunity for Chicago’s future, are retrenching: Salesforce Inc. and Meta Platforms Inc. are giving up almost 240,000 square feet (22,300 square meters) of space.

“Something dramatic needs to be done,” said Andy Gloor, chief executive officer of Sterling Bay, a major developer behind the trendy Fulton Market neighborhood. “Chicago is not going be able to thrive without a dynamic central business district.”

One particular blow came from meatpacking giant Tyson Foods Inc., which has previously announced it would shut its local offices. It exited 234,000 square feet of downtown office space in the first quarter.

Chicago fared the second-worst among 11 US cities in an index of office leasing activity, ahead of only San Francisco in the first quarter, according to real estate firm CBRE Group Inc. Tenants leaving their current space or downsizing due to hybrid work or recent layoffs added 1.5 million square feet of sublease space in downtown Chicago in the first three months of the year, CBRE data show. That’s enough space to house about 15,000 to 20,000 people.

“A lot of these companies are trying to test-drive whether or not having smaller space, having a bit more flexible space and working remotely will allow for the same productivity,” said Matt Carolan, who co-leads a team of real estate brokers at Jones Lang LaSalle Inc. 

It’s a contrast to finance-heavy New York, where Mayor Eric Adams has been pushing companies to bring employees back to office towers and Wall Street executives have been critical of remote work. JPMorgan Chase & Co. told its managing directors last month that they must be in the office every weekday.

Tom Wilson, CEO of Allstate, said the insurer has found that “flexibility really sells” and the post-pandemic policy has helped recruiting efforts in all locations across the country.

“We decided to treat our employees as customers,” Wilson said. “We sell them a job, and a job comes with some money, some professional growth — and now it comes with more flexibility.”

Behind the scenes, Chicago officials say employers have been extra flexible with workers for fear of losing people in a tight labor market. It’s a challenge for the city where business leaders have criticized rising crime, but empty streets aren’t conducive to safe environments either.

Crime incidents in Chicago jumped 41% last year from 2021, and another 43% so far in 2023. Billionaire Ken Griffin cited violence as one of the reasons for moving his Citadel business to Miami, while CME’s Duffy recently opened up about his wife being carjacked in broad daylight.

“We need to continue to create reasons for people to come downtown,” said Michael Fassnacht, head of World Business Chicago and the city’s chief marketing officer. “I encourage all the corporate leaders to have at least a three-days-in-the-office policy.”

There are other knock-on effects from the hybrid work model. Fewer people downtown have left retailers reeling. The Magnificent Mile’s vacancy rate stands at 29%, with the section furthest to the north around Water Tower Place — a vertical mall that once housed Macy’s Inc. — 39% empty, according to Cushman & Wakefield Plc.

As Johnson takes office, he’ll have to tackle Chicago’s slow recovery from the pandemic, rising crime and empty buildings that are losing their value, which could reduce the amount of property tax the city collects in the long term.

The 47-year-old Democrat appealed to voters in a largely progressive city. During his campaign, he pledged to raise taxes on major corporations in order to boost Chicago’s revenue, but business leaders say he’s been reaching out and is open to hear their arguments on why such a levy would drive companies away.

“Mr. Johnson has no legal authority to impose a transaction tax on my business,” said CME’s Duffy, adding that fighting crime should be a bigger focus for the new mayor. “In our leases, we have a language in there that says if there’s something that’s ill-conceived from the city or the state, that our leases are null and void.” 

Johnson has met with various business leaders and has asked them to leverage their knowledge to help the city cut costs or raise more revenues, according to Jason Lee, a spokesman for the transition team. The incoming mayor understands the challenges the downtown is facing and is focused on revitalizing the Loop, as the central business district is known, he said. 

The city’s “downtown commercial corridors still bear the scars of the pandemic via higher vacancy rates and lower foot traffic,” Johnson said in his inauguration speech. 

He stressed the need to make the city’s public transportation system safer and more reliable so its residents could get to jobs as well as enjoy Chicago’s amenities.

It’s not all bad news for Chicago. The West Loop and its Fulton Market district are booming, with a flurry of bars and restaurants serving employees at companies including Alphabet Inc.’s Google and McDonald’s Corp. High-quality buildings in the area command about $20 a square foot more than in the Loop, according to JLL’s Carolan.

“Every single building that we’ve built in Fulton market is a 100% leased,” said Gloor of Sterling Bay, which is currently in the process of building another tower in the neighborhood. 

Chicago’s cheerleaders are also hopeful for the future of the Thompson Center, an underused 1980s government-owned building recently acquired by Google. The plan is for the building to be renovated and reopened in 2026.

Yet back in the financial center, the value of the Cboe’s 400 South LaSalle building has already been cut by more than half because of two writedowns and depreciation, regulatory filings show. The company put the building up for sale almost four years ago to move to new headquarters in the renovated Old Post Office, while its trading floor relocated to the Chicago Board of Trade.

Even if it gets a new owner, reviving downtown will take a lot more than a building sale.
​
The more companies implement return-to-office polices, “the more bodies that come downtown,” said Brad Serot, vice chairman at CBRE. “That’s when you start to see busier streets, restaurants, cafes thriving again.”