An Oak Brook-based developer is planning to start construction on a 52-story office tower on Wacker Drive next summer, the first major speculative office building project in downtown Chicago since the real estate orgy of the 1980s and perhaps the first in any big downtown area in this decade.
InSite Real Estate Development LLC is sending out a prospectus to woo tenants for the 1.4 million-square-foot building, which would be one of the larger office towers in the Loop and could cost between $300 million and $400 million.
The building at 301 S. Wacker Drive, across the street from the Sears Tower, is being designed by Skidmore Owings & Merrill, the venerable Chicago architecture firm that was one of the major victims of the post-1980s real estate crash, drastically cutting its staff and scrambling to get overseas assignments.
Officials at InSite were unavailable for comment Wednesday, but its prospectus says the building will be started next July and be finished in early 2000.
An alternative plan for an 800,000-square-foot building to be finished late in 1999 also exists, according to the prospectus.
Rumors have been growing for the last few months that a major new Loop office building was in the offing, and Skidmore officials have been dropping hints that they were beginning to get the type of local, trophy building work that used to be a mainstay.
Skidmore star Adrian Smith is listed as the lead designer on the project, which will have an exterior of granite, stainless steel and silver glass.
A new spire on the Chicago skyline promises to be watched around the country. Suburban office construction has recently reached fevered levels in spots, and a handful of buildings have gone up downtown for specific major tenants, such as the Blue Cross/Blue Shield building on the south edge of Grant Park.
Generally, though, downtowns have been shunned–and a Chicago project with no anchor tenant could mark a turning point in the market.
“It’s part of the inevitable movement of the cycle,” said Jonathan Miller, senior vice president of New York-based ERE Yarmouth, a leading real estate investment management firm. “Chicago may be a little ahead of other downtowns.”
Real estate market conditions have been edging toward the point where a new project would be feasible, with downtown office vacancies dropping from their 1990s high point of almost 23 percent in 1992–when the last building of the ’80s wave was finished–to less than 14 percent now.
Even more dramatic has been the drop in vacancies in the best and newest properties called Class A buildings. They were almost one-fourth vacant in 1992 but that empty space has been squeezed to less than 8 percent by some estimates.
That gives a big boost to rental rates, which in turn makes construction inviting for developers, lenders and investors. That process began two years ago in the suburbs but is just hitting downtown Chicago.
“Clearly rents are beginning to spike downtown,” said Scott Brandwein, president of Insignia/FC&S Commercial Group in Chicago. “It began last January and it appears to be accelerating, and we expect another significant increase in 1998.”
He said annual rents for Class A space are approaching $20 a square foot exclusive of taxes and operating expenses, and rents around $25 would be required to justify construction. The prospectus for the new building cites expected annual rentals of $24 a foot.
Brandwein added that large blocks of available space–100,000 square feet or more–are dwindling in the Loop, making it harder for big firms to find appropriate sites. He said he could think of 25 companies, including law, securities, accounting and insurance firms, that could be potential tenants in the new building.
“We believe that there’s enough demand for space to fill one building of this size,” Brandwein said. “Five (buildings) wouldn’t work.”
The observation underlines both the wariness of real estate observers since the 1980s binge and the importance of timing for a developer in a newly strengthening market cycle.
The first building completed has greater odds for success than succeeding buildings, and the last building is almost certain to encounter troubles.
The final project of the last wave was the Chicago Title & Trust Center, at 161 N. Clark St., which was finished in 1992 and suffered gaping vacancies until it was finally acquired at a bargain price by billionaire Chicago financier and ace market-timer Sam Zell.
Cutting across this received wisdom, however, is the fact that a successful project almost certainly engenders other projects as developers have something to point to when they go to lenders and investors for financing. And since no one wants to be last, developers tend to rush into a market at the same time.
Brandwein said he could see room for two or three “well thought-out, appropriately financed” projects in the current rising cycle.
“I don’t think there will be a glut of office space,” he said.
