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Chicago to Offer Most Generous Subsidies in U.S. to Save Its Downtown

Our mayor has it all wrong. Our City is in financial turmoil because our taxes are too low. We need higher taxes and did I mention our lousy police force. People commit crime and illegals move to our City because they're afraid of law enforcement. We need to go further than defunding our Police Dept. We should eliminate it and create instead a Social Activist Welcome Wagon that patrols the streets.

Chicago to Offer Most Generous Subsidies in U.S. to Save Its Downtown

Local politicians and developers struggle to revitalize the city’s office district

By Peter Grant, WSJ

May 28, 2024 9:00 pm ET

Chicago gave birth to the skyscraper in the late 19th century. Now, local developers and politicians are trying to keep many of today’s office towers from dying off.

The city is going beyond any other in providing public subsidies to convert obsolete office space into apartments and hotels, despite enormous budgetary challenges. Even Chicago’s politically progressive mayor signed on last month.

The city’s office market has been hurt by weakening demand, higher interest rates and difficulties in refinancing. Big companies such as Citadel and Boeing have moved their headquarters elsewhere, and Chicago commercial-property values have plummeted.

While these economic trends have afflicted central business districts in other major U.S. cities, by one measure Chicago’s is the hardest-hit.

Three-quarters of the mortgages backing its office space that were converted into securities are either in default or are at risk of default, the highest of any major metropolitan area in the nation, according to credit research firm KBRA Analytics.

Chicago’s office-vacancy rate has soared to 16.3% from 11.9% in early 2020, and it is notably higher than the U.S. average of 13.8%, according to data firm CoStar Group. Some downtown office buildings have sold for less than one-quarter of what they were valued at a few years ago.

Average asking rents haven’t fallen much, but partly because so many landlords are facing financial difficulties, the available supply is shrinking.

“There are fewer landlords competing for tenants because so many buildings are in this zombie state,” said Michael Reschke, a leading Chicago developer.

This dire situation has even caused the city’s mayor to ally with the real-estate community on a plan to save the downtown office district.

Brandon Johnson, who took office a year ago, ran on a pro-union platform that called for new taxes on businesses. In recent months, he has taken pro-business steps such as appointing Ciere Boatright, a real-estate executive, to lead the city’s Department of Planning and Development.

Johnson’s main revenue initiative has been a $1.25 billion bond issuance for affordable housing and economic development that received widespread business support.

“He does not want to be the mayor who loses downtown,” said David Reifman, a partner at the law firm Croke Fairchild Duarte & Beres, who served as commissioner of planning and development under former Chicago Mayor Rahm Emanuel.

Mayor Brandon Johnson’s main revenue initiative has been a $1.25 billion bond issuance for affordable housing and economic development. PHOTO: KYLE MAZZA/ZUMA PRESS

Chicago’s mayor isn’t the only progressive who is turning to pro-business initiatives to revitalize ailing office districts. In San Francisco, arguably the city hardest-hit overall by the office downturn, Mayor London Breed is backing a range of tax proposals and other initiatives to spark housing and business growth.

The Chicago real-estate industry was particularly happy in April, when Mayor Johnson supported a plan to convert vacant office space in the heart of the financial district to 1,000 apartments, partly using city subsidies. The plan originally was proposed by Johnson’s predecessor, Mayor Lori Lightfoot.

“It wasn’t his program,” said Jonathan Bennett, president of AmTrust Realty, which owns an office building targeted for conversion. “He didn’t have to stay with it.”

Under the plan—the most generous in the country—the city will provide $150 million to property developers to convert four buildings in the heart of the business district to more than 1,000 apartments, as long as about one-third are set aside as affordable units. The Johnson administration is in discussions with other landlords to add their properties to the program.

Other cities are struggling with mountains of empty office space and are moving forward with conversion projects, even without subsidies. In the first quarter, conversions of nearly 70 million square feet of office space were undergoing conversions, up from 60 million in the third quarter last year, according to real-estate services firm CBRE Group.

But most analysts agree that conversions can fill only a fraction of the 1.17 billion square feet of vacant U.S. office space. The cost of converting many buildings would be prohibitive, especially those with large floors that couldn’t be carved up into apartments easily.

Chicago is fortunate in having many buildings developed before World War II that have the right design for conversions. Many of these properties currently face financial distress, but those problems could pave the way for conversions. Their eventual resolution will likely involve a new owner paying a discounted price, which would make a conversion more financially viable.

“We’re seeing the values start to reset,” said Boatright of the Department of Planning and Development.

But Chicago’s ability to provide subsidies for office conversions is limited. City revenue is sure to be hurt by the sharp value decline in office buildings, which are major contributors to Chicago’s property tax base.

U.S. cities also will soon be losing a major source of revenue that they have been using to close budget gaps: The Biden administration’s $1.9 trillion American Rescue Plan passed during the worst of the pandemic is winding down.

Office vacancy is expected to keep climbing. Salesforce, the software company, put up for sublease 140,000 square feet of 500,000 square feet it originally leased in its new Chicago tower.

“Everyone went through an exercise of [office space] optimization coming out of the pandemic,” said Relina Bulchandani, Salesforce executive vice president in charge of real estate.

Even the Willis Tower, the Chicago skyscraper that for a quarter-century was the world’s tallest, faces an uncertain future. The debt service on the property’s $1.325 billion floating-rate mortgage soared with the rise in interest rates driving expenses much higher.

A spokeswoman for Blackstone, the building’s owner, said Willis Tower is nearly 90% occupied and its mortgage “remains in good standing.” Over $500 million has been invested in a “transformative renovation” of the building, she said.

Still, the tower’s operating costs are also rising. “With cash flow getting squeezed, it’s harder for that property to cover debt service,” said Patrick Czupryna, a managing director at KBRA, which has listed Willis Tower as one of the “loans of concern” in Chicago.

Write to Peter Grant at

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