Mayor Johnson’s $150M Funding for Office-to-Resi Conversions Driving Downtown Chicago Revival

Chicago is facing significant challenges in its office property market. According to KBRA Analytics, the city has the highest default risk among major U.S. cities, with office vacancy rates substantially higher than the national average. Office vacancies in Chicago have surged to 16.3%, a sharp increase from the 11.9% rate in early 2020. Comparatively, the national average stands at 13.8%, as reported by CoStar. Compounding the issue, nearly 75% of office mortgages turned into securities are either in default or at risk, the highest rate among major U.S. metropolitan areas.

Pro-Business Subsidies

To counter these challenges, Chicago is offering substantial public subsidies to help convert outdated office buildings into residential and hospitality spaces. Mayor Brandon Johnson is spearheading efforts to leverage the city’s historic architecture for these conversions. A key initiative is a $1.25 billion bond aimed at affordable housing and central business district development, which has garnered widespread support. In April, Johnson endorsed a $150 million plan to transform four vacant office buildings into 1,000 apartments. Additionally, he appointed Ciere Boatright, a commercial real estate executive, to lead the city's Department of Planning and Development.

Sustainability Concerns

However, there are concerns about the long-term sustainability of these subsidies. Chicago’s revenue constraints, exacerbated by declining property values and reduced federal assistance, raise doubts about the feasibility of continuous financial support for office conversions. The situation is critical even for iconic structures like the Willis Tower, where rising debt service costs due to increasing interest rates are creating financial strain.

Broader Implications

Chicago is not alone in its efforts to repurpose unused office spaces into apartments and hotels. Other cities are pursuing similar strategies, both with and without public subsidies. In the first quarter of 2024, around 70 million square feet of office space were being converted, an increase from 60 million square feet in the third quarter of 2023, according to CBRE. However, these conversions are a small fraction of the 1.17 billion square feet of vacant office space across the U.S., leaving open the question of whether such public subsidies can significantly impact the vast amount of unused office space.