Last Updated: April 1, 2015
Chicago Tech Sector Shows Staying Power
1871, the tech incubator in the Merchandise Mart, plays an important role in the tech ecosystem
CHICAGO—The city’s office market received a big shot in the arm last year as investors from across the nation poured money into the downtown’s burgeoning tech sector, according to a new report from JLL. Although tech companies have been recognized for several years as some of the brightest lights in the CBD, JLL officials say this flow of venture capital shows that the sector also has tremendous depth, and the benefits should continue to spill beyond its traditional River North home for many years.
“You now have real money coming into Chicago-based start-ups,” Nooshin Felsenthal, senior vice president of investment sales, JLL, tells GlobeSt.com. “And it’s not just Chicago-based venture capital firms investing.” Instead, the city is now taken seriously by investors that once kept their focus on tech hubs like Silicon Valley and Boston.
“Chicago had been this hidden gem,” she says, but in 2014, nearly $1.6 billion in total funding flowed into Chicago, a 50% increase over 2013 and the most ever. This was the second year in a row that Chicago passed the $1 billion threshold.
What investors may have noticed is the remarkable ecosystem that now nurtures the city’s vast array of tech firms, from two-person start-ups to giants like Motorola Mobility. Local universities, for example, have taken a page from their Boston counterparts and launched many partnerships with private sector tech firms. And with the establishment of several tech incubators such as 1871, all these new graduates now have somewhere to take their ideas.
“The city is proving itself to be the head of the pack,” Felsenthal adds. In 2013, tech employment in Chicago grew 8% according to the new report, placing the city in the top three among the nation’s major tech markets for employment growth in the sector, beating out established tech markets such as Boston, Los Angeles and Dallas.
And this growth has already had a major impact on the CBD’s real estate market. Tech firms accounted for 25.7% of the top 20 leases in 2014, 36% in 2013 and 23.8% in 2012, JLL found. Prior to 2011, tech companies typically accounted for less than 5% of the top leases.
Furthermore, JLL estimates that the gross purchasing power of the tech workforce is now more than $13.7 billion annually. And these high paying jobs have helped transform the city’s urban core. Downtown’s residential population grew by 48,000 people, or 36%, from 2000 to 2010, the fastest rate of growth seen in any major US city during that time period.
The changes brought by the tech sector have also rippled through every industry, Felsenthal says. All office users in the city certainly noted that the neighborhoods with a lot of tech firms did much better in the aftermath of the recession. “It was the fringes of the city that recovered first,” and now “the core of the city is trying to look like the fringe.”
All companies swim in the same labor pool, she points out, and many are telling landlords they want the amenity-rich spaces that tech firms have made standard. And this change is even hitting once-dowdy office markets like the East Loop.
As reported in GlobeSt.com, for example, GlenStar Properties, LLC remade 55 E. Monroe into an amenity-rich property and began to get results. Last year it signed Punchkick Interactive, Inc., a mobile marketing expert that used to call River North home, to 23,401 square feet. GlenStar officials partly attributed this and other leases to the building’s new 4,000-square-foot bike room, a giant video conference room on the mezzanine level, the proximity to Millennium Park and the surrounding area’s round-the-clock activity.
“I think the East Loop now offers an environment that is very similar to River North,” Felsenthal says, and leasing activity there has taken off in the last twelve months. Especially impressive has been the transformation of the old Prudential Building at 130 E. Randolph St. into One Prudential Plaza by Berkley Properties and 601W Companies, which have committed nearly $85 million to improvements, including renovations of the lobby and plaza areas as well as new and upgraded amenities such as a rooftop deck.
Late last year, Cision, a provider of public relations software and services, signed a long-term lease for 49,464 square feet in the 41-story tower. And Textura, a suburban software provider, just signed for 23,400 square feet.
Felsenthal expects to see many more such moves in the next few years. As tech firms add jobs “there really is no where for them to grow in River North,” a submarket which currently has a vacancy rate of about 6%. Therefore, whether they choose the new tech hub growing around Google’s offices in 1K Fulton in the Fulton Market, or renovated buildings in the East Loop or Central Loop, tech firms have just begun their transformation of the office market.
The long-term prospects for Chicago’s tech sector are perhaps best illustrated by the impressive series of IPOs and acquisitions in 2014. The software firm Fieldglass was acquired by SAP AG for $1 billion and Apartments.com was purchased by CoStar Group for $585 million. In addition, Felsenthal says that at least another 30 tech companies are nearly ready to launch their own IPOs. “It shows there is a lot of depth in this sector and a lot of staying power.”