Google plans to open in the Thompson Center by 2026. Will the tech giant help revitalize the Loop?

Google surprised many last year when it agreed to buy the James R. Thompson Center in the heart of the Loop. The tech giant hasn’t revealed its plans for the Helmut Jahn-designed building, where it plans to open an office by 2026, but that hasn’t stopped speculation that the project may give downtown Chicago a much-needed jolt.

“There will likely be a Google effect,” said Elise O’Connor Goodman of commercial real estate firm Transwestern. “Companies tend to go where Google goes.”

Google has been credited with sparking the redevelopment of whole neighborhoods when it opens an office. Well-paid workers flock to such areas, including New York’s Meatpacking District, where Google opened more than a decade ago. Google has attracted other tech firms eager to catch the New York neighborhood’s new vibe, sparking new business for nearby restaurants and retail.

The Google effect has already worked its magic in Chicago. The Fulton Market neighborhood just west of downtown was largely occupied by food wholesalers and distributors in 2015 when the tech giant planted its Midwest headquarters at 1000 W. Fulton St., a mammoth former cold storage building renovated by developer Sterling Bay. The neighborhood is now one of the nation’s hottest office markets, with new skyscrapers and streets crowded with shoppers and diners.

Some hope Google’s future downtown office will also rejuvenate the Loop, where many older office buildings have high vacancy rates and shaky finances. But it’s uncertain whether Google alone can revive the city’s urban core.

“Google will help, but the problem is bigger than any one organization can solve,” said Joe Learner, chairman of North American brokerage for Savills, a commercial real estate firm.

Google is still formulating how it will use the 1.3 million-square-foot property. The company has a build-to-suit agreement with a venture led by Chicago developers Michael Reschke and Quintin Primo, which bought the Thompson Center last summer from the state of Illinois for $105 million and will launch a floor-by-floor gut renovation.

“We remain committed to our long-term presence in Chicago and the development of the James R. Thompson Center,” Google spokesperson Alex Joseph said.

But before Google even arrives, financial distress may overwhelm the Loop. Three years into a work-from-home trend that seems permanent, office tenants are shrinking their footprints, driving up vacancy rates. In some cases, they’re negotiating to pay less in rent, or moving to new buildings in Fulton Market.

That’s making it difficult for the owners of older, obsolete Loop buildings to keep up with mortgage payments or launch needed renovations, and many will face hard choices: convince banks to restructure their loans, take steep losses by letting lenders take back properties or sell out to new owners.

“This is not a problem that is going to solve itself in a short period of time,” Learner said. “We’re going to be having these conversations next year and the year after that.”

Downtown looks almost normal on some days, especially the middle of the week when many workers leave their home offices and commute, but empty spaces keep popping up. More than 27% of downtown’s nearly 150 million square feet is now available to rent, up from 24.5% one year ago, according to a Savills report.

And with offices still empty on Mondays and Fridays, big users have decided to “right-size” their offices, including insurance firm Aon, which just renewed its lease in the East Loop’s Aon Tower, but is taking just 300,000 square feet, 25% less than it previously used, said Robert Sevim, president of Savills Chicago region.

Other companies such as Molson Coors and Antares Capital decided to leave older buildings and occupy about 80,000 square feet each in the West Loop’s new BMO Tower at 320 S. Canal St.

“There are going to be some clear winners and some clear losers,” Sevim said of downtown buildings. “The haves and have-nots will see a wider gap.”

Many of Chicago’s best-known office buildings are teetering on the edge, carrying large debts and at risk of missing loan payments. Aon Center, the 1,136-foot tower at 200 E. Randolph St., was placed on a loan servicers’ watchlist after its owner, 601W Cos., missed a mortgage payment this year and then secured an extension on its loan, according to Trepp, which tracks financially troubled real estate.

Even relatively new buildings could be headed for trouble: 300 N. LaSalle St., a 1.3 million-square-foot tower completed in 2009, also hit the watchlist after law firm Kirkland & Ellis announced in 2021 it was leaving its more-than-600,000-square-foot office in 2023 and moving to Salesforce Tower, a new riverfront skyscraper developed by Hines in River North. Another tenant, Boston Consulting Group, will also soon depart for a new Class A Fulton Market office.

“As soon as these vacancies take place, the financial picture will look dramatically different,” said Manus Clancy, senior managing director at Trepp. “That could happen to any building as leases come up for renewal.”

Google has rebuilt entire neighborhoods, and not just in Chicago. New York’s Meatpacking District became one of the city’s tech centers, filled with restaurants and retail, after Google first began taking space in the industrial area near the Hudson River more than 10 years ago, said Jeffrey LeFrancois, executive director of the Meatpacking District Management Association.

Twitter and other tech firms opened offices near Google’s main building at Eighth Avenue close to the river, and Google established other hubs including a new office campus on Pier 57, the historic riverfront tourist attraction.

“New York did not have a lot of tech tenants before Google,” he said. “Now they are the big fish in a big sea.”

Clancy isn’t sure Google can cure Chicago of its post-COVID hangover. Big Tech firms such as Meta and Amazon are giving up space, not taking it, and the sector doesn’t have the same vibe.

“It’s rare one firm can change a city’s trajectory with one lease,” he said. “And right now, office is in the same place shopping malls were five years ago. This is going to be a very painful stretch.”

Downtown could see lenders take control of financially troubled properties in the next few years, he added. Brookfield Asset Management fell behind on loan payments and faced a foreclosure lawsuit for 175 W. Jackson Blvd., a 22-story tower completed in 1912, which had a $280 million loan and a rising vacancy rate. A court-appointed receiver will now attempt to sell it.

“It was death by a thousand cuts,” Clancy said.

Other buildings more than 90 days delinquent on their loans include the old Field Building at 135 S. LaSalle St., which lost its anchor tenant, Bank of America; the Civic Opera Building at 20 N. Wacker Drive; and 216 W. Jackson Blvd., according to Trepp.

Savills’ Learner said many buildings, especially older central Loop properties, will need to be financially restructured so the owners have much more manageable mortgage payments and can afford to add modern amenities, or sold off at a loss.

Chicago may need an entirely different kind of owner to take charge, he added. Instead of big institutional players, which typically look for big returns, family offices or wealthy individuals such as hair care mogul John Paul DeJoria, who bought the former McDonald’s campus in Oak Brook, may find they can pick up big office buildings at cheap prices and turn them around.

“Unlike New York, historically speaking families haven’t been big players in Chicago,” he said. “There is the opportunity now for smart, patient capital to take advantage of the shift in the marketplace.”

But families are likely to stay away from functionally obsolete buildings, he added. Like Jose Cuervo’s Beckmann family, whose Agave Holdings purchased 225 W. Washington St., a 28-story tower, in 2022 for nearly $83 million and plans to buy 300 S. Wacker Drive, they’ll probably stick to well-located buildings that just need some extra care.

Even if Google comes in and is wildly successful, the city may have to offer more tax abatements or other financial tools to make it worthwhile to take over some failing buildings. Former Mayor Lori Lightfoot launched in 2022 one such initiative, LaSalle Street Reimagined, which aims to transform financial district office space into about 1,000 apartments, including hundreds of affordable units.

But such strategies won’t work everywhere, said Rafael Hernandez, principal of The Blackwood Group, part of a team chosen to rehab the 41-story Clark Adams Building at 105 W. Adams St., a 96-year-old building, into hundreds of apartments. It can be converted because it has terraces and setbacks on all sides, giving most of the interior access to natural light and ventilation, a must for renters.

“Some of the office buildings downtown have interior layouts that are more of a square,” he said.

Tearing down buildings is prohibitively expensive, Learner said, so the Loop may simply end up with a collection of empty, zombielike buildings, no longer able to compete with riverfront or Fulton Market buildings, but not suitable as apartments and too obsolete for offices.

“Some are not well suited for any of the above,” he said.