Downtown office space at crossroads, local broker says

One of the city’s top office brokers said Friday he expects more downtown towers to encounter challenges in paying their bills, a problem allegedly faced by owners of the Circle Tower on Monument Circle.

John Robinson, managing director for the Indianapolis division of Chicago-based JLL, said he expects at least three of downtown’s 10 major office towers to go through foreclosure or take big losses in a sale over the next few years.

Likewise, many developments are likely to face challenges in restructuring their loans or accessing cash to make improvements to their office space to make them more competitive with better amenitized office projects like Bottleworks District, The Stutz and non-downtown campuses, he said.

“If your loan expires in the next couple of years, you’re having conversations with lenders already, and those are not pleasant conversations for either the lender or the owner,” Robinson said following a panel discussion at IBJ’s annual Commercial Real Estate & Construction Power Breakfast on Friday morning.

“Just to refinance your existing buildings today, you’re going to have to bring in a massive amount of new equity, and your interest rate is 200% higher than it was before,” Robinson said. “So, does the project [like that] even make sense in today’s economic climate, when the vacancy rates are so high, and the demand is so low?”

The total vacancy rate for office space downtown in the second quarter of this year was 21.2%, according to JLL. In the second quarter of 2019, it was 18.1%.

The rise in vacancy, Robinson said, is largely the result of companies reevaluating their space needs post-pandemic—particularly with the trend toward hybrid work. That process has led some to look elsewhere for more comprehensive campuses and unique amenities, while the general decrease in downtown foot traffic has had far-reaching effects on downtown’s restaurants and retailers.

There’s little talk of new downtown office product coming online in the near future. Robinson said that’s largely because of exorbitant cost increases. In 2008, the cost to build a new office building downtown was about $125 per square foot; today that figure is closer to $350 per square foot.

IBJ first reported on the lawsuit filed against Circle Tower owner Expanse, a Chicago-based co-working company, that alleges the firm has defaulted on its payments and owes a balance of more than $12 million.

Separately, Circle Tower is expected to get a new tenant later this year, when Command Coffee takes over the street-level, Circle-facing space occupied by Starbucks before the shop closed last October.

That’s not to say the downtown office market is dead, Robinson said, adding that it will require a bounce back in retail and restaurant activity, along with other amenities, that draw people to the city’s core.

“It’s going to be okay, long-term,” he said. “Everyone is struggling: the economy is struggling, the country is struggling. Indianapolis historically has lower highs and higher lows. So it’s going to be okay. But it’s going to be several years before that occurs.”

Robinson said that while he doesn’t expect most office towers to shift to residential as a solution to the challenges of low office space demand, some are likely to make an attempt.

The market has proof of the concept. Indianapolis-based Keystone Group overhauled of the former AT&T building at Ohio and Meridian Streets, converting more than 200,000 square feet of office space to luxury residential units. Keystone is also converting the former office building on the southeast corner of Market and Illinois streets into an InterContinential Hotel, expected to open in 2024.

“You’ll see partial conversions of some buildings, and then some full conversions of others,” Robinson said.

Another panelist, F.A. Wilhelm Construction President Phil Kenney, said the city, state and Indy Chamber are evaluating a strategy for converting downtown office buildings into apartments.

Panelists also touched on a variety of other topics, including diversity and inclusion in development, the state of the housing market and what should be done drum up more interest in Monument Circle.

The southwest quadrant of the Circle has been closed throughout the summer to host a park-like setting called Spark on the Circle and encourage more foot traffic. Only the southwest quadrant is closed, leaving vehicular access to the eastern portion of the roundabout.

“As long as people are using it effectively and [city leaders] are doing the analysis to see if it makes sense … and it doesn’t affect the membership at the Columbia or the Indianapolis Symphony Orchestra or the new coffee shop going in there,” Kenney said, “It’ll draw some more people to the area, definitely.”