Old Post Office developer looks to defy a brutal market with a new project
By: Danny Ecker
July 25, 2023
The city of Chicago may be trying to help developers get rid of downtown office space. But 601W is about to bring a lot more to the market.
The New York-based real estate developer is ramping up marketing for Canal Station, a refurbished office building at 801 S. Canal St. with 683,000 square feet of workspace that it aims to have mostly ready for tenants to move into by the end of the year. The $265 million project is breathing new life into a six-story property stretching almost a full city block along Canal Street between Polk and Taylor streets; it was fully leased to Northern Trust from 1990 until the bank's lease expired in late 2020.
It's a bold investment by 601W that appears to fly in the face of the prevailing office market trends. Downtown office vacancy has hit new record highs in nine of the past 11 quarters, driven by a barrage of companies scrapping big chunks of their workspace as they embrace the rise of remote work. That downsizing movement — combined with a big jump in interest rates over the past year — has devastated property values, creating a historic wave of distress that is financially crushing landlords across the central business district.
Supply and demand are so out of balance that city planning officials are working with developers on proposals to turn five large office buildings on and near LaSalle Street into residential properties, projects that collectively call for more than $300 million in taxpayer subsidies.
That's the ugly backdrop for 601W and its local leasing partner, Telos Group, as they hunt for tenants to fill a building that has never proven itself as a destination for office users.
601W and Telos see a much rosier picture. Canal Station is poised to piggyback off the leasing success of the Old Post Office, just one large block north and nearly full. The addition of nearby BMO Tower and its recent streak of tenant wins also has helped validate the corporate appeal of the southwest corner of the Loop, an area Telos now calls the "Post Office District" to build cachet.
One centerpiece of Canal Station's marketing: It's meant to be a bargain. Telos projects annual rents in the building will be close to $45 per square foot, including taxes and operating expenses that tenants typically pay. That's in line with what companies pay for competitive second-tier, or Class B, buildings downtown.
Canal Station, meanwhile, will be overhauled with nearly 30,000 square feet of new tenant amenities, including a 7,300-square-foot outdoor terrace, a gym, a tenant lounge and a conference center. The 110,000-square-foot floor plates could be leased by individual users or split up among several, marketing materials show. Most floors will come with small, private outdoor terrace spaces.
"It's going to be a significant value play (compared) to Fulton Market and the new trophy development buildings (downtown), and give, we think, just as good of a quality environment," said Jeff Dowdell, who is teaming with fellow Telos senior vice president Matt Whipple to market the project.
Selling prospective tenants on the location of Canal Station may be the biggest hurdle. Northern Trust employees jokingly referred to the building as "Canalcatraz" for its isolation relative to the Loop. Though not prohibitively far from Union Station, the walk down Canal Street today includes proceeding under a highway on sidewalks in need of repair.
601W plans to offer tenants a shuttle bus along Canal Street to Union Station and Ogilvie Transportation Center, as well as 375 on-site parking spaces and new streetscapes next to the building. Canal Station also has places to eat and shop close by: The Southgate Market shopping center is immediately south of the building, while a Portillo's sits across the street.
The building's view to the east is a deep pool of residential buildings, as well as The 78, a 62-acre planned megaproject from developer Related Midwest.
"You don't realize how close it is to Roosevelt Collection, and there are options for food out there, but the optics are that it is far removed from the Loop," said David Knight, managing principal at Advocate Commercial Real Estate Advisors, which negotiates leases on behalf of tenants; his firm is not involved in the Canal Station project. "Getting tenants that are used to being in the Loop to explore that location will be their biggest challenge."
601W has already sold a few of its most important partners on its vision: its lenders. The firm landed $215 million in construction financing last summer for the project. Little Rock, Ark.-based Bank OZK provided a $147.5 million senior loan, and Lionheart Strategic Management provided $67.6 million through a mezzanine loan, the lenders announced last year. The project also includes preferred equity from Milestone Asset Management.
A 601W venture paid $68 million for the building in January 2020 as Northern Trust was preparing to vacate it, part of a consolidation of the bank's downtown offices into a new one at 333 S. Wabash Ave.
601W has been one of the most active investors in the downtown office market over the past decade. In addition to the Old Post Office, the firm controls ventures that own the Aon Center and the office tower at 1 S. Wacker Drive. Another 601W venture owns the Civic Opera Building along Wacker, where the owners were hit in 2021 with a $195 million foreclosure lawsuit that is pending.
Canal Station accounts for a large portion of the new office product downtown that is under construction today. Real estate services firm CBRE is tracking five downtown office projects underway totaling almost 1.5 million square feet, just 25% of which has been pre-leased. That is a daunting prospect for landlords, though the amount of space is just half of the square footage under construction a year ago thanks to the recent completion of Salesforce Tower at Wolf Point.