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The Willis Tower's $670 Million Makeover – Urban Land Magazine – Urban Land

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By Alby Gallun
November 2, 2022
The Willis Tower’s revamped front lobby. With a five-story addition that includes restaurants and retail space, the building today is more inviting to outsiders, including neighborhood office workers and residents, than it was in the past. (Garrett Rowland/EQ Office)
Undermanaged and underinvested for years, the newly unveiled, amenity-rich redevelopment appears prescient.
Blackstone Group made a huge bet on downtown Chicago in 2017, the year it launched a $670 million redevelopment of the Willis Tower, the city’s tallest skyscraper. It would have been hard to imagine at the time that a pandemic would sweep around the globe just a few years later, pushing Chicago office vacancy rates well above 20 percent and causing some to wonder whether companies would even need office space anymore amid the new hybrid work models and shrinking space requirements.
It is not a good trend for any property, especially a 4.5 million-square-foot (418,000 sq m) colossus like the Willis Tower. But Blackstone is counting on the skyscraper’s new and improved version to succeed in a post-pandemic market as companies explore ways to draw employees back to the office.
Five years later, the project has transformed a 110-story building previously known mainly for its height into a bustling, amenity-rich real estate mashup that caters to tenants, tourists, and neighborhood office workers and residents. New York City–based Blackstone has added cafés, a bar, lounges, and a large fitness center for tenants and revamped its Skydeck observatory, one of Chicago’s most popular tourist
destinations.
The building’s main attraction is Catalog, a five-level, 300,000-square-foot (27,900 sq m) addition on the south side of the structure that includes restaurant and retail space topped by a landscaped rooftop terrace, all open to the public. Blackstone is also wrapping up a $60 million overhaul of Willis Tower’s antiquated elevators, cutting down on long waits and ride times for tenants traveling to and from the building’s upper floors.
The redevelopment changed Willis Tower “into a leading building based on what tenants and employees want today,” says David Moore, senior vice president and portfolio director of EQ Office, a Blackstone company that manages the private equity firm’s office portfolio.
“The way you get them to come back in is to deliver a commute-worthy experience,” says Bob Chodos, an office tenant broker and vice chairman in the Chicago office of Newmark. “Companies want to find ways for people to come in without compelling them to come in.”
Finding the Right Mix
Building amenities offer one solution. Well before COVID-19, landlords were adding rooftop terraces, bars, lounges, and fitness centers. Those features are even more important now.
“Every building of size now has a real amenity package,” says Danny Nikitas, principal and office leasing director in the Chicago office of Avison Young. “Just to get in the game, you’ve got to have that or you’re not going to even get a tour” with a prospective tenant.
That is one reason Chodos thinks Blackstone’s redevelopment came at a propitious time.
“Without it, I think the building would be struggling hard,” he says. “Frankly, they are better positioned in the market for a post-pandemic recovery. They are way out in front.”
It is too early to say whether Blackstone’s investment will pay off in the long run, but recent leasing activity suggests that the project has given the Willis Tower a competitive edge. In June, IMC, a Dutch trading firm, signed a lease to expand its space in the building to 160,000 square feet (14,900 sq m), up from 110,000 (10,200 sq m). About a week later, Abbott Laboratories leased 100,000 square feet (9,300 sq m) there for a satellite office, an alternative for employees who would rather work downtown than in Abbott’s headquarters in the far northern suburbs.
The building is already 88.8 percent leased, according to real estate data provider CoStar Group. The redevelopment has given Blackstone the power to raise rents, says Brian Whiting, president of Telos Group, a Chicago-based brokerage firm hired by EQ Office to handle office leasing duties at the Willis Tower. Tenants have signed recent leases there for $38 to the mid-$40s per square foot on a net basis, up from about $28 per square foot for the firm’s first lease in the building, he says.
“Without [the redevelopment], it would still be a commodity building,” Whiting says.
The building’s addition includes Atmospheric Wave Wall, an art installation by Olafur Eliasson, near the south entrance of its Skydeck Chicago tourist attraction. (EQ Office)
Evolution
The property has gone through multiple ups and downs since it opened as the Sears Tower in 1973. The high-rise headquarters of the Sears department store chain became an immediate icon as the world’s tallest building, a title it held until 1998. In 2013, the 1,451-foot (442 m) skyscraper lost its standing as the tallest structure in the United States to One World Trade Center in New York City. It took its current name in 2009, when London insurance brokerage Willis Group Holdings signed a lease for space in the building that included naming rights.
The tower’s performance suffered after 9/11 amid worries that it was a target for terrorists, and it could not keep pace with the top office towers in the city under an ownership group led by New York investor Joseph Chetrit.
“The prior owners did not invest in the building,” Chodos says. “They kind of ran it into the ground.”
Blackstone, one of the world’s biggest real estate investors, bought the Willis Tower in 2015 for $1.3 billion, the most ever paid for a U.S. office building outside New York. It was arguably also the biggest fixer-upper in Chicago history.
For years before, the Willis Tower was inward-looking, welcoming its tenants but making a limited effort to attract outsiders, aside from visitors arriving through a separate entrance to its Skydeck observatory. Gensler, the architecture firm that Blackstone hired to redesign the property, has attempted to change that.
Shifting Perspective
Through Catalog—a reference to the building’s past as the headquarters of Sears—and other additions, Gensler has opened up the building to tourists who might want to grab a bite to eat before hitting the Skydeck, or to workers from neighboring office buildings over their lunch hour. Restaurant tenants include Do-Rite Donuts, Sweetgreen, Sushi-San, and Tortazo, a Mexican concept created by well-known chef Rick Bayless. Kindling, a sit-down restaurant, and an Urbanspace food hall are on track to open in the coming months. Event space provider Convene occupies Catalog’s entire third floor, its largest space in the city.
With multiple demand drivers, Catalog can sustain more restaurants than a typical office building could—a bonus for office workers in the tower.
“Having that strong user base really drives a thriving retail environment, which supports the office population,” Moore says. “Each user helps prop the other one up.”
Catalog’s rooftop terrace—a public space that includes beehives and features a summer concert series—is a “sneaky hidden gem,” says Brad Serot, a Chicago office tenant broker.
The renovation gives the building “a competitive advantage coupled with the fact that you have these unencumbered views on its upper floors,” he says.
To boost the Willis Tower’s strength as a tourist destination, Blackstone invested in a new interactive exhibit about the history and culture of Chicago that visitors walk through as they wait for an elevator up to the building’s Skydeck observatory. Capitalizing on the tourist traffic to the Skydeck, Catalog includes another attraction targeting visiting families: Color Factory, an interactive, kid-friendly art museum that lies just steps away.
Going Up
The overhaul of the Willis Tower’s elevator, meanwhile, solves a longtime problem that had become a major liability for the property. High-rise elevator systems typically have a useful life of about 20 to 40 years, but the equipment installed when the building was originally constructed in the 1970s had never been replaced, says Elizabeth Herman, general manager at Otis Elevator, which is installing the new system, including more than 100 elevator cabs. The elevators broke down a lot.
The Willis Tower also was notorious for its slow elevators, keeping tenants waiting for as long as five or six minutes, says Newmark’s Chodos. To shorten wait and ride times, Otis installed a “destination dispatch” system, which groups riders going to the same floor together, eliminating multiple stops. Instead of pushing a button after they step inside an elevator, they push a button on a pad outside the elevator, and the computerized system instructs them which elevator to take.
In addition to reducing maintenance costs, the elevator renovation eliminated a big source of frustration for tenants.
“That was one of the best investments [Blackstone] made,” Chodos says. “It had to be made.”
Doing the Math
The big question is whether Blackstone will get an acceptable return on its roughly $2 billion investment in the Willis Tower.
The property’s recent results are encouraging. Its net operating income (NOI) dropped from $61.7 million in 2019 to $35.9 million in 2020 when the pandemic hit, and revenue from the Skydeck evaporated, according to CoStar data. But the building bounced back in 2021, generating NOI of $86.4 million—a 40 percent increase from its pre-pandemic total in 2019.
Still, the future remains uncertain. Multiple Willis Tower tenants have options to either contract their space or terminate their leases in the next few years. In 2021, the tower’s largest tenant, United Airlines, decided to reduce its space in the building by 150,000 square feet (13,900 sq m). Another tenant, law firm ArentFox Schiff, also wants to shrink its space, offering 59,000 square feet (5,500 sq m) up for sublease last year.
Right now, it is unclear whether Blackstone could even recoup its entire investment in the Willis Tower in a sale. But Moore of EQ Office says that a sale is not in the cards anyway—at least not yet.
“It’s fluid,” he says. “We’re a thoughtful investor that’s not in any hurry.”
ALBY GALLUN is a senior real estate reporter for Crain’s Chicago Business.
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