More than 80% of Chicago commercial real estate professionals have a negative outlook for the rest of 2023 as the city faces challenges such as crime, the uncertainty of a new mayor, rising interest rates and a national slowdown in deals amid worries of a recession.
Including survey respondents who described themselves as concerned about the Chicago-area property market, 82.8% had a negative feeling about the next six months, up from about 65% in last year’s mid-year outlook report by by The Real Estate Center at DePaul University and the Urban Land Institute Chicago District Council.
More than 75% of respondents said they believe the economy is in a recession or will be by the end of the year. Yet, at the same time, almost 46% of real estate investors, brokers, lenders, academics and other industry professionals described themselves as bullish for the second half of 2023, according to a report
The report’s release comes amid an unclear financial picture nationally, with positives such as low unemployment offset by continued interest-rate hikes, corporate cost-cutting and other economic worries.
“It’s a market unlike anything we’ve seen before,” James Shilling, finance professor and George L. Ruff Endowed Chair in the Real Estate Center at DePaul, said in a statement. “The report cites more than a dozen threats acting as headwinds, all posing a significant risk to the health of the real estate market and cities. And at the same time, job numbers are good, and unlike 9 of the 12 recessions since World War II, the driving force is not housing related.”
Locally, investors are waiting to see how the city will fare under newly elected Mayor Brandon Johnson and whether the number of office workers downtown will continue to slowly increase, which could help boost drooping property values — particularly for older-generation office towers in the heart of the Loop business district that have struggled to keep pace with modern buildings along the Chicago River and in the fast-growing Fulton Market district.
Looking further ahead, 38.6% of those surveyed were bullish for next year, up from 35.1% who felt that way in last year’s report.
Projects and Price Drops
Longer-term positives include Google’s plans to buy and occupy the James R. Thompson Center, which would boost the surrounding Loop business district, as well as the recent start of site work on the $8 billion Burnham Lakefront mixed-use megadevelopment south of the Loop.
Chicago’s first casino and several other planned developments along the Chicago River promise billions of dollars in projects coming to the area between the Loop and Fulton Market and the city’s North Side. A $250 million investment by Facebook founder Mark Zuckerberg and his wife Priscilla Chan could boost the city’s growing life science research ecosystem.
But poor demand and a wait-and-see attitude by many large institutional investors have led to big price chops, such as Chicago developer R2’s planned $70 million purchase of the 41-story office tower at 150 N. Michigan Ave. If that deal is completed, it would be less than the $85.5 million in debt on the tower and far below the nearly $121 million that seller CBRE Investment Management paid for it in 2017.
Other well-known office towers that have been handed back to their lenders are expected to sell for well below their previous price or otherwise face financial distress include the Chicago Board of Trade Building, Civic Opera Building and Burnham Center.
Building owners looking to land new tenants are up against a historically high list of big subleases, with companies including Salesforce, Facebook parent Meta, Tyson Foods, Publicis and Uber looking to shed large blocks of space.
It’s unclear when or if remote-work trends that began with the onset of COVID-19 in early 2020 will subside enough for office towers to return to pre-pandemic values.
“Office has overtaken hotels as a tough sell for lenders,” Greg Warsek, executive vice president and group leader at Associated Bank, said in the report. “Office is a four-letter word and that won’t be changing for the foreseeable future.”
Ongoing Challenges
Adding to the challenge in Chicago, according to the DePaul-ULI report, are Cook County property taxes.
“Deals are hard to underwrite because of the enormity and unpredictability of this significant expense,” Mike Kamienski, a partner at accounting and consulting firm Baker Tilly, said in the report. “It’s a huge variable that makes it hard to complete deals in Chicago.”
Gaining full approvals from city agencies to expedite developments also is an ongoing obstacle that developers hope the new mayoral administration will address, said Dean Marks, managing director at development firm Sterling Bay.
“The development timeline process remains very challenging and unpredictable,” Marks said in the report. “That makes it hard to ascertain when you’ll be in the ground. One thing that institutional capital hates is unpredictability.”
Sectors perceived to be the strongest include industrial, data centers, suburban and downtown multifamily and self-storage.
Yet even top sectors have felt the effects of an uncertain economy.
One recent example was Miami-based Crescent Heights’ $173 million purchase of the 398-unit apartment tower at 340 E. North Water St. in Streeterville. It was the highest-priced apartment sale of 2023 thus far, but the price was well below the more than $240 million that the seller, Atlanta-based Invesco, paid during peak pricing in 2016.
The decreased price is viewed by many in the industry as the product of difficult financing and a reduced pool of buyers rather than a sign of weakened demand for downtown apartments.
“The Chicago market was hurt by COVID, especially the [central business district,” Phil Lukowski, managing partner of portfolio management at Chicago-based Waterton, said in the report. “We’ve been pleasantly surprised at downtown’s recovery and in spite of the slowdown that is occurring nationally, the Chicago market is still okay.”
The survey is subjective, based on the perceptions of real estate professionals, but it provides a window into the way the Chicago market is perceived locally and nationally. Reading the ebbs and flows of a market can lead to buying opportunities.
Family offices and high-net-worth individuals appear more willing to try to time the market in search of “the early and best deals,” said Mary Ludgin, head of global research at Heitman.
“People want to invest while the knife is still falling,” she said in the report. “They also need to know where the knife is in its trajectory and prefer it to be closer to the bottom.”