In a market defined by high interest rates, cautious banks and shifting underwriting standards, Chicago’s commercial real estate developers are still getting deals done, but not without recalibrating their strategies and reimagining the capital stack.
“There is capital to deploy but the metrics look differently than they did a few years ago,” said Julie Sommese, Illinois managing director of PACE Equity.
Liquidity hasn’t dried up, but where and how that capital enters a deal has changed. Developers are adjusting to lower leverage, tighter credit conditions and changing roles among lenders. Traditional banks are active, but not at the levels of recent years. Alternative capital sources are increasingly stepping in to replace debt that has become harder to secure.
Julie Sommese, PACE Equity
“There is plenty of debt capital in the system today,” said Dan Rosenberg, executive vice president at BWE. “Liquidity is abundant for all asset classes. Sure, multifamily is more in favor than say office, but as the basis in office buildings begins to reset, there is plenty of debt liquidity to acquire and reposition them. The cost of the liquidity ‘is what it is’ and people are hoping it will go lower.”
Dan Rosenberg, BWE
Multifamily, industrial and other favored asset types are still attracting lenders, particularly for stabilized or near-stabilized projects. Competition remains strongest for high-quality multifamily, retail, industrial, medical office, creditworthy single-tenant triple-net assets and self-storage. Hotel and multitenant office assets continue to face more selective underwriting.
Construction financing has made a limited comeback, mainly for multifamily and industrial projects, but with caveats. Loan-to-cost ratios remain compressed and speculative construction deals face steep hurdles unless backed by strong sponsors or committed tenants. Speculative construction for retail and office is largely off the table, except in build-to-suit scenarios.
Meanwhile, the role of debt funds has noticeably diminished with many sidelined by constraints in their own funding pipelines. Only the largest players have maintained access to the capital they need to lend at scale. That’s led some developers to explore new tools — or old tools used in new ways.
“Banks are more active than they have been over the past few years,” Rosenberg said. “There is not enough transaction volume to satisfy the current lender appetite.”
That imbalance is forcing creativity. Dealmakers are stacking capital differently, blending traditional senior debt with less conventional sources to keep projects on track despite the rising cost of capital and stricter underwriting.
“We are seeing more people use preferred equity and mezzanine structure to bridge leverage gaps,” Rosenberg said. “Additionally, investor/operators that have been accustomed to having one limited partner may need to find more than one and/or raise their equity from high net worth friends and family.”
Sommese sees similar shifts as developers aim to maintain ownership without shouldering the full burden of today’s tighter debt standards.
“Rather than raising more expensive sources of equity like mezz debt, borrowers are realizing that the lower capital costs and fixed, long-term nature of PACE Equity can not only help boost IRR but can avoid equity dilution by maintaining a larger ownership percentage,” she said.
Borrowers who once might have leaned more heavily on high-leverage senior debt or mezzanine are now turning to tools like PACE, a form of property-assessed clean energy financing that provides long-term, fixed-rate capital for energy-efficient projects.
“Less ‘traditional’ lenders, such as PACE Equity, are definitely seeing a huge increase in interest,” Sommese said. “PACE has been demystified and developers are realizing the positive, accretive impact we can have to a project. Our clients are replacing more expensive capital with ours to lower their overall WACC and blended construction rate.”
Traditional banks are also reacting to the competitive environment, not just by being more selective, but by adjusting how they price and structure deals.
“Given the excess supply of liquidity in the market relative to transaction flow, we are seeing lenders lowering their spreads and chasing price down,” Rosenberg said. “Leverage is up moderately, but still lower than peak lending times. That said, generally speaking, they have remained fairly disciplined from an underwriting perspective.”
Discipline is still the watchword. According to market insight, banks and institutional lenders continue to expect borrowers to bring substantial equity — often 35 percent or more — and provide recourse when necessary. That’s a big shift for developers used to non-recourse deals and higher leverage. For newer developers or those with thin track records, the options are limited, especially for speculative projects without a tenant or a clear path to lease-up.
“Underwriting standards remain historically sound with substantial owner equity of typically 35% or more and recourse from viable guarantors, where and when needed,” according to Old National. “Difficult transactions typically entail existing properties that have missed original lease-up expectations whether rental rate and/or occupancy driven shortfalls. Sponsors with limited track records have limited options raising debt for speculative construction opportunities.”
Deals often stall when properties miss lease-up expectations or when sponsors lack experience. Sommese echoed those concerns, pointing out that deals which might have secured 80 to 85 percent leverage just a few years ago are now getting closer to 60 or 65 percent if they’re getting done at all.
“We’re seeing the most difficult sticking points being leverage,” she said. “Traditional banks just aren’t comfortable at the leverage points they were a few years ago. For deals that could have gotten 80-85% leverage before, we’re seeing banks closer to 60-65%. That’s where PACE Equity can really help. We can come in and fund that 20% gap significantly cheaper than mezz debt, pref equity or a bridge debt fund.”
Beyond the capital stack, many in the market are watching macroeconomic and policy conditions for clues on what’s next, both nationally and locally.
“I think if we take today as a point in time, the most important trends are going to look to the political environment, specifically the uncertain tariff atmosphere,” Sommese said. “Developers are struggling with pricing projects with confidence. It’s a real struggle right now.”
Closer to home, high property taxes in Cook County continue to weigh on deals, particularly for institutional investors who can place their capital in lower-tax markets. Volatility in local assessments creates significant challenges for underwriting and long-term planning, especially for new construction, where future tax liabilities can be hard to predict.
At a broader level, the entire CRE ecosystem is still waiting on key price adjustments to play out. One major unresolved question: How long will it take for sellers and lenders to mark down assets purchased or financed under previous valuations?
“The two themes that I look at over the next 12 months are: when will institutional limited partner equity come back in a meaningful way? When will sellers/lenders cut their losses on ‘yesterdays’ transactions so that the markets can find a new equilibrium?” Rosenberg said.
“The answer to the latter may drive the answer to the former.”
Still, there are bright spots and real projects moving forward, especially for those who know how to navigate the new terrain. Sommese highlighted a recent deal in the heart of downtown Chicago as an example of how capital structure innovation can make deals pencil.
“PACE Equity funded 11% of the capital stack for the development of LG Group’s corporate headquarters, a 16,000-square-foot building in downtown Chicago,” she said. “LG Group is a Chicago-based developer and full-service construction company that fully occupies the building. PACE Equity funding replaced owner equity with low-cost, fixed rate financing.”
For many developers, the moment requires more creativity, more equity and more flexibility, but that doesn’t mean development has stopped. The market may be recalibrating, but seasoned players are adapting, not retreating.
“I don’t think it’s completely doom and gloom. Developers will continue to develop. That’s what they do,” Sommese said. “The successful ones will find ways to push through this cycle. Experienced developers know this is the CRE world and will find ways to get their projects funded and built.”
