IllinoisCRE DePaul/ULI Chicago survey: COVID-19 and Cook County taxes will lead to “Nike swoosh-shaped” recovery in Chicago Charles Wurtzebach August 4, 2020 Share on Facebook Share on Twitter Share on LinkedIn Share via email Global events that trickled down to Chicago’s real estate markets ensured the belief that 2020 is a year like no other—even in just six months. That thesis was borne out by the Third Annual Mid-Year Perspective on Chicago Real Estate Markets, a collaborative report in 2020 between The Real Estate Center at DePaul University and the Urban Land Institute Chicago District Council. Based on the findings of a survey, more than 60 percent of real estate professionals with ties to DePaul and/or ULI Chicago are concerned or trending toward concerned about Chicago-area real estate markets. That concern is being driven by the direct and indirect impacts of the novel coronavirus (COVID-19) and, in the markets in Cook Cunty, a property tax situation that is unique to Illinois’ 102 counties. When the various market factors and conditions are aggregated, the majority of participants in the report predict an elongated, Nike swoosh-shaped recovery. Among notable findings in the survey, the greatest concerns among real estate professionals are the pandemic’s unknown duration and the severity of return, followed very closely by the economic pressures on local and state government. More than one third of participants believe there will be a modest shift in investments to the suburban markets. Respondents also indicated that the greatest threat to a vast amount of real estate in the Chicago area is the continued uncertainty of Cook County property taxes, with many also highlighting city, state and county financial issues. Experts also anticipate a variety of post-pandemic office configurations, as employers embrace work-from-home strategies while looking to ensure productivity and sustain company culture. Greatest concerns The DePaul-ULI Chicago survey ranked eight concerns on a scale of 1 to 5, with 5 being the highest. Running in a virtual dead heat were the pandemic’s unknown duration with a 4.3 weighted average rating and the pressure now being felt by local and state governments with a 4.2 rating. Tied for third with a weighted average of 3.9 were rising unemployment and widespread availability of a COVID-19 vaccine. “We’re in a severe economic recession,” said Keith Largay, Senior Managing Director and Chicago office co-head, JLL. “It’s hard to predict the outcome and unintended consequences of 40 million job losses and the stress it puts on the balance sheets of people, companies and governments.” Most pressing threat Real estate professionals, especially those conducting business in Cook County, are quick to identify the continued uncertainty of the property tax situation as the greatest threat to the market. The Cook County tax situation scored a 3.8 weighted average rating (based on the same scale to rate the greatest concerns), demonstrating a high level of concern. According to Brian Forde, partner, O’Keefe Lyons & Hynes, LLC, the threat is more complicated than simply saying taxes are too high. “As long as Cook County uses a classification system where commercial and industrial real estate is assessed at two to two-and-a-half times that of residential properties, property taxes will always be a challenge, and it always will be so long as that system currently in place persists” Forde said. “That will be further exacerbated when coupled with the inability of taxing officials to manage the sheer volume of valuing 1.8 million parcels. There is just no one size fits all solution.” Vicky Lee, vice president development, Focus, agreed yet also views continual changes and policy ambiguity—which can lead to uncertainty and more complicated underwriting—as among the greatest threats, predominantly for multifamily development. Particularly concerning are recent changes to the property tax assessment process and a rumored change to Chicago’s affordable housing requirement, known as the Affordable Requirements Ordinance (ARO). “We have received consistent feedback from our investors and lenders that the uncertainty regarding taxes makes it hard to commit capital to Chicago,” Lee said. “Similar conclusions are being drawn from ARO policies.” The suburbs In the midst of COVID-19, the suburban marketplace looks increasingly more attractive than it has in some time. The question remains as to whether that increasing attractiveness is short lived or advances further. More than three quarters (76.2 percent) believe that there will be a nominal to modest increase in suburban investments, though 42.4 percent believe the shift will be only nominal or insignificant. “The suburbs could benefit from the changing patterns we’re seeing,” said Sue Blumberg, senior managing director, NorthMarq. “If you are working from home, a studio apartment gets awfully small. We could see renters looking to the suburbs where units and outdoor spaces are larger.” Opportunities for investing in suburban office buildings have been increasing, as long as the product is priced right. “A prized portion of the workforce always will be in certain suburban markets,” said Mary Ludgin, senior managing director, head of global research, Heitman. “Suburban office has been priced to reflect the risks involved and that is making it attractive for some. Moving forward we may see further opportunities where there already is corporate demand—demand that could be intensified because of COVID.” According to Michael Newman, principal, president and CEO, Golub & Company, one of the benefactors may be single-story office buildings and complexes—those that offer private entries and minimal common area spaces. He contends it can be difficult to make the numbers work for single story, but adds, “Single story could be really interesting. It could be an increased area of demand in the suburbs.” Shape of the recovery According to the DePaul-ULI Chicago report, a recovery in the Chicago real estate markets is most likely to be shaped like a Nike swoosh or a W. More than 42 percent (42.5 percent) predict a Nike swoosh, in large part because Chicago has remained and should continue as a moderate growth market, without extremes in either direction. More than one third (33.5 percent) believe the recovery will “fly the w,” a more popular North Side baseball team tradition. One expert didn’t select a swoosh or a W, opting instead to suggest that with too many factors to speculate the recovery will be anything but a V. Outlook The jury is still out on what the post-pandemic office environment will look like, and the impact myriad possible scenarios will have on the need for office space. The possibilities—more work from home, satellite offices in the ‘burbs and a shrinking downtown footprint—are endless, and largely dependent on the comfort levels of employers and employees alike. Yet there are people who say any option with significant work-from-home choices faces its own set of challenges. “I don’t think people are as effective working from home,” said John O’Donnell, CEO, Riverside Investment & Development. “It’s difficult to add new business opportunities without traveling. In addition, it harms the career growth of younger employees.” Michael Episcope, a co-founder of Origin Investments believes there will be less overall demand for office space, but also said, “It’s hard to create a company culture without physical space.” Conclusion Broadly speaking, investors are getting ready, but are not in a rush, to place capital as long as the situation is right. Many investors are looking at defensive options like debt positions where there is a layer of equity as a buffer just in case valuations are not correct. Others want a mix of defensive and offensive options, so they are looking at opportunistic investments that take on more risk. “Buying during a recession tends to create good outcomes. But we’re in the early days of a recession unlike anything we’ve seen before,” Ludgin said. “There are lots of chapters to this story. We’re in chapter one or two of maybe a six- or eight-chapter book.” In spite of the various issues, concerns and threats, in Chicago and across the country, Chicago real estate professionals want to be optimistic. They are tired of COVID and want it to be over. Yet whether reality and optimism go hand in hand remains to be seen. About the author Charles Wurtzebach is the Douglas and Cynthia Crocker Endowed Director of the Real Estate Center, DePaul University.