Even as early signs of the Delta variant of COVID-19 were emerging, a majority of Chicago real estate professionals were expressing great optimism about the marketplace for the balance of 2021 and all of 2022 and the need to be fully vaccinated to return to the office.
In its 2021 Mid-Year Chicago Sentiment Report, The Real Estate Center at DePaul University says that nearly 60% of CRE professionals are at least optimistic, if not bullish, about Chicago real estate for the next 18 months. And perhaps as a sign of the times, a similar level of professionals, 56%, say being fully vaccinated should be a requirement for returning to work in an office setting.
The Real Estate Center, along with participation from the Real Estate Investment Association (REIA) and CoreNet Global|Chicago Chapter, gauged the Mid-Year Sentiment for Chicago’s CRE Market. The full report includes results of a survey of more than 500 professionals and perspectives from DePaul alumni in the CRE industry, sponsors of The Real Estate Center and members of REIA and CoreNet.
“Capital is still flowing as investors remain optimistic,” says Charles Wurtzebach, Douglas and Cynthia Crocker Endowed Director of The Real Estate Center at DePaul University. “People know that traditional economic forces like oversupply and lack of demand did not cause the ‘pandemic downturn’. We were dragged into it kicking and screaming and we want it to be over!”
Tom Volini, Executive Vice President, Colliers Chicago, a tenant rep broker and a REIA Board Member, now expresses a greater level of concern for what the office market could look like after Labor Day.
“I recently heard of a large office employer that has again closed its Loop office due to a number of vaccinated employees testing positive and growing concerns tied to variant,” Volini says. “We are collectively crossing our fingers and hoping this trend to gain steam and dampen the optimism we’ve seen lately. Time is the mechanism for telling us what will happen.”
Key findings of the 4th Annual Chicago Mid-Year Sentiment Report include:
• The market factors causing the greatest concern at mid-year include the rising cost of construction, materials and labor; changing tax structures; and rising inflation.
• Real estate professionals are genuinely concerned, perhaps even skeptical, about the effectiveness of political leadership at virtually all levels of government.
• There is nothing more certain than death, taxes and property tax uncertainty in Cook County. Those concerns, and uncertainty, aren’t going away.
• Industrial and multifamily assets are viewed most favorably and the least likely to see future distress; indoor malls, viewed as the weakest asset class, are likely candidates for distress.
The Bulls Are Back
In the aggregate, 58.5% of CRE professionals are at least optimistic, if not bullish, for 2021 while 61.4% are at least optimistic if not bullish for 2022. This is opposite of the sentiment expressed in 2020 for 2021 when approximately 60% were concerned about the year ahead.
Mary Ludgin, Senior Managing Director and Director of Global Investment Research, Heitman, said the COVID era has been like an arctic cruise—arduous and exhausting with moments of great beauty and exhilaration. She noted the “shockingly fast” actions that were punctuated by the rapid decline of the markets to their fast rebound and the despair of how to combat the virus to the availability of three vaccines.
“COVID paralyzed us,” Ludgin adds. “But it was like a polar plunge: quick and deep and then we started to come out of it.”
The Lack of Trust
The perception of government ineffectiveness at local, county and state levels is of significant concern in Chicago’s CRE community. The ineffectiveness includes, but is certainly not limited to, crime, school, pension liability and various other factors. Those issues have a significant impact on how the Chicago metropolitan area is viewed by Corporate America that may bring jobs and by investors who may bring investment capital here.
“Real estate investors are not like die hard Chicago Cubs fans – those who love the geography no matter what it gives you each year,” says Tom Jaros, a partner with Levenfeld Perlstein and a REIA board member. “Real estate investors are not loyal to a market out of sheer faith. The number of investors that love Chicago can’t ensure success for every project like in some other markets.”
Regardless, he also says, using my clients as a barometer, that there is still a lot of investor appetite for Chicago; a lot of that comes from people who know the town, the landscape.
Not to be overlooked and sandwiched in between concerns about the effectiveness of state and local governments are the real estate community’s concerns regarding the continued uncertainty of Cook County property taxes. “We have one of the worst property tax burdens in the nation,” says Brian Forde, a partner with the firm O’Keefe Lyons & Hynes, says. “In Cook County, the situation, and the burden is worse.”
Forde also suggested that “Someone with courage and conviction needs to step up to make a change, or the end result will create a narrower range of investors looking to make acquisitions in Chicago or to explore new development opportunities here.
Positions of Strength
All of the issues and concerns notwithstanding, CRE professionals in Chicago view the industrial and multifamily sectors as the best performers. Industrial and multifamily assets (both suburban and downtown) were ranked as the three strongest asset classes and the three likely to be impacted the least by distress. That is not to say that the market overall will not see distress, even though it is not currently as prevalent as many had projected.
“There will be distress, but in a healthy way; one that creates opportunities,” says Steven Weinstock, First Vice President, Regional Manager and National Director of Self Storage Division, Marcus & Millichap.
The Post Labor Day View
Traditionally, the time immediately after Labor Day has always marked the beginning of the push for the year’s transaction activity. This year, in addition to speculating on what the environment will look like approximately 22% of the participants expect the work environment will mean being back in the office full time after September 1. Almost 40% believe that picture will mean being in the office at least 50% of the time. Further, By the end of 2021, nearly 60% believe we’ll have reached a point where 75% of employees will return to work, even if under flexible arrangements.
“We’ve seen very few companies going boldly forward,” says Eric Gannon, Principal, Gensler. “There is some trepidation to define a policy and create a work environment when there is so much unknown.”
The Delta variant surge notwithstanding, Wurtzebach is generally optimistic about the Chicago real estate markets. “Pent up demand is and will remain significant.”