Chicago real estate professionals universally agree that the commercial real estate markets have been consistently strong through the first half of 2018. However, according to a Mid-Year Chicago CRE Market Survey conducted by The Real Estate Center at DePaul University (The Real Estate Center), there is far less agreement on the outlook for the second half of the year.
“There are many perspectives, and much to evaluate when considering the state of the commercial real estate markets in Chicago,” said Charles Wurtzebach, chair, department of real estate and Douglas & Cynthia Crocker endowed director, the Real Estate Center, DePaul University. “CRE professionals with ties to The Real Estate Center generally see the glass as half full.”
According to Wurtzebach, job growth, organic business growth and the outsiders’ view of the value of Chicago real estate all are positive factors. In contrast, he noted rising interest rates; financial and political concerns at the city, county and state level and the prospects for further increases in property taxes as factors keeping those thoughts in check.
Second half outlook
No one in commercial real estate is denying that Chicago has experienced an incredible bull market run for nearly one decade. It is the length of that run, in part, that has served to somewhat temper enthusiasm in the market and make people more concerned in 2018 than they were in 2017.
“Given the sustained bullishness of the Chicago marketplace, it is rational to think that some type of correction is in order,” said Brian Rogan, vice president, Associated Bank. He went on to say that while there may be some pricing softness in the next year, he does not expect to see a major, across-the-board correction taking place.
According to the survey results, more than half are still bullish or optimistic about the market’s direction for the second half of 2018.
“Capital in the market is helping to push prices higher,” said Stephanie Matko, vice president, asset management, Pearlmark Real Estate Partners. “The unanswered question remains how many takers there will be at these higher prices.” She advised that anyone who is able to get an off-market deal should act quickly as they are few and far between.
Matthew Wurtzebach, vice president, commercial finance group, Draper & Kramer, said some lenders and equity investors have allocations that still have more to invest in 2018 than they did in 2017. “They have a strong appetite and are competing on price to win the best loans,” Wurtzebach said. He predicted that the industry may see a more conservative approach to construction loans.
City and state financial Woes
More than 48 percent of respondents said Chicago and Illinois’ political and financial woes are of great significance and 38.5 percent ranked the significance as modest.
“The fiscal ills of the city and the need to further raise real estate taxes is a concern of mine,” said Don Pafford, senior vice president, US Bank. “At some point this all has to bubble up and be a roadblock, whether you’re an investor or a developer.”
At the same time, Rogan had a little different take. “Chicago had a reputation as a flyover market; a market that investors would fly over for other cities in the country,” Rogan said. “But Chicago has done a great job of building really good properties. So good that today people can’t achieve the returns they want from the coasts” and are turning their attention to Chicago.
Some investors, like Origin Investments, find the financial woes of the city and Cook County creating a great deal of uncertainty which makes it more difficult for deals to pencil out. “We’re still buying, and looking for more acquisitions in the Chicago area,” Michael Episcope, Origin Investments principal and co-founder, said. “We are being conservative in how we are underwriting taxes so that we minimize the impact any property tax increases might have on our returns.”
Amazon HQ2 or sustained organic growth
Survey participants were hard pressed to say that one outcome—winning the battle for Amazon’s HQ2 or productive, ongoing organic growth—would be more impactful for the city of Chicago. Just over 56 percent said Amazon HQ2 would be most impactful, though many expressed concern or a wait-and-see attitude based on gaining a better understanding of the incentive package that would be awarded to Amazon.
“It’s hard to know what the Amazon incentive package will mean; hard to gauge the impact, because we don’t know what has been offered,” Wurtzebach said. “Amazon is one tenant, and there is risk in putting all your eggs into one basket.”
Shilling noted that an Amazon victory is not void of concerns. “Sometimes you have to worry about what you wish for,” he said, comparing the issues that San Francisco and Seattle have experienced—huge infrastructure spending and major congestion—as they have grown as major tech hubs.
For Episcope, the question of Amazon versus organic growth is not an either/or situation, it’s an and. “If Amazon comes to Chicago we’ll see growth we haven’t seen in 40 years,” he said. He also noted that over the long run, Chicago needs to sustain the growth of Fortune 100 companies to the City.