Every year for the last 18 years, REjournals has hosted its annual kickoff conference, the Chicago Commercial Real Estate Forecast. It’s a massive event—the largest of its kind—but there’s always one must-see panel: The State of the Market.
As he has in years past, Danny Nikitas, managing director and principal at Avison Young, moderated the discussion. Joining him before a room full of approximately 900 real estate professionals were Nooshin Felsenthal, managing director, Tishman Speyer; Josh Graham, CPA, senior manager, WIPFLI; Geoff Kasselman, partner and senior vice president, workplace strategy, CRG; Jim Pape, senior vice president and market manager of commercial real estate, TCF Bank and Paul Reaumond, executive vice president, CBRE.
Nikitas started the discussion with a macro view of the market. On a national scale, he noted that the Dow was down 5 percent at the end of 2018 but in this past year it was up 32 or 33 percent; however he also pointed out that, while consumer confidence is high, a slowing economy has led to weaker business confidence. Globally, the U.S.-China tariff dispute, tensions in the Middle East and the never-ending Brexit saga may all impact the economy.
According to Felsenthal, skyrocketing stock markets weren’t mirrored by real estate transactions as relatively few assets exchanged hands in the Chicago market last year. In downtown through the end of 2019, there were approximately $1.3 billion worth of assets traded—roughly a third of historic averages. Throughout the rest of the country, volumes were generally flat, indicating Chicago’s unique, yet undesirable standing.
“2019 saw a remarkable slowdown in the capital markets in Chicago and nationally, specifically in the office sector,” said Felsenthal. “Nationally, investors are shying away from the office sector which has fallen a little out of favor relative to other sectors like industrial and multi-housing. In Chicago specifically, headlines about the fiscal situation and our new tax administration have added an opaque situation to this market.”
The story is not nearly as grim in the industrial sector, of course. As Kasselman pointed out, there are 10 million consumers in the Chicago MSA driving the market and Chicago is still an excellent regional and national distribution hub. That’s even before the nascent cannabis industry has its full effect on both the retail and industrial sectors. Marijuana sales are on track to hit $1 billion in Illinois this year; when the market matures that figure could be between $2 and $4 billion.
But when it comes to industrial, the real action is in big box, Class A distribution centers. Chicago’s centralized location has made it one of the stars of the e-commerce revolution.
“The vacancy rate in the speculative set of inventory in Chicago has declined for 11 straight quarters,” Kasselman said, citing Colliers International data. “The interpretation being that we can’t build these buildings fast enough. They’re being absorbed as fast as we can put them up.”
Graham delved into Opportunity Zones, the federal program designed to inject capital funds into disadvantaged areas around the country. The details around Opportunity Zones are still murky, and many have been hesitant to invest in these areas if other strong fundamentals aren’t also in place.
“It’s going to take time,” Graham said. “I think people want instant gratification and to know that this program is going to be successful.”
Though the program has been in effect for two years, the Fed is still periodically releasing new guidelines, as recently as December 2019. Among other things, these new regulations simplified exit strategies for developers. Graham pointed out that Chicago lags other Midwest markets when it comes to raising Opportunity Zone capital to date, falling behind St. Louis, which has raised the third most nationally, as well as Indianapolis at fourth most and the Twin Cities at eighth most.
In the office sector, according to Reaumond, 2019 proved to be an excellent year, from both a user and owner standpoint. There are indications, however, that it may have been the peak for the cycle, at least in sentiment if not reality.
“When you look at historical concessions compared to where they were ten years ago, it was a great year to be a tenant,” Reaumond said. “I think that’s reflective of where landlords feel they are in this cycle; they’re trying to capitalize on what they’re thinking are the last few years of what has been a great run, specifically in Chicago.”
And a great run it certainly has been. As Reaumond pointed out, coworking continues to lead the demand for space, despite the recent missteps of the sector’s largest player, WeWork. However, Chicago also saw a ten-fold spike in coastal tech companies opening offices in the metro. Those companies accounted for 300,000 square feet of space in 2011, and they now occupy 3.5 million square feet.
In terms of financing, Pape claimed that 2019 was better than 2018, and he expressed optimism about 2020.
“At the beginning of the year I was a very concerned about the debt funds coming in, as we started to see their pricing creep down closer to what banks have been at,” Pape said. “But leverage for banks is still very low. I think most of the bankers here will say they didn’t see a lot of problems in their books, which is a great sign.”
All in all, the panel agreed that those real estate sectors that performed well in 2019—industrial, multifamily and office—will continue to do so in 2020. At least through the first six months, after which all of their crystal balls turn hazy.