Chicago Commercial Real Estate: 10 Things We Watched in 2019
Chicago, IL | December 19, 2019
At the beginning of 2019, we focused on 10 things that would drive the commercial real estate market in Chicago. As the year comes to an end, we’ve examined which issues were resolved, and which have yet to be settled one way or another. A new mayor in Chicago has yet to fully define her office, and the booming economy still contains many skeptics. Chicago developments like Lincoln Yards soldier forward, tech companies continue to expand, yet it’s still difficult to predict how future generations will affect the office market in the city and suburbs.
Read our full thoughts below.
WHO WILL BE OUR NEXT MAYOR?
Chicago’s Mayor Rahm Emanuel announced that he won’t seek reelection in 2019. Rahm’s critics dubbed him “Mayor 1 Percent,” accusing him of boosting the city’s downtown activity at the expense of Chicago’s neighborhoods. Now that the race for mayor is wide open, strong contenders are jumping in. Two major issues facing this batch of candidates will almost certainly be reducing crime, as well as finding ways to improve economic conditions for the South and West side communities while somehow maintaining the CBD’s business interests. Will the next mayor provide a plot twist for Chicago’s tale of two cities, or will the status quo remain?
We have a clear answer: Lori Lightfoot. After beating out well-known political figures like Toni Preckwinkle, Gery Chico, and Bill Daley, the relatively unknown Lori Lightfoot was resoundingly Chicago residents’ choice for a new direction. Though Lightfoot has not been in office long, a few things have prophesized her balanced approach to running the Windy City: she clashed with the Chicago Teachers Union, fired Police Superintendent Eddie Johnson, is pushing to curb aldermanic privilege, and continues to support the Lincoln Yards proposal despite opponents within City Hall.
CITY AND STATE FINANCIAL TURMOIL
Will the sky finally fall or will Governor-elect JB Pritzker and a new mayor fix the financial mess we’re in? Sooner or later something’s got to give. Will it be property taxes? An employee head tax? Bankruptcy? None of these outcomes will be beneficial to Chicago’s office market or the community at large, but the uncertainty isn’t doing us any favors either. In a recent speech, Mayor Emmanuel proposed a number of ideas to finally stabilize city pensions, including a constitutional amendment to cut COLAs, revenue from legalized marijuana, and a city casino. Will the new mayor act on any of these ideas, or is the lame duck mayor blowing smoke?
Still no answer on this one, and the uncertainly continues to torture us all. Governor Pritzker has had some successes, like consolidating hundreds of downstate police and fire pension funds. Still, underfunded pension liabilities are currently estimated to be $137.3 billion and Illinois currently has the lowest credit rating of any state. Mayor Lightfoot managed to pass a $11.65 billion dollar budget for 2020 that is relatively balanced without any overly painful tax hikes, but she did so despite significant progressive pushback.
CHICAGO'S MEGA-DEVELOPMENT SITES: WILL THEY ACTUALLY HAPPEN?
One upside of the Amazon HQ2 debacle was a forced jump start to multiple mega-development projects at The 78, Lincoln Yards, the Burnham Lakefront, and Tribune Media’s River District. Before leaving office, Rahm is determined to push through TIF deals required for these projects to see the light of day. But with no HQ2, developers must abandon hope of having the tech giant as a tenant, and planned office development on these sites will most likely need an anchor tenant to move forward. There do not appear to be enough tenants in need of the scale of office space that could support all these developments. Lincoln Yards, which may have the easiest time attracting an anchor tenant, is facing significant community opposition. With no HQ2 and other obstacles facing developers, which of these projects will continue to progress and which will sit empty for another decade?
No mega site has taken a clear path to victory just yet. Though Lincoln Yards is still a favorite punching bag for the city’s most progressive combatants—the teacher’s union staged a sit-in at Sterling Bay’s headquarters in October—the development has won key court cases and will begin infrastructure work at the beginning of 2020. Other megadevelopments have had few major announcements in the second half of 2019. The 78 still seems to be a strong contender, but there hasn’t been much news from that corner of the city lately. The Burnham Lakefront has the benefit of being an Opportunity Zone, but the Opportunity Zone fever seems to have died down as investors realize the limitations of this economic incentive.
TECH COMPANIES SHIFT FOCUS TO THE WINDY CITY
Now that the steady stream of corporations migrating from the suburbs to the CBD seems to be drying up, the next source of growth for Chicago’s office market appears to be West Coast tech companies looking to tap fresh talent pools and take advantage of competitive rental rates. For example, Google, SalesForce, and Facebook recently took on significantly more office space in the CBD. Glassdoor, Snapsheet, Foursquare, and Shiftgig have also recently opened offices in the city. Does this trend mean Chicago is officially a top-tier tech city?
This trend is clearly gaining momentum. Uber signed the largest lease of 2019, taking 463,000 square feet at the Old Post Office, where it plans to house its Uber Freight headquarters. Google is reportedly in negotiations with Sterling Bay to lease two additional new developments in Fulton Market. If these leases are finalized, Google will be the largest office leaseholder in Chicago. Glassdoor doubled its Chicago office space this year, and multiple west coast tech companies are currently in the market to establish or expand their Chicago presence.
Co-working is not really co-working anymore. “Flexible office” may be a better term, because that’s what WeWork and their cohorts are focusing on now, and it’s causing major market disruption. Today’s office occupiers are warier of opting into long-term leases and co-working companies are offering an alternative solution that meets their needs with maximum flexibility and less commitment. With these attractive new options, will companies decide the traditional leasing process is too onerous and futile? How will building owners respond to these changing expectations?
The WeWork IPO disaster and subsequent meltdown is changing the co-working landscape. However, most CRE professionals understand that the problem was not the concept of co-working or flexible office, just WeWork’s unrealistic growth and questionable business decisions. Other established co-working platforms will likely benefit from WeWork’s fall from grace as they will no longer have to fight with a vulture for real estate or customers. Hopefully, WeWork will slow down and bounce back under new management—a complete demise of a company that is a primary leaseholder in every major city would not be good for real estate markets. Meanwhile, expect fewer announcements of huge co-working leases in 2020.
FULTON MARKET: BOOM OR BUST?
Fulton Market has been the go-to location in Chicago’s office market for some time now, transforming from mostly old meat packing facilities to luxury boutiques and swanky bars and restaurants. Now that planned office developments are finally coming to fruition we will see how strong the market fundamentals of the area truly are. However, are there enough companies willing to pay Fulton Market’s premium rents to support the 6 million square feet of new development in the pipeline, or are we looking down the barrel of a real estate bubble?
Fulton Market does not appear to be slowing down any time soon and investors bets seem to be paying off. Fulton Market saw the highest per-square-foot-priced sale in Chicago’s history in 2019 when Intercontinental Real Estate purchased 811 W Fulton from Shapack Partners for $50.3 million, or $775 per square foot. Google is looking to add 800,000 square feet between two buildings that Sterling Bay plans to build in Fulton Market. Three Fulton Market office development projects with a total of about 745,000 square feet were delivered in 2019, and an additional 1.8 million square feet of offices are currently under construction.
HOW WILL HOUSING AFFORDABILITY ORDINANCE AFFECT DEVELOPMENT?
At least for now, Chicago’s housing market is affordable compared to other major cities on the East and West Coasts. In fact, our housing affordability is a primary attribute of Chicago’s standard of living. However, the nearly 13,000 new downtown apartments built in the past 4 years are cost-prohibitive for most Chicagoans. As our high paid tech jobs grow, will we remain affordable or go the way of Seattle and other mid-sized cities that saw housing costs sky rocket? Conversely, will the city’s push for mandatory affordable housing minimums backfire and prevent new development, further exacerbating the housing affordability problem?
Mayor Lightfoot is likely to increase the requirements of Chicago’s Affordable Housing Ordinance (ARO) significantly. So far, the results of the ARO have been disappointing. In 2015 the city estimated that 1,200 new units of affordable housing would be created due to the ARO, but by the first quarter of 2018 development was on pace to create only 431 units by 2020. During the October CTU strike, teachers demanded the ARO be revised, complaining that developers can avoid on-site obligation by paying into an affordable housing fund, leading to fewer affordable units in nice neighborhoods with good schools. Mayor Lightfoot has since created a task force to examine the ordinance, which she claims was her office’s intention all along. If Lightfoot makes it more difficult for developers to opt-out of affordable housing, developers claim that higher costs will follow, which will discourage construction.
In the immediate, Chicago still has a lower cost burden than many other major cities, including Los Angeles, Miami, New York, and San Francisco. This is a big reason why tech firms like Salesforce and Google have chosen to expand here.
WHO IS GENERATION Z?
Speaking of aging millennials, what about Generation Z? As the youngest adults begin to infiltrate the office environment, will they have similar workplace expectations as millennials? Will their lifestyle choices pull real estate trends in a new direction the way their predecessors did?
As more Generation Z professionals graduate college and enter the workplace, assumptions about them are being proven wrong. Though they’ve been labeled introverts addicted to their screens, studies are showing that many Gen Z workers prefer face-to-face interactions with managers. They also have a desire to learn from their older coworkers, while imparting their own approach to open-mindedness.
With so few Generation Z kiddos old enough to enter the workforce, it’s difficult to determine precisely how their lifestyle desires diverge from millennials’. Recent studies have indicated that, unlike urban-centric millennials, Generation Z may prefer the suburbs and are more interested in homebuying. They also prefer to live in diverse neighborhoods within proximity of their work. As the largest demographic of the US, will this cause a shift away from downtown offices toward suburban workspaces? Time will tell.
WHAT ARE THE CHANCES OF RECESSION?
There is no shortage of experts pontificating on the inevitability of a recession just around the corner. However, with unemployment at historic lows and most key economic indicators in good condition, there are no clear storms on the horizon. What is there to worry about? For one, the stock market has been increasingly unpredictable, trade wars are brewing, national and International politics are disconcerting at best, and our national debt is growing at an alarming rate. Shall we go on?
Little has changed year-to-year: some experts continue to see recessions around every corner, unemployment remains low, and a full trade deal between the US and China has yet to come to fruition. The economy may be strong, but many investors are planning for the worst. Will a recession happen in 2020? It’s difficult to predict, but here are a few factors you can keep an eye on: Continued trade negotiations between China and the US, Brexit outcomes, and political unrest in countries like China and Iran.
THE FUTURE OF THE SUBURBAN OFFICE MARKET
Chicago’s suburban office market has never fully recovered from the recession. The highly sought-after millennial employees’ preference for an urban lifestyle created a corporate suburban to urban migration that boosted the CBD office market and left the suburban office market to struggle. However, some investors have placed their bets on a suburban renaissance despite little leasing activity, believing that older millennials finally having children will eventually move to the suburbs. Are employers ready to take a chance on the suburbs?
Maybe. There has been news of companies considering suburban office space in a new light, but no deals to get too excited about just yet. The cost differential is now so wide that it has to start turning heads eventually, especially with concerns of property tax increases. So no, there’s been no stampede towards the suburbs just yet, but 2020 could be the year of the suburban bounce back.
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