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Chicago CRE Optimism Wanes Dramatically But Fundamentals Still Strong

After one of the longest economic recoveries in U.S. history, a series of events, including unsettling developments on the international scene and sweeping changes in local political leadership, has made some commercial real estate professionals in Chicago a bit more cautious about the local real estate market’s prospects.

The Real Estate Center at DePaul University's Charles Wurtzebach, Hines' Brian Atkinson, NorthMarq's Sue Blumberg, Wells Fargo's Brian Rogan

There was a significant increase in pessimism in the Second Annual Chicago Mid-Year CRE Sentiment Report, produced by The Real Estate Center at DePaul University.

Last year, just 4% said they had a bearish outlook on the Chicago region’s market, compared to 20% this year, DePaul researchers said.

The overall outlook remains positive, though it is waning. Approximately 52% of those surveyed characterize the market for the first half of 2019 as consistently strong. That is down from almost 70% who said the first half of 2018 was strong. 

“We feel some headwinds now, and everyone wants to make sure there is nothing underneath that we’re not seeing,” NorthMarq Managing Director Sue Blumberg said. 

But even after 10 years of economic expansion, no one has noted any of the warning signs that typically herald a falling market.

“There hasn’t been a jump in delinquency, the net absorption in both multifamily and office sectors are good, rents are growing, and interest rates are still at an all-time low,” Blumberg said.

“There is nothing real estate related on the economic horizon that indicates big errors in underwriting,” added Charles Wurtzebach, chair of DePaul’s Department of Real Estate and director of the Real Estate Center. “The discipline in the financial sector has gone a long way toward keeping the recovery going.”

Aside from new worries about the seemingly constant trade wars and other possible world events, Wurtzebach attributes the more subdued mood to some uncertainty over how to navigate a transformed political environment, which includes new leaders at the city, county and state levels.

Rahm Emanuel was perceived as being very pro-business, and we have very little to go on when trying to understand how Mayor [Lori] Lightfoot will be different,” he said.


Although both Wurtzebach and Blumberg, along with most survey respondents, said it is too early to make judgements on the new leadership, Gov. J.B. Pritzker has made some positive impressions.

The most recent legislative session was historic, as lawmakers passed a major capital bill, legalized recreational marijuana and approved an expansion of gambling.

“We are starting to see a process down in Springfield that is resulting in actual decisions,” Wurtzebach said.

Perhaps even more important, and worrisome, than a new mayor or governor, was the election of Fritz Kaegi, the new Cook County Assessor, who came into office promising to make major adjustments to the values of commercial real estate.

Even here, however, many have decided to adopt a wait-and-see attitude.

“We commend the assessor for being so transparent,” Blumberg said. He particularly applauded Kaegi’s willingness to get out and meet people affected by the changes.

“There was a knee-jerk reaction at first, that the first new assessments were exorbitant, and it was freaking people out, but we now expect municipalities will revisit tax rates and make some adjustments, meaning the actual amount of taxes might not go up very much.”

That will be a long and complicated process, Blumberg acknowledged, and even if no one’s worst fears have been realized, approximately 98% of survey participants still feel local issues like this, along with the city and state’s precarious financial positions and the possibility of a progressive income tax, in some degree hurt activity in the commercial real estate market.

"If I'm a lender or an investor in Chicago, how do I forecast what real estate taxes will be?" Wurtzebach said. "It's not a trivial matter by any stretch."

Likely changes to tax rates did not dispel the overall perception among survey respondents that Chicago has many strengths, including steadily increasing values, abundance of debt capital available and good activity levels across virtually all property sectors, that will keep the local economy humming. 

“I think it is going to continue, barring any big, fundamental economic crisis,” Wells Fargo Vice President and Senior Private Banker Brian Rogan said. “My long-term view remains positive for current owners and future developers.”