With Chicago's Fiscal Woes, Perception Is Reality To Outside Investors
The Chicago commercial real estate market is in the midst of a booming two-year run, spread across several asset classes. But could looming problems with Chicago's fiscal stability bring the train to a screeching halt?
A crowd of over 400 attended Bisnow's 8th annual State of the Market event at NewCity yesterday to hear what our expert panelists had to say about the existing landscape. The message they clearly received: proceed with caution. The city's ongoing struggles with pension insolvency, rising real estate taxes and crime may have a negative impact on real estate.
Farpoint Development principal Scott Goodman likes how Mayor Rahm Emanuel has addressed the city's fiscal woes, but perception is reality and Chicago still has a long way to go to change the view of outsiders regarding crime and financial instability. Scott says there's been some positive movement in that area, with the mayor attracting companies to downtown, but until that forward momentum is discussed nationally, there will be no true change in perception from out-of-town investors. Scott remains hopeful that discussion will happen. After all, Scott says, Chicago was associated with Al Capone before Michael Jordan arrived.
Bucksbaum Retail Properties CEO John Bucksbaum agrees with Scott that Rahm has done a decent job addressing some of the city's looming fiscal time bombs. But John remains concerned about real estate taxes because of the economic impact the increases will have on projects and the people within them. He's also worried institutional investors on a national scale will react adversely to the news reports on the city's violence.
One method John believes could address this is to give depressed communities some sense of ownership in the developments that happen there. This is where tax subsidies can come in handy, and John says healthy retail like the Whole Foods in Englewood Square can be an example of how it can be done moving forward.
RPAI CIO/COO Shane Garrison says Chicago's troubles were the first thing investors wanted to discuss during a recent European business trip. Shane had 20 meetings in two weeks, and Illinois was a concern for half of them. This concerns Shane, as an institutional investor, since RPAI is in the liquidity business—those concerns could make it harder to exit the market.
Singerman Real Estate president Seth Singerman still sees strong interest in Chicago real estate, despite concerns about the city's finances, and he points to the high-volume transactions that have closed or are in the pipeline as proof. Example: 300 North LaSalle traded for $500/SF in 2010; four years later, it sold for $650/SF. Seth expects assets on the market to sell for equally high numbers.
Seth doesn't deny that factors like Chicago's budget woes and the property tax hike may have ramifications on the market, but those fears have yet to translate to capital values, and Chicago remains a hot market for domestic and foreign investors.
JLL managing director Keith Largay (right, with Pircher, Nichols & Meeks partner Dave Pezza and Starwood Retail Partners president/COO Scott Ball) says there's some investor caution, depending on asset class, and investment nationally is starting to slow. There's a 15% to 20% dropoff in investment in 2016, which Keith says is respectful in this market.
Low interest rates have investors weighing their options as the market heads into the late innings. There's renewed interest in suburban office properties because they hold higher cap rates than their downtown counterparts, while assets in secondary markets are even higher. If an investor is willing to hold on to an asset in these markets for an extended length, and have long-term capital backing, Keith says those investors can reap high yields with low interest rates.
Starwood Retail Partners CEO Scott Wolstein (left, with Pircher, Nichols & Meeks partner Gene Leone) says reports of e-commerce destroying brick-and-mortar retail are much ado about nothing. Scott notes that direct mail retail accounted for 7.5% of total sales before the Internet era. Today, the combination of e-commerce and direct mail sales are 7.5% of total sales. Scott says the true root of retail distress is the oversupply of power and lifestyle centers that impact regional malls, and retailers failing to adapt to the changes in the marketplace. Direct mail and e-commerce are inefficient distribution systems, because it still costs money to ship product that final mile.