6 In 10 Chicago CRE Pros Are Optimistic About Outlook, But Safety And Taxes Remain Big Concerns

A majority of Chicago commercial real estate professionals are bullish or optimistic in their expectations for the city's real estate market over the next 24 to 26 months, but many also raised concerns over Chicago's safety and tax environment, according to a new midyear sentiment report.

The report, conducted by a joint initiative of the Real Estate Center at DePaul University and the Urban Land Institute's Chicago District Council, found that CRE's long-term outlook on Chicago had brightened. A year ago, only 39.1% of respondents were bullish or optimistic about the city's real estate prospects, while that figure reached 60% in the 2024 edition of the survey.

Optimists cited the depth of the city's CRE market and an uptick in transaction volume as some of the reasons for enthusiasm.

“The innate optimism we are seeing, in spite of challenging market conditions, reinforces the resilience and long-range view of many real estate investors and developers,” Reagan Pratt, the director of the Real Estate Center at DePaul University, said in the report. 

But the bears pointed to the city's perceived safety issues and tax climate as a hindrance to doing business in Chicago. One anonymous survey respondent said that taxes are “killing” investment properties and that many investors won't touch Cook County. 

Concern over safety and taxes from respondents grew year-over-year. On a five-point scale asking respondents to quantify the city's top challenges, safety scored a 4.38 and property taxes scored a 4.32. Last year, both issues were just over 4.1.

CRE pros said crime isn't an issue they are able to underwrite in a deal and that city leadership has contributed to uncertainty around potential changes in the tax code that could make deals harder to pencil. 

For more deals to get done, 46% of respondents expect the bid-ask spread on properties to narrow. Of that group, 62% expect the movement to come from seller capitulation, 29% predict counterparties to meet in the middle, and just 9% anticipate buyer capitulation.

“Sellers will have to move more,” Emi Adachi, managing director and co-head of global investment research at Heitman, said in the report. “The market has been unrealistic.”

Chicago real estate professionals said they are more confident that a recession will be avoided than they were midyear 2023. At this time in 2023, 32% of participants said we were already in a recession, while that figure is down to 18% this year. Forty-three percent of respondents now say the U.S. will avoid a recession altogether, whereas just 12% said they believed that last year.

About 28% still believe a recession could occur in 2025.

There are fewer naysayers on Fed moves as well, though the survey was conducted before the Federal Open Market Committee shaved half a point off interest rates Sept. 18.

More than half of those surveyed said the Fed would produce a soft landing, while the number expecting a hard landing halved from a year ago to 18%.

“The smooth landing in the U.S. so far has been attributable to the Federal Reserve’s cautious approach to managing interest rates and a strong job market,” DePaul Real Estate Center Chair James Shilling said.

“If economic weakness is indeed coming, the Fed may regret not starting to cut interest rates in January 2024, as it can take 18 months for a change in monetary policy to impact the economy.”