Top Stories That Rocked Chicago CRE In 2022 — And To Keep Watching In 2023
From the sale of major buildings to a string of corporate relocations out of the city, commercial real estate in Chicago rode a wave of ups and downs in 2022.
The past year brought new hope of revival for the flagging Loop thanks to Google's $105M purchase of the iconic James R. Thompson Center and a city initiative to transform aging and mostly vacant office buildings along LaSalle Street into 1,000 new apartments and condos. It also brought the promise of hundreds of highly paid new jobs and $200M in annual economic activity with approval of Bally's plans for a $1.7B casino development in the city’s River West neighborhood.
But the year was fraught with uncertainty as well, as the downtown office market continued to falter and distress spread, major corporations announced plans to move elsewhere, and perceptions of crime and high taxes disincentivized new growth in the eyes of many CRE players.
Bisnow canvassed CRE experts across the city and asked them to share their thoughts on the top industry news stories shaping Chicago CRE this year — and which stand to continue doing so in 2023.
Office In Peril
Across the country, companies are struggling to bring employees back to the office, leading to office occupancy rates plateauing. But Chicago is suffering more than most, currently reigning among the nation's top three metros in terms of office vacancy alongside San Francisco and Houston, all topping 20%, per JLL.
Already, some buildings have been taken over by lenders and more could soon follow.
“It'll be interesting to see what happens with the foreclosure market … because you've got so many office tenants that are not renewing their leases, and the big vacancies, they're not going to be able to pay the mortgages,” said Gloria Materre, managing director of EnTrust Realty Advisors. “I think we have to pay attention to that because I think that's going to be looming, unfortunately, and that may impact whether we have another recession.”
One potential solution proposed by Chicago Mayor Lori Lightfoot involves incentivizing developers to transform vacant buildings along the LaSalle Street corridor into housing, much of it affordable.
“We are very interested in what the city is trying to do, and hopefully that has success with getting some residential conversions here,” Farzin Parang, executive director of the Building Owners and Managers Association of Chicago told Bisnow. “We only represent office folks, so it might be counterintuitive with the office industry saying ‘yeah, some residential conversions, we're losing members from that,’ but it does go into this, you need an overall vibrant downtown that in the longer run helps office as well.”
The proposed project has been met with mixed reviews about the feasibility of conversions.
“I think that's going to be very difficult," Materre said, pointing to the cost and red tape involved in retrofitting and converting old buildings given federal and state regulatory guidelines for developing affordable housing.
The better option might be to just tear down some vacant buildings, according to Peak Properties Managing Partner Mike Zucker.
“The reality is that if people aren't going back to the office, maybe some old office buildings should really just come down," Zucker said.
Can Bally's Casino Make Good On Its Promises?
Chicago’s first casino was approved by the city council in May, as was a temporary casino at the vacant Medinah Temple, a former Bloomingdale’s store at 600 North Wabash Ave., which will operate until the larger project is complete in 2026.
The complex will include 3,400 slots, 170 table games, 10 food and beverage venues, and a 500-room hotel tower with rooftop bar, among other amenities, and is expected to generate $200M annually in economic benefit to the city.
The final zoning approval for the $1.7B casino was approved by Chicago City Council in December. But some of those interviewed by Bisnow expressed some skepticism and marked this a story to watch in 2023.
“I hope that it brings the money that it says it's going to bring in, and I hope the money goes for the use that it's supposed to because we've seen other things happen before, and the money didn't do that," Materre said. "I think a lot of the people are not happy about the location for it. It'll be interesting to see what happens with commercial and residential real estate when the casino comes. I think we have to watch and wait and see.”
Lots of questions remain as to how the casino will affect real estate in the area, Zucker said.
“How's the infrastructure gonna work? How are the roads gonna work? How are people gonna get there? How are we able to clean? How's it going to be safe? If I bought a little home over there, what am I going to do with it?” Zucker said.
“I just think there's so many unanswered questions, and I would hate to be a resident in that area. I think home values will become depressed. Maybe the tax revenues will make up for it. Maybe [Lightfoot] will be viewed as a hero five years from now, I don't know, but from my just personal opinion of being involved in the city for almost 30 years, it doesn't feel good.”
A Brutal Year For Chicago HQs
Citadel founder and CEO Ken Griffin's announcement this summer he would move the Chicago-based hedge fund and its market maker, Citadel Securities, to Miami was strike three for the city and came fast on the heels of two other big losses: In early May, aerospace giant Boeing announced plans to take its operations from Chicago to Arlington, Virginia. A month later, it was Caterpillar's turn to declare it would pull up stakes in the city and move to Irving, Texas.
The relo news was not all bad for Chicago. An announcement that Chicago would land Kellogg Co.'s new HQ after the company split itself three ways in June was a morale-booster, as city officials pointed to the decision as a sign Chicago is still in the game.
“They’re moving the highest-growth division to Chicago. The key word there is growth,” Deputy Mayor for Economic Development Samir Mayekar said at the time. “That growth will happen here in Chicago."
The Bears Make A Move
While the deal isn’t finalized yet, it became clear a new stadium and entertainment complex was almost as good as done when the Chicago Bears released plans and renderings for a future move from Soldier Field to suburban Arlington Heights.
The Bears are not only proposing to build a new stadium but to create a mixed-use site at the former Arlington International Racecourse with an entertainment district and a mix of commercial, residential and retail sites.
“I would tip my hat to the Bears and say good move and move on,” Zucker said. “You’ve just got to say ‘Hey, congratulations. Great move,’ and what are we going to do to make Soldier Field better?”
The CRE Tax Burden
In 2020, the Cook County Assessor’s Office conducted a Covid-19 adjustment, shifting the property tax burden from residential real estate to CRE during the beginning of the pandemic.
That bulk of the burden flipped to residents in 2022, at least those residents living in the city, but experts said the fact property taxes are up by 6.6% overall this year while CRE is still struggling will continue to be an issue.
“We still have this massive shift from residential tax burden onto commercial in a very negative, bad time for commercial property, especially office buildings," Parang said. "That will continue to play out over a few years because I believe the assessor decided he just didn't agree, and he's already, for 2022, reset those values to what he wanted them to be anyway."
Parang and others said Chicago taxes continue to be a drag on the market's potential, echoing findings from the DePaul University-Urban Land Institute 2022 Chicago Mid-Year Sentiment Report.
“It's a big disincentive," Parang said. "It's an upward pressure on rents in a time when you've got people redetermining what their use of office is. It's a very negative thing, not only for the industry, but we think for the city as a whole, for downtown, where you want office occupancy.”
With property taxes being the biggest expense for building owners, increased tax burdens get passed through tenants’ rents, which is particularly difficult during times of low office occupancy, he added. The uncertainty around property taxes has been a challenge for investors, too.
“Logic would say that one of your largest expenses, which is taxes, should be a fixed expense, meaning you should have an idea of what your taxes are when you’re making the purchase,” Zucker said. “The fact that taxes are such an unknown creates such a problem for investors in Chicago.”
