Big Business Drivers Will Keep Chicago Moving In 2020, Despite Political Worries

Politics dominated much of the conversation around commercial real estate last year, but some worries that gripped industry leaders in Chicago one year ago, including the impending loss of a pro-business mayor, receded during 2019, allowing many to approach the new year with increased confidence.

“Overall, people are quite positive about Mayor [Lori] Lightfoot, and the way she has been making strides,” Glenstar Properties Managing Principal Michael Klein said.

He said he appreciates how Lightfoot brought in a balanced budget without a significant property tax increase. However, the proposals put forward so far to tackle the city and state’s long-term budget challenges have been temporary Band-Aids, rather than solutions, said Klein, whose company will host Bisnow’s Chicago Forecast 2020 event Jan. 15.

“Pension costs especially can’t be solved with budget trimming by the city. It’s really a constitutional issue for the state, so hopefully someone will step up and say when and how we are going to deal with this.”

Making moves to solve the state’s budget issues will assume greater importance in 2020 and beyond, Klein said. The days when Chicago could grow by attracting local suburban companies into its burgeoning downtown may be over. From now on, growth will depend on attracting companies from outside Illinois, ones that will need reassurance they won’t get hit with high taxes in the years ahead, he said.

“The companies that were planning to move downtown have mostly already moved, so I don’t think that will be a big business driver,” he said.

Outsiders may have already begun avoiding Chicago. Much of the year saw a significant slowdown in office investment, even though in the past few months a couple of major trades were announced, including Boston-based Beacon Capital Partners’ plan to buy 190 South LaSalle St., a 40-story tower, for about $230M.

“The hope is that it’s just the beginning, because there will be some investors that say, ‘if Beacon is buying, what am I missing?’” Klein said.

Still, he is far from certain the investment drought is over. He said roughly $7B worth of product was on the market in 2019, and normally, that means investors would spend roughly $5B to $6B. Last year, even with the flurry of late investment announcements, the total invested would only come to between $1.2B and $1.6B, depending on when purchases close.

If the drought does continue in 2020, it may be attributable to both the overall fiscal uncertainty, and efforts by Cook County Assessor Fritz Kaegi to reform the county’s property assessment system, Klein said. Kaegi will also speak at Bisnow’s upcoming conference.  

Klein said he does not oppose Kaegi’s overall goals, but worries the mandated triennial schedule of reassessments, which won’t be finished until 2021, will keep suppressing investors’ interest.

“What Fritz Kaegi is trying to do is bring in clarity, and I think that’s a good idea, but the fact that we have triennial assessments means we will have two to three years of uncertainty as it rolls out.”

CBRE Chairman, Americas Research, and Senior Economic Advisor Spencer Levy said these challenges may not have any long-term impact on the Chicago region.

Assessed values for some north suburban properties have recently doubled or even tripled, for example, but he expects the actual taxes due will increase a fraction of that.

“Investors should be realistic about how much their taxes will actually increase,” he said. “There are far greater factors at play that will make Chicago a wonderful place to invest over the long term.”

The local economy, especially Chicago’s Central Business District, has galloped forward since the end of the recession, according to Levy. That forward motion is likely to continue. The Chicago CBD already has the most diverse economy among U.S. cities, with no industry accounting for more than 14% of the economy, and employers added more than 92,000 jobs since 2008, CBRE researchers said in their new study, Why Chicago?  The River North and Fulton Market submarkets led the market, with employment increases of more than 40% and 56%, respectively.

Although the city has experienced population loss in the past few years, mostly in lower-income communities, CBRE expects the CBD to continue growing. Since 2000, the center core’s population grew 50% to 248,000, and by 2023, it should hit 271,000, a 9.3% increase, or more than double the U.S. national average. That would help continue the multifamily boom, in which demand already outstrips new supply.

Household income averages $126K in the core, CBRE found, but downtown rental rates average $2,200, or about 21% of that income, meaning Chicago rents still have a lot of potential to grow.

Matthew Dumich, an architect and principal with SmithGroup, sees untapped potential in the city. In 2020, he will be watching how well developers Sterling Bay and Related Midwest do as they foster new life sciences businesses, what he calls “Chicago’s next wave,” for their Lincoln Yards and The 78 megadevelopments on the downtown’s periphery.

“All of these developers are trying to understand what a life sciences ecosystem could mean,” he said.

He said developers will need to curate the right mix of biomedical research, higher education and healthcare providers at each site, work that will take shape this year.

Another big change in 2020 will be the Lightfoot administration’s attempt to foster more economic activity on the South and West Sides, which could mean commercial real estate opportunities far from the expanding downtown, Dumich said. He will also speak at the upcoming Bisnow conference.

“It’s the first time there has been a special focus on these communities.”

It is significant the administration has hired a new group of urban planners tasked with coordinating all city agencies, such as the transportation and planning departments, in these areas.

Chicago Neighborhood Initiatives' efforts in Pullman on the Far South Side is a good example of what could take place in other neighborhoods, Dumich said.

“Their development is about what the community needs, not what a developer wants, but they are also attracting businesses, and they’re making money.”   

That kind of expansion is part of the reason the few clouds hanging over Chicago don’t worry Levy much. He said while they may scare away some investors, that will make room for others who will accept some risk if it means better long-term returns.

“I love healthy risks, because healthy risks create opportunities for others.”