After a rocky 2020, will 2021 bring stability to commercial real estate?
The coronan virus pandemic disrupted the Chicago commercial real estate market in surprising and drastic ways in 2020. Here’s what happened this year and what to look for in 2021:
THE COVID CRASH
What happened: The arrival of the coronavirus in Chicago in March turned the commercial real estate market upside down, but its impact on the industry contradicts broad statements. The pandemic devastated retail landlords as government restrictions closed many malls, stores and restaurants and consumers crouched at home and bought many goods online. Local hotels suffered a staggering drop in occupancy due to falling trips and canceled conventions. Many were behind on their mortgages; A foreclosure lawsuit for $ 338 million has been filed against the Palmer House Hilton. But industrial and life science properties appeared to be gifted with antibodies, which drew the attention of investors who had few places to go. The pandemic did not spare the local office market as companies postponed expansion plans or decided to reduce their floor space while doing business through Zoom. The housing impact has been mixed, brutal for landlords in the city center but minimal in the suburbs.
What to look out for next year: A recovering economy, boosted by vaccinating America, should help the markets turn around, but the process may take patience. Reversing the stationary decline could be elusive as consumers now trained to shop all kinds of products online see little reason to return to the stores. The biggest wildcard: office. Will companies need as much office space in the future after figuring out how to work remotely? Many won’t.
HERE COMES AMAZON
What happened: Amazon, which had been slowly adding stock here before the pandemic, went wild after they arrived. Amid the rise in online orders from homebound Americans, it became clear that the steady transition of the economy to e-commerce was accelerating. Amazon then devoured more than 14 million square feet of warehouse space in the Chicago area in places like Downers Grove, Pullman and Markham in the first half of the year. The expansion of the company’s extensive sales network was arguably the biggest local economic growth story of 2020: The Seattle technology giant with around 23,000 employees in Illinois in the summer triggered a hiring hype that could add up to 15,000 more here. However, Amazon’s push also caught the attention of community and environmental activists, who raised questions about the company’s environmental impact and the quality of its jobs.
What to look out for next year: Expect news of more warehouses and jobs in 2021 – along with more criticism.
Early steps for mega-projects
What happened: Developers behind several mega-projects planned for downtown began the year looking for anchor tenants to get their work started. Despite the pandemic, they managed to book some victories. Related Midwest won in February when Governor JB Pritzker announced the release of $ 500 million in state capital to help develop the Discovery Partners Institute, a 500,000 square foot classroom and laboratory at the University of Illinois used by the 78 Related’s planned is A planned 62 acre campus along the South Branch of the Chicago River south of Roosevelt Road. Elsewhere on the Near South Side, a coalition of developers has signed a contract with Israel’s largest hospital to open a medical innovation center that will anchor a 15 million square foot campus on the former site of the former Michael Reese Hospital McCormick Place is planned in the city. Sterling Bay has yet to announce tenants in Lincoln Yards on the North Branch of the Chicago River, although it has revealed plans for a life science laboratory building on the project’s southern boundary.
What to look out for next year: All three developers have to shut down large infrastructure projects to get started. Sterling Bay plans to begin work on a bridge that will cut through the heart of its project by mid-year. Related is still working on expanding Wells Street through its location and road projects for the Michael Reese location are ongoing. All claim they are in good shape with a blank board to develop campuses for the post-pandemic world.
INVEST SOUTH / WEST GETS ROLLS
What happened: Mayor Lori Lightfoot’s administration embarked on a crucial new phase in its program aimed at renewing tainted business corridors in the city’s South and West Side neighborhoods. The city asked developers for bids for the first seven projects in locations selected in Englewood, Auburn Gresham and Austin, among others. The initiative aims to get several city departments to focus on upgrading the properties in the hopes that they will drive more projects and job creation nearby. Lightfoot is committed to allocating $ 750 million in urban resources such as TIF funds and small business grants to the 10 Invest South / West projects.
What to look out for next year: The city plans to select developers for its first three projects by February, with a view to those who break ground in early 2022. She will also submit her last three proposals for proposals for Humboldt Park, Roseland and South Shore earlier this year.
The office party is over
What happened: After the best year for office demand in the city center since 2007, developers have built new office skyscrapers next to Union Station (BMO Tower) and Wolf Point (Salesforce Tower). Then came a massive work-from-home experiment that is still ongoing and begs questions about whether demand will ever be as good again. This will remain a great unknown until large numbers of companies return to offices. What is clear is that there will be a lot more space available: with the two towers, new projects in the Fulton Market District, and other major additions like the refurbished upper floors of the Marshall Field building, only 5.5 million square feet of office space is under construction, according to CBRE 36 percent of it are pre-let. The vacancy rate reached its highest level since 2011 and has not yet risen: In the course of 2020, companies almost doubled the space on the sublet market to 5.3 million square meters, which means that they will need much less physical work space in the future.
What to look out for next year: When will a critical mass of workers return to the inner city? And if so, will it be less frequent? Like most of the economy, these questions depend on the distribution of COVID vaccines. But they help determine how bad the headache will be for downtown landlords. Most companies have postponed leasing decisions when they can, but the first new transactions that are made say a lot about the type and location of buildings tenants want and how much space they need. This has a significant impact on the daily liveliness of the central business district.
Rated and stressed out
What happened: After trying to guess what the election of Cook County Assessor Fritz Kaegi in 2018 would mean for them, property owners in the northern and northwestern suburbs finally found out. And commercial landlords weren’t happy. A campaign Kaegi promised would reform the way the county values commercial real estate, arguing that its predecessor had grossly undervalued it. The property tax invoices received from homeowners and landlords in the summer showed the Kaegi effect: The average tax burden for residential property in communities in the northern and northwestern suburbs of Cook rose by only 1.1 percent from 2019. However, the average bill for commercial and industrial property rose 15.8 percent. Landlords criticize Kaegi for using flawed methods to value properties and accuse him of deliberately trying to shift the tax burden onto them. Kaegi denies he has a political agenda and says he just wants to get the math right.
What to look out for next year: The stakes rise in 2021 when Kaegi’s office evaluates the city of Chicago, which is where most of the county’s real estate assets are located. Although the property taxes based on the new assessments will not come out until 2022, tower owners will not hesitate to express their displeasure if the assessment officer hits them with large increases.
WHEN THE RENT IS DUE
What happened: The federal and state governments have taken extraordinary measures to protect vulnerable tenants who have lost their jobs during the pandemic, including freezing evictions. Many home landlords have worked out payment plans with unemployed tenants, but a drop in rental income has cut profits and driven some into mortgage problems. Landlords have also found that Governor JB Pritzker’s eviction moratorium was too broad, which has created incentives for working tenants to stop paying their rent.
What to look out for next year: With vaccinations going on and the brightening economic outlook, expect the moratoria to be lifted in 2021. Tenant proponents worry about a spate of evictions afterwards.