News from the Chicago Chapter

Industrial Market Solid in First Half of 2020 While Status of Other CRE Assets Still Speculative

IREM Chicago Virtual Mid-Year Market Review Held July 23

The industrial asset class continues to perform well while multifamily, retail and office properties in the metropolitan Chicago market face uncertain futures following the first half of 2020, a six-month period severely shaken by the continued fallout of the COVID-19 pandemic, civil unrest, high unemployment, and shuttered businesses.

That summarizes the commentary from the four local CRE professionals who comprised the panel during the IREM Chicago Mid-Year Market Review Webinar held July 23.

(Visit this link to access the Zoom recording of the webinar.  The type in this password: ZLR5+nL8.)

The annual discussion, normally held over a luncheon, gave participants insight into the dramatic fallout that has taken place in recent months and reasons for optimism in future. IREM Chicago President Angela Aeschliman, CPM® and President-Elect Steve Schimmel, CPM® welcomed those in attendance and thanked Industry Partners for their financial support.

After introductions, moderator Danny Nikitas, Principal of Avison Young, noted that, “2019 seems like it’s not so long ago, but the year is removed from what’s happening here today.” Sharing thoughts on the office market, Nikitas said recent trends to reduce office space per employee will be reversed, and some tech firms have put expansion plans on hold and are looking to suburban submarkets. And, office development at mega sites like The 78 and Lincoln Yards will advance “one day at a time.”

Here are thoughts shared by the panelists:

Gail Lissner, CRE, SRA, Managing Director, Integra Realty Resources: “2020 has been absolutely been the longest year, and we’re only halfway through it,” Lissner remarked. The multifamily market opened the year with a robust 95 percent occupancy rate. In past years, an occupancy level below 90 percent was a rarity.  At mid-year, many apartment managers reported occupancy in the high 80 percent level and some even dropped to 70 percent.  Renters are offered concessions of up to three months; but the pandemic has made it harder to manage units when leases are due for renewal, and some renters have moved back home due to job loss or the loneliness brought on by working from home.  Around 2,000 new units are under construction, and delivery in 2021 is projected to be low. Multifamily will continue to be one of the more resilient property types and investors remain bullish.

Susan Bergdoll, Vice President at Duke Realty. The industrial market remained strong during the first half of 2020. “While people were at home due to the COVID pandemic, they continued to buy things,” Bergdoll said. The growth of Amazon throughout metropolitan Chicago fueled the activity of this asset class; Bergdoll said the e-commerce giant leased roughly half of the industrial space in second quarter, and she predicted overall market activity to continue at a steady pace in third quarter.  Also, the industrial market currently is not overbuilt, another factor in its success to date. Pricing has remained constant along major corridors like O’Hare and Interstate 55 and Interstate 80.  Industrial leasing agents have resorted to using drones to provide virtual showings.

Deena Zimmerman, Vice President at Sperry Van Ness. The retail market will be a tenant’s market for the next three years, and landlords will need to get creative to keep and land new tenants. This development was driven by the fact that a significant number of businesses that closed during the pandemic will not reopen. In the Chicago market, 4,400 businesses closed permanently or temporarily, and 2,400 are not expected to reopen. “The biggest fear is that there’s another wave of COVID in September or October when the PPP runs out,” Zimmerman said.  On a national level, Chicago ranked fourth in terms of business closings, with restaurants being especially hard hit.  On a positive note, leasing at second generation restaurant spaces in the suburbs is active, and restaurants that offered take-out before the pandemic are doing well.  The outlook is bleak for traditional malls, especially those with food courts.

Brandon Svec, Director of Market Analytics, Co-Star Group. In his presentation on the overall market, Svec noted that in February the Chicago MSA had 4.7 million jobs; by April, an estimated 540,000 jobs were lost, and the unemployment rate soared to 17 percent. “Not long ago, we were talking about a labor shortage,” Svec said. “How that has changed.” An analysis of multifamily apartment search statistics revealed a growing number of tenant prospects seeking two and three-bedroom units in suburban markets over studio and one-bedroom apartments in the higher priced downtown markets. This development, Svec said, could be driven by a greater number of employees opting to work from home. On a related development, the fastest-growing multifamily submarkets in the MSA are in southern Wisconsin and Northwest Indiana.