CRE N Illinois

State of the market from the Chicago Real Estate Forecast

State of the market from the Chicago Real Estate Forecast,ph01
(From left to right:) Danny Nikitas, Ken Szady, Daniel Rosenberg, Drew Nieman, David Bercu and Tony Pricco.

For the past decade and a half, the Chicago State of the Market panel has been a cornerstone of REjournals’ annual Commercial Real Estate Forecast conference. The 2018 event was no different, with a faculty comprised of some of Chicago’s leading commercial real estate firms engaged in an in-depth look at the marketplace, including the trends that took hold in 2017 and the headlines likely to be made in 2018.

Danny Nikitas, the managing director of Avison Young’s Chicago office, moderated the panel—the fifth year in a row he’s performed such duties at the Forecast. Joining him were David Bercu, SIOR, principal, Colliers International; Drew Nieman, executive vice president in CBRE Chicago’s agency leasing group; Tony Pricco, president and partner of Bridge Development Partners, LLC; Daniel Rosenberg, partner and managing director, capital markets at Cohen Financial and Ken Szady, SIOR, CCIM, a national director and senior leader of Marcus & Millichap’s institutional property advisors division.

The panel began by first looking back. “2017 was a very good year,” said Rosenberg. “It was an extension of what we’ve seen the past couple of years.” He believes that though rates are historically low, changes to floating rate borrowing, coupled with the new tax law, should mean that 2018 continues on the previous year’s trajectory.

Even with the migration of some businesses from the suburbs into the Chicago CBD, the core office market saw vacancy rise, mostly due to corporate consolidation. That said, Nieman remarked that rental rates continue to rise in Class A and B buildings. “That’s an interesting phenomenon when someone can say vacancy’s gone up and rental rates have gone up. That usually doesn’t work that way,” he said. “But it does if you’re building better products that can handle this densification.”

It didn’t take long for the panel to focus on the industrial side, and the good news from 2017 doesn’t appear to be abating. And according to Bercu, these highs aren’t entirely due to e-commerce. “We are onshoring. We are manufacturing items in the United States again, particularly here in Chicago,” he said, eliciting applause from the audience.

Pricco echoed that sentiment, noting that a variety of industrial uses are driving up land values in submarkets primed for warehouse and manufacturing space. “The one complaint I get from tenant rep brokers is there’s not enough supply for the demand they see coming down the pike, which just makes me giggle,” he said.

Unlike other asset classes, at the start of construction, the majority of new industrial projects are going up as spec, getting leased during the 12-month or so construction cycle. “Bigger users plan ahead. Smaller users like to see the walls going up before they’re going to commit,” Pricco said. “You have to have a spec component.”

But industrial projects do present challenges to real estate investors. “There’s a dearth of quality investments nationally. Those that get brought to market really get sought after, so that’s compressing cap rates,” Szady said. “Industrial is a net hold. Once an institution has it, they’re not flipping it.

The panel touched on a number of other topics, including the variety of tax rates between Cook and the collar counties, the last mile phenomenon and the ability for crowdfunding to disrupt the limited partnership market. The effect of the city’s and the state’s finances on commercial real estate was sure to come up, as well as uncertainty at the federal level. “For 2018 I keep saying more of the same,” Rosenberg said. “Barring any geopolitical event, I think it’s going to be more of the same.”

For the past 16 years, REjournals has hosted what has become the largest, longest-running commercial real estate forecast event in Chicago, the Midwest and perhaps the U.S. The Chicago Real Estate Forecast brings together the brightest minds and the best dealmakers in the industry to set the tone for the upcoming year. Over 850 commercial real estate professionals attended the 2018 Forecast.