CRE N Illinois

Chicago: Major player, second city or a mix of both?

Moderator LaTonya Ellis from Ice Miller asks a question while panelists Brian McKiernan with CenterPoint Properties and Art Rendak with Inland Mortgage Capital listen. Moderator LaTonya Ellis from Ice Miller asks a question while panelists Brian McKiernan with CenterPoint Properties and Art Rendak with Inland Mortgage Capital listen.
Panelists Bob Clark from CRG and Dean Giannakopoulos with Marcus & Millichap. Panelists Bob Clark from CRG and Dean Giannakopoulos with Marcus & Millichap.
Panelists Bob Clark, Dean Giannakopoulos, James Postweiler, Brian McKiernan and Art Rendak address the biggest issues facing Chicago. Panelists Bob Clark, Dean Giannakopoulos, James Postweiler, Brian McKiernan and Art Rendak address the biggest issues facing Chicago.

LaTonya Ellis asked the big question during this month’s 18th annual Commercial Real Estate Forecast Conference: Is Chicago, the Midwest’s biggest city, still a major player in the commercial real estate world? Or does the city instead live up to its nickname as a second city, a lesser cog in the world of investment and development?

The answer that Ellis received? It was complicated, with a panel of CRE experts pointing out both the strengths of the city and the challenges that it faces.

Ellis, practice group director for real estate and municipal finance with the Chicago office of law firm Ice Miller, moderated the talk during the big forecast conference held Jan. 9 at the Hyatt Regency Chicago. She led its participants through discussions ranging from Chicago’s powerful infrastructure to the burden the state faces with pension payments to the specter of rising taxes.

Panelists did agree that though Chicago faces challenges, it’s still an important destination for developers and investors. Its commercial real estate market, then, remains a strong one, despite concerns.

Bob Clark, principal, executive chairman and founder of CRG, said that it’s often easy for long-time residents of Chicago to take its positives for granted. He brings an interesting perspective: Clark grew up in St. Louis, and still does plenty of commercial real estate work there. He said that the difference between St. Louis and Chicago is significant.

“We moved our company here to Chicago in 2010. We think that Chicago presents us with an amazing opportunity in the long-term,” Clark said. “We recognize that there are problems here. But every city has issues. The way we look at it is you have to be able to make adjustments. You have to adjust to the market. Yes, the city faces tax issues. There are pension issues to deal with. But even so, I am super bullish on Chicago.”

James Postweiler, executive managing director with Newmark Knight Frank, said that one of the biggest issues developers and investors face when eying Chicago is uncertainty. They know that in the city of Chicago and in Cook County assessments are going up. What they don’t know is how that will impact tax levels.

And it’s that uncertainty that might cause developers and investors to hesitate before targeting Chicago, Postweiler said.

“The big picture goal should be transparency,” Postweiler said. “You need to understand what the tax levels are going to be. If you don’t know that, you don’t know what your net operating costs are going to be. We know that taxes are going to be higher, but we don’t know by how much. Because of this, some buyers want to wait before making any moves.”

Brian McKiernan, senior vice president with CenterPoint Properties, said that this uncertainty hampers Chicago when it is competing for business with, say, a state like California.

“Chicago is always a viable option. That is not changing,” McKiernan said. “But there are some real challenges that Chicago has to solve, and investors know that. Where do you invest your dollars? I know that we aren’t actually pursuing deals in Cook County right now.”

The pension crisis facing the city and state was also a topic of discussion among panelists. Until those problems are addressed, they said, some investors will be leery of sinking their dollars into the city’s commercial real estate market.

Then there is Chicago’s population. It has been shrinking during the last several years, another cause of concern for the panelists.

“Someone has to pay those pension bills,” said Art Rendak, president of Inland Mortgage Capital. “Somehow, some way, that issue has to be addressed. We also need population growth here. Illinois and Chicago need to figure out how to address these issues. There needs to be a plan put in place.”

McKiernan said that there are bright spots for the city, though. He pointed to the efforts being made by new Chicago mayor Lori Lightfoot to root out corruption in the city government. Efforts like these make a difference, he said.

“The crackdown on corruption helps,” he said. “There is at least a movement to get Chicago back to a stable, solid city. It’s really about making sure you get the services you deserve for your taxes. There no easy cures, but the work has to be done.”

The panel did have good things to say about Chicago, too, of course. There was plenty of discussion about the strength of the city’s multifamily market, for instance.

Deaen Giannakopoulos, senior vice president for debt and equity structured finance with Marcus & Millichap, said that this sector will evolve, though, in the coming years. That’s largely because Millennials, who have been so active renting apartment units in the city of Chicago, are growing older.

“Millennials like flexibility,” Giannakopoulos said. “About 60 percent of Millennials are entering their 30s now. There could be a significant move to the suburbs, then, in the coming years as these Millennials start to grow their families. They might want to move to the suburbs and take transit back to the city.”

This means that not only will the demand for multifamily product remain high in the city itself, but this demand should be strong in the closer-in suburbs, especially those connected to the city by train lines.

Postweiler wondered how a migration to the suburbs could impact the Chicago office sector. Today, many companies are opening offices in the heart of the city as a way to attract those young workers who want to live and work in Chicago.

There are plenty of positives to working in the city: Workers are close to restaurants, meeting spaces, bars and entertainment options. This makes those city office buildings attractive to workers, both young and old.

But there are benefits to working in the suburbs, too, Postweiler said. It can be less stressful getting to and from work. It’s easy to park. And developers today are building suburban offices that have the same level of amenities that you’d find in newer Chicago office buildings.

“Developers and companies have to look at the entire labor pool,” Postweiler said. “The labor pool isn’t just about Millennials. A large portion of the labor pool is interested in working in the suburbs.”

Ellis asked panelists to predict which city neighborhoods or communities will emerge as future hotspots for new development. No one had a crystal ball, of course, but several panelists did venture predictions.

Rendak said he expects future development to mushroom out of the West Loop area and into Humboldt Park and Bronzeville.

“The affordability and availability of land could make those areas attractive alternatives to Fulton Market,” Rendak said.

On the industrial side, McKiernan said that the O’Hare market will remain busy. He also said to expect more construction and development in DuPage County. And just over the Illinois border into Wisconsin? That’s an attractive area to developers who want to build close to Chicago but want to avoid Illinois politics and problems, he said.

Giannakopoulis said the O’Hare market will be strong for office sales and construction. That market has long been tight, he said, and is showing no signs of slowing. He also said to expect significant new office construction in the areas surrounding Oak Brook Mall in the suburb of Oak Brook.

Clark pointed to the Motor Row District on Chicago’s Near South Side. This area is ripe for new development, Clark said. He also said that he expects more new development in Chicago’s Hyde Park neighborhood.