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Ahead of the CRE Forecast, a look at Chicago in 2019

CRE Forecast preview: Nieman and McShane share some early insight,ph1

When the 850 or so expected industry professionals pour into the Hyatt Regency Chicago on Jan. 8 for the 17th annual Commercial Real Estate Forecast Conference, they’ll hear from dozens of experts about where the market is headed in 2019. We reached out to two of the speakers, Molly McShane and Drew Nieman, for a preview of what they feel the year has in store for us.

Looking ahead is pointless without context. So how would these two characterize the overall commercial real estate markets in the year that was 2018?

“Highly competitive—both from a developer’s perspective on starting new deals and from an investor’s perspective on asset pricing,” said McShane.

McShane was recently promoted to chief operating officer at The McShane Companies and she will be a panelist on the State of the Market panel at the Forecast. Nieman, an executive vice president in CBRE Chicago’s agency leasing group will speak as part of a new and timely panel, Chicago: A River Runs Through It, which will delve into the recent activity and growth along the Chicago River.

“2018 was a very good year,” said Nieman. “We had a new tower launch at 110 N. Wacker Drive and two more towers were announced recently at Wolf Point and Union Station. We saw the continuation of firms migrating from the suburbs to downtown and national tech firms expanded in Chicago at an impressive rate. All of this has helped offset the consolidation in the financial and legal industries, as they look to densify space.”

The Wolf Point project is the new Salesforce Tower; CBRE was instrumental in bringing the tech firm to Chicago. At Union Station, BMO Bank will take naming rights and occupy a new office building adjacent to the iconic rail hub.

“I think there will be a lot of activity in 2019,” said Nieman. “With two new towers just launched and 110 W. Wacker actively leasing, there is clearly a lot of demand for new space and I think users will continue to look at these projects. It will be more competitive, but all of these projects are delivering at different times. With the staggered delivery, there should be enough activity to sustain them all.”

McShane shares Nieman’s optimism, though she is a bit more reserved. She indicated a number of factors that have the potential to hasten the end to this development cycle.

“2019 looks good, but nobody is predicting too far beyond that. Right now the demand drivers for industrial real estate are still strong, and debt and equity capital remain available,” said McShane. “The geopolitical risk environment is a bit concerning; trade wars would hurt. Also the continued increases in construction costs and land prices make many deals hard to pencil out.”

That said, there’s no denying the near-historical performance of one asset class, nor is there reason to assume it will slow anytime soon. “I believe well-located, well-designed industrial facilities will continue to be highly sought-after investments,” McShane said.

The Chicago metro had a 2018 that was respectable by just about any metric. However, the region suffered a blow when Amazon split its HQ2 sweepstakes between two East Coast markets and again when Apple announced a $1 billion investment into a new Austin campus.

For her part, McShane was not surprised by the loss of HQ2. “Chicago is a great market to work and live in, but our fiscal situation eliminates us as a good option for a lot of groups,” she said.

It’s hard to ignore the fact that, while Chicago will always be the heart of the Midwest and has ably attracted corporate relocations from the suburbs and second-tier markets, large-scale firms seem to be scared off on making massive investments here. Nieman, however, remains bullish on Chicago’s ability to attract hyperscale users.

“I think large firms are seeing the overall occupancy cost benefits in Chicago when compared to the coasts,” said Nieman. “The costs are significantly lower and we have an excellent workforce. We have seen some big expansions from national tech firms in the last year and I think national users will continue to see Chicago as a place to expand.

One thing that Nieman finds interesting when it comes to the downtown office market is the fluctuation of the downtown core. The very definition of what the center is and the boundaries are of the Chicago CBD has shifted over time.

“When I started, the epicenter was considered Madison and Monroe and then it expanded to Wacker. Now, we don’t really know where Main and Main is,” Nieman said. “We have seen Fulton Market expand rapidly and it still has room for growth. River North has become a major destination. We also have these new megaprojects—the 78, Lincoln Yards and the Chicago Tribune site on the North Branch.

“All of these projects are pushing the boundaries of the traditional office market,” Nieman continued. “There is a lot of infrastructure improvement that is still needed to make these a reality, but they are exciting projects and it has been very interesting to watch the evolution of the market.”

The question on everyone’s mind this late in the cycle is how much time do we have left? Nobody wants to be caught celebrating a bull market as the bear’s shadow overtakes them.

“There’s a ton of runway left—we just have to be smart about where we play,” said McShane. “It’s not evenly distributed. I think being volume-driven at this point is a risky strategy.”

“Outside of a global downturn that is out of our control, I feel good about Chicago and optimistic that 2019 will have more than its fair share of activity,” said Nieman. “The only thing that is a question mark about 2019 is the mayoral transition. There are a lot of candidates and they have varied opinions on Chicago and development as to what is important. The eventual winner could affect activity. We will just have to wait to see how.”

Click here to register for the 17th annual Real Estate Forecast Conference to be held Jan. 8 at the Hyatt Regency Hotel in Chicago.