The office market may not be as robust as other asset classes, but ‘it’s not dead’
The Chicago Market doesn’t get rave reviews these days, with one neighborhood being a notable exception.
“When you look at Chicago, it’s hard to underwrite projects except on Fulton Market,” said Daniel Haughney, chief investment officer of LG Development Group, on Thursday. Bisnow’s Chicago 2022 forecast event.
Rahul Shah of Sherpa Capital Group, Daniel Haughney of LG Development Group, Jason Lewis of UBS Realty Investors, Chris Metcalf of Inland Bank & Trust, Vicki Noonan of Cushman & Wakefield and Evanston Mayor Daniel Biss.
Developers began creating SF millions in new offices in the former meatpacking district just before the pandemic hit, and while most of those buildings have gone vacant, 2021 has seen relatively strong rentals. And with young professionals continuing to take an interest in the neighborhood, apartment developers have also continued to launch new towers there.
This activity has also brought its streets back to life, according to Vicki Noonan, managing director of Cushman & Wakefield.
“There are more and more restaurants opening every day, and they are thriving and succeeding,” she said.
But it’s hard to see a similar dynamism at work elsewhere in the city, Haughney said. There’s a litany of concerns that make new investments in Chicago properties seem risky, from worries about the financial health of state and city governments to perceptions of crime and the city’s strict rules on inclusion. of affordable housing in many new developments.
Cities across the United States have the same challenges, he added. But many of these places are also showing much higher rent increases than Chicago, a city known for its slow and steady growth.
Multifamily opportunities exist in Chicago if you look closely, even outside of Fulton Market, according to Chris Metcalf of Inland Bank & Trust. His group does a lot of rehabilitation deals worth between $2 million and $15 million and found that such deals would translate.
“You get a decent base when you’re not building from scratch,” he said.
Still, Metcalf was cautious about investing in Chicago, adding that it takes more to get a deal done than making the numbers work.
“We also ask: ‘Who are the people behind a project, and do we believe in them?’ “, did he declare.
Brian Rogal of Bisnow and Cook County Assessor Fritz Kaegi
Noonan said the coronavirus makes it difficult, at least in the short term, to see the highlights of Chicago neighborhoods outside of Fulton Market. In-person occupancy of downtown offices remains below the national average, and the performance of these buildings is still unclear. But she is optimistic that a return to the office is inevitable.
“What we’ve learned is that a hybrid work environment can work, but it doesn’t help the next generation grow. In person is required,” she said.
The key, she added, will be for landlords and tenants to make offices as attractive as possible, with full suites of amenities and ways to provide young employees with the opportunity to interact with all the colleagues they know. they may have only met via Zoom calls.
“You have to ask yourself, ‘What can we do to make sure people get in?’ said Noonan.
Haughney said his company is now seeing in-person office occupancy between 75% and 80%. That’s a big improvement from a year ago, and with the new hybrid work schedules, it could be as high as it ever will be.
“We landed where we think we’re going to go,” he said.
And that level of occupancy doesn’t necessarily mean huge reductions in rented amounts, Noonan said. Before the pandemic, trendy office designs emphasized strategies such as benching, which reduced the amounts allocated to each person. In the years since, many tenants have said they’ve taken this strategy too far and are now looking to increase rented amounts by including more collaborative spaces, moves that should give many landlords hope.
“Desktop is definitely not as robust as other asset classes right now,” Noonan said. “But it’s not dead.”
Scott Goodman of Farpoint Development, Thomas McElroy of Level-1 Global Solutions, Damian Eallonardo of WE O’Neil Construction, Peter McEneaney of Thor Equities, Elbert Walters III of Powering Chicago and Molly Phelan of Siegel Jennings.
Haughney said he also expects the rest of downtown Chicago outside of Fulton Market to rebound.
“In the short term there is going to be pain, and eventually Fulton Market will be a winner,” he said.
But at some point, he added, Fulton Market will run out of available inventory and other submarkets will start to attract their share of new tenants.
Evanston Mayor Daniel Biss said one of the biggest issues facing Illinois and Chicago is perceptions. The area looks great whenever it’s compared to other Midwestern metros, especially as a talent mecca, but long-held opinions of its fiscal stability mean it suffers compared to places like than the Bay Area.
“There’s the perception that the Midwest is a declining region,” he said.
But these attitudes have sometimes not kept pace with reality. Biss said there have been real improvements in the state’s financial health in the past five years alone.
Bond rating agency S&P Global, for example, released a state report a year ago titled Is Fiscal Stabilization on the Horizon for Illinois? Shortly thereafter, the agency changed its outlook for Illinois to stable.
Haughney said the region has other strengths as an investment market that sometimes go unrecognized. It’s less risky for multi-family investors to park their money here because new stocks are typically only 1% of the total, whereas in a hot city like Nashville, Tennessee, where growth and returns can be much higher, new stocks can reach 15% of the market.
He added that he talks about the benefits of investing in Chicago wherever he goes.
“It’s important to spread the word, and the tide is turning,” he said.