By Don DeBat

26-Nov-23 – Despite high interest rates and an ongoing negative political environment, Chicago’s real estate market will survive and thrive in the near future.

That’s the prevailing message sent at the Lincoln Park Builders of Chicago’s 34th annual real estate industry forum. The event, held November 16 at Theater on the Lake on Lincoln Park’s waterfront, attracted nearly 1,000 upbeat and enthusiastic real estate professionals.

“In today’s dialogue, development is blamed for higher taxes, unaffordable rents, resident displacement, and pillaging of neighborhoods,” said J. Michael Drew (left), founding principal of Structured Development, LLC. “It is cited as a primary contributor to the widening wealth inequality of today.”

Mayor Brandon Johnson’s proposed increase in the Chicago transfer tax on properties sold for $1 million or more – a measure that the City Council will send to voters to decide in the March 2024 election – is high on the list of problems worrying the industry, Drew said.

While highlighting points of contention between real estate and Chicago’s increasingly powerful progressive, Democratic-Socialist political machine, Drew pointed out where the industry has opportunities.

“The real estate industry can no longer be reactionary to such initiatives,” noted Drew, a 40-year development veteran who received at the forum the Lincoln Park Builders’ Impact Award for lifetime achievement. “Developers should focus on compromise with the industry’s political opponents and prove real estate shouldn’t be vilified.”

Drew advised the industry to be proactive in addressing Chicago’s issues, insist on input and collaboration with policymakers rather than confrontation, provide the financial data to support the industry’s position and contribution to its economy, and find alternative pathways to fund today’s social equity challenges.

“Change the dialogue from the development community as the problem and redefine it as part of the solution,” Drew said. “The future of the city and its neighborhoods may well depend on a new and better way of messaging and addressing the challenges ahead.”

Are rents rising to NYC levels?

Keynote speaker Ron DeVries, Senior Managing Director of Integra Realty Resources, reported that Chicago’s real estate prices continue to rise, while sales volume is “crushed in the single-family residential market.”

DeVries (right), who oversees the quarterly research of rental and occupancy rates for more than 150,000 apartments in the Chicago area, noted that “residential rent increases in Chicago are running just behind New York City.” Meanwhile, the vacancy rate in downtown Chicago office space is nearly 50 percent, he said.

On the positive side, in 2023 – for the seventh year in a row – Chicago was voted the “Best Big City in the U.S.” by readers of Conde Nast, a New York-based global mass media company.

Forum moderator Steven Fifield, Founder/CEO of Fifield Companies, noted that Chicago is the nation’s leader in the amount of distressed commercial real estate loans in any city. Because cash flow is down so much, “the delinquency rate is running at nearly 23 percent,” he said.

“Downtown Chicago office buildings have lost 60 percent of their market value,” said Fifield (left), because of sky-high interest rates, COVID, and continued work-from-home. “Capitalization rates downtown now are 6 percent, up from 4 percent,” he says, indicating rising lender risk.

Panelist Matt Garrison, CEO of Chicago-based R2 Companies, disclosed that his firm is working to close on the purchase of the 41-story office tower at 150 North Michigan Avenue at a huge discount from the more than $150 million that seller, CBRE Investment Management, injected into buying and upgrading the property.

Office building mortgage holders on properties that are at least 80 percent leased and generating revenue are willing to extend debts, but capital from commercial mortgage-backed security lenders for an office acquisition “basically doesn’t exist,” Garrison said.

Apartment rents on the rise

“Multi-family residential values currently are less than the cost to build new apartments,” noted panelist Frank Campise, principal and head of acquisitions for JAB Real Estate.

However, rent growth has been strong lately, said Campise (right). He attributed the trend to the city’s 2021 implementation of a new Affordable Requirements Ordinance, which mandates developers dedicate at least 20 percent of units in new rental projects as affordable housing.

That’s slowing down new development and thus supply, said Campise, so rents have more room to grow than they would under previous conditions.

Panelist Corey Oliver, CEO of Strength in Management, predicted “there’s going to be a lot of investment opportunities in South Shore, Woodlawn, Bronzeville, and Auburn Gresham. Some speculators are going to start losing their properties over the next 18 months.”

On a more positive note, Fifield predicted that interest rates will come down 150 basis points in the next 12 months, pushing benchmark 30-year fixed mortgages to 5.79 percent from the current 7.29 percent.

On November 22, the Freddie Mac Primary Mortgage Market Survey reported that 30-year conforming residential fixed-rate loans declined to 7.29 percent from 7.44 percent a week earlier. A year ago, the 30-year fixed loan average was 6.58 percent.

“In recent weeks, mortgage rates have dropped by half of one percentage point, but potential home buyers continue to hold out for lower rates and more inventory,” noted Sam Khater, Freddie Mac’s Chief Economist. “This dynamic is reflected in the latest data showing that existing-home sales nationwide have fallen to a 13-year low.”

Despite the general gloomy outlook on the Chicago real estate market, the Real Estate Forum panelists generally forecast a recovery within 18 months. Interest rates eventually will come down, apartment rents will rise, and the market will rebound, the forum concluded.