What stood out most for Chicago’s commercial real estate industry in 2019 was not downtown’s robust office market, the continuing strength of multifamily properties or the seemingly unstoppable rise of the distribution and logistics sector — all long-term trends — but the political earthquakes that struck the region.
A wave of populist anger swept out of office a host of politicians seen as business-friendly, and ushered in a group of reformers determined to change the ways both city and state were run. Cook County Assessor Joe Berrios was the first to go, ejected by voters a little over one year ago in favor of former money manager Fritz Kaegi. Illinois Gov. Bruce Rauner left office shortly after, replaced by billionaire businessman J.B. Pritzker.
Not every progressive goal set forth in last winter’s campaigns was reached. As a candidate, Lightfoot denounced the deals made by Emanuel to secure public tax increment financing for massive mega developments such as Sterling Bay’s Lincoln Yards and Related Midwest’s The 78, which will radically expand the boundaries of the Central Business District.
“These megaprojects are going to utterly transform parts of our city, when frankly we’re not investing in other parts of our city, and we have no idea what the impact on infrastructure, transportation and schools will be,” Lightfoot said during a campaign event at The Hideout, a popular music club near the Lincoln Yards’ site. As mayor-elect, however, she relented, and withdrew her opposition to holding votes on the tax increment financing deals. Aldermen then approved in April the Lincoln Yards proposal by a vote of 32-13, and The 78 by 31-14.
Moves like that, showing a flexibility toward development issues, have kept many big commercial real estate players optimistic that Lightfoot is someone they can do business with in 2020, even if few supported her candidacy. The possibility of rent control was another bogeyman confronting commercial real estate in 2019 that never quite materialized.
Although Pritzker expressed support on the campaign trail for repealing the state’s Rent Control Preemption Act, which would have allowed municipalities like Chicago to impose controls, the proposal never made it out of the legislature.
Another key piece of legislation that failed to become law, but will certainly appear on the legislature’s to-do list next year, was Kaegi’s so-called data modernization bill, which would require commercial property owners to submit data on rental rates, occupancy levels, concessions, net operating income and other benchmarks.
Kaegi said his office needs this information to accurately assess the true value of county properties and reach his overall goal of rebalancing the tax burden between commercial property landlords and the homeowners who voted him into office. Building Owners and Managers Association of Chicago and other trade groups came out against Kaegi’s proposal, and said owners need more time to absorb what the legislation will mean.
“We don’t see the need to rush these wholesale changes,” BOMA/Chicago Executive Vice President Michael Cornicelli said. “I think he should take it much slower.” The proposal never made it to the governor’s desk, but that political battle will restart in 2020, and both Kaegi and Lightfoot, who strongly supports his proposed reforms, are making a big push to win over commercial owners.
Last week the two held a joint presentation on Kaegi’s plans for the coming year, and said reforming the county’s methods will eventually draw in out-of-state investors, many of whom, they contend, avoid the county due to its idiosyncratic property assessments. The leaders have a lot of work to do before they can win over the region’s major landlords. Kaegi’s office this year completed the scheduled reassessment of the county’s northern suburbs, and the results did not assuage any fears.
The assessor valued Evanston’s 80-unit Central Station apartment building at $31.6M, more than double its last assessment, Crain’s Chicago Business reported in April. Amli Evanston, a 214-unit building, saw its $25.7M value triple to $74.5M. Still, the actual taxes owed on each property won’t be known until next year, when municipalities and other taxing bodies set their rates.
The southern suburbs will undergo a scheduled reassessment in 2020, but Chicago, including its CBD, isn’t up until 2021. Chicago real estate leaders say they remain worried about property taxes, especially as they are already rising, even before the new assessments kick in.
According to a June study by Cook County Clerk Karen Yarbrough, taxes paid by property owners in Chicago’s central region would go up 9.7% this year. That unsettles people like Thomas Scott, founder and CEO of CA Ventures, a Chicago-based investment company, who told Bisnow in November that uncertainty is the thing investors hate most of all. “I am not complaining about paying taxes, I’m complaining about the surety of what those taxes are going to be.”
What now worries the commercial real estate community more than the new assessments is the impact the changes may have had on investment volume. In many ways, the Chicago region maintained its reputation throughout the year as a vibrant market, one that can promise higher returns than coastal areas like New York City, Boston and Seattle, but investors began avoiding the city’s office properties. At the year’s halfway point, investment sales totaled just $244M, a 20-year low, according to a July report from MBRE.
It is difficult to pin down precisely why investors shied away, as most are reluctant to openly discuss their decision-making process, but according to a Real Capital Analytics study, the decline was far more severe in Cook County than the surrounding region, although most Chicago-area counties also experienced some drop-off in new investment. Some bright spots appeared in the latter half of 2019.
The disclosure that German investor Commerz Real AG was in exclusive negotiations with Sterling Bay to buy its Fulton West development at 1330 West Fulton St. for about $175M, first reported in August by Crain’s, was a shot in the arm for the local office investment sector, and showed its underlying fundamentals, especially in rising neighborhoods like Fulton Market, may override whatever concerns exist about taxes. Commerz Real AG’s Gerd Johannsen told Bisnow company officials would not comment on any tax issues. “But we see Chicago as an attractive market because of its healthy fundamental data,” he said. “The real estate market is benefiting from a strong influx from the surrounding region.”
Researchers looking at the demand drivers for downtown Chicago’s office and residential markets see tremendous reasons for long-term optimism, as corporations like Salesforce, Google and Uber keep migrating to the city, bringing thousands of affluent workers that need housing in their wake.
Other big sales began appearing in the fall. Spear Street Capital, a San Francisco-based investor, is ready to plunk down between $415M and $425M, or about $440 per SF, for 500 West Monroe St., a 967K SF tower owned by Piedmont Office Realty Trust, Real Estate Alert reported in October. Crain’s then reported that Beacon Capital Partners, a Boston-based firm, will buy the 40-story 190 South LaSalle St. for about $230M.
Whether these deals mean investors are ready to make it rain, and end the city’s office investment drought, is hard to judge, but The Howard Hughes Corp. was confident enough to put its 110 North Wacker Drive on the market for sale. The company is streamlining its operations and unloading what it calls non-core assets, including the 1.5M SF 110 North Wacker, in the next 12 to 18 months. When completed late next year, the 1.5M SF building, developed with Riverside Investment & Development, will be Chicago’s tallest new office tower in 30 years. Tenants have already agreed to occupy about 1M SF, Howard Hughes officials said.
Other political shake-ups occurred throughout the year, opening up remarkable opportunities, while possibly closing off others. The state created an entirely new industry during the spring’s historic legislative session by legalizing recreational cannabis starting Jan. 1, setting off a deal-making rush among medical marijuana cultivators looking to expand, and a months-long scramble to secure Chicago retail properties where providers could sell the new product.
Lease negotiations between cannabis companies and landlords across the city will intensify in the new year as providers try to beat their competitors to market and meet Chicago’s stringent zoning requirements. “It’s going to be the Wild West out there as we figure out who is going to go where over the next few months,” The Lord Cos. President and Managing Partner Keith Lord said.
“It’s about the biggest thing since the repeal of Prohibition.” Another sweeping change was a major reworking of the city’s building code, the first such undertaking in 70 years. A pet project of Emanuel, the move easily secured City Council approval in April, after winning support from a broad cross-section of stakeholders, as well as the new Lightfoot administration. The ordinance aligns the city’s construction requirements with the most up-to-date national standards, and BOMA/Chicago’s Cornicelli said this should help make construction more affordable starting in 2020 by allowing the use of a wider range of materials and technologies, as well as make it easier for outsiders to work in the city.
Amidst all these new prospects, the power of the city’s reform forces to hamstring the commercial real estate industry was felt again in late summer. After a string of lucrative condominium deconversions in 2018 and 2019, which multifamily investors used to transform condo buildings into apartments, activists, who worried about getting displaced from their homes, convinced the City Council to tighten the requirements.
In 2020, investors will need to secure approval from 85% of a Chicago building’s condo owners, instead of the state requirement of 75%, to buy and deconvert a building. The same activists say they will push for more reforms in 2020, such as limits on the number of non-residents that can buy up units in a condo building, one method multifamily investors had used to help reach the 75% threshold.
The promise, or depending on your point of view, the threat, of more reform is a reminder that the currents that swept Lightfoot, Kaegi and Pritzker into office are still powerful, and will shape the industry in 2020 and beyond. The City Council’s Black Caucus on Wednesday, for example, nearly upended the legalization of recreational marijuana. Unhappy that there are no African American owners among the cannabis companies set to open for business in 2020, black aldermen forced a vote after a furious morning debate on whether to delay the sale of recreational cannabis until July.
The mayor and her allies beat back the attempt, but it may be a sign of things to come in 2020. Continuing pressure from activist groups also pushed Lightfoot to appoint a new 20-person affordable housing task force charged with overhauling the city’s Affordable Requirements Ordinance, a law that has met criticism from all sides, and requires private residential developers that need zoning changes or receive city money to set aside 10% of the total units as affordable housing, or pay an in-lieu fee to the city.
The task force will propose changes to the ARO in the next few months, and there is little doubt it will push developers to help create more affordable housing. “In an ideal world, we could use the ARO as leverage to get private developers to create more affordable units, but without discouraging new development,” task force co-chair Juan Sebastian Arias of the Metropolitan Planning Council said. “The question is, where is that sweet spot?”