CHICAGO—While commercial real estate professionals in Chicago still believe the local real estate market is strong, uncertainty mainly over state and local tax issues are causing some to take a more bearish view of the Windy City's fortunes going forward.

In the Second Annual Chicago Mid-Year CRE Sentiment Report produced by The Real Estate Center at DePaul University, approximately 52% of participants—down sharply from 69.8% a year ago—characterize the Chicago real estate market for the first half of 2019 as consistently strong.

“In general, CRE professionals in Chicago want to be optimistic that there is plenty of strength and momentum left to keep the cycle moving forward,” says Charles Wurtzebach, chair, department of real estate and Douglas & Cynthia Crocker endowed director, the Real Estate Center, DePaul University. “Yet there are concerns and obstacles that can't be overlooked; they are impacting market sentiment.”

Among the report's findings were that CRE professionals that are bullish on the markets dipped from 31% in 2018 to 29% this year. While still in the minority, CRE professionals who are bearish on Chicago's future economy rose sharply from 4% to 20% during the same period.

A total of 62% of survey participants noted that the Chicago real estate market is either consistently strong or strengthening. “There is strength in the market, and growth. Leasing activity is strong, concessions are manageable and owners can be more proactive,” says Michael Newman, president and CEO, Golub & Co. “Attitudes are generally positive, but they can get and do get tempered when various other factors specific to the city, the county or the state get factored in.”

One area of concern is the level of speculative development in the region, particularly the suburbs. “Additional concerns, prevalent in both the downtown office and in pockets within the suburban industrial market, is the level of speculative development taking place. “There are some concerns,” says Brian Atkinson, managing director, Hines, specifically noting the level of spec space in the Fulton market area. “The space is not pre-leased and is being marketed at a rental rate that is higher than a typical Fulton Market rents. The question is how does it impact the momentum of that market, and what is the trickle-down effect in the CBD?”

A total of 97% of participants say state and local financial/government issues are impacting the markets in Chicago, although most note that it is too soon to determine the impacts a new governor and Cook County Assessor are having on the commercial real estate market in Chicago.

Approximately 98% of survey participants say local issues—the financial position, property tax and transfer tax increases and the potential implementation of a progressive income tax—are having an impact on real estate activity in the Chicago area. Of the 98%, 70.8% say those issues are hurting activity while 27.1% say the impact has been at least nominal, DePaul states.

“We're unique in Illinois, and in Cook County, because of lingering financial issues,” says Shane Garrison, chief operating officer and chief investment officer, RPAI, says “It is a significant structural problem.”

Garrison notes that if Chicago were one of 20 potential markets for acquisitions on a long-term basis, almost all of the competing markets are more appealing than the Chicago metropolitan area. He believes three factors are causing that dim view of the city: the potential for a progressive income tax, an increasingly inordinate property tax burden and the potential in the multifamily sector for rent control measures.

“You can't tax yourself out of problems. It's not a good equation,” Golub & Co.'s Newman says.

Instant Insights /

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