Chicago Has a Resilient Commercial Real Estate Market
The skyline glistens with the Central Business District’s high-rise office and residential towers. The downtown’s surrounding neighborhoods are home to local businesses and retail tenants, and the suburbs are abundant with innovative warehouses and amenity-rich office campuses. Like the rest of the world, Chicago’s real estate market has been impacted by the pandemic. While some property types like industrial and multifamily came out on top, the entire market has been fundamentally changed.
The industrial market thrived over the past few years, entrenching Chicago as a national industrial powerhouse coming out of the pandemic. Industrial vacancy rates have consistently reached record lows quarter after quarter, as demand for new products and rent growth have both risen to record levels. In fact, in the last three years, asking rents have grown almost 10% according to Newmark’s historical data. Taking rents increased even more significantly, up by 24%. As supply rushed to keep pace with demand, a backlog of proposed new construction accumulated when supply chain issues caused a shortage of building materials. As supply chain issues have eased, the volume of properties under construction has grown to the highest levels in over 25 years.
Chicago’s office market vacancy rates rose as workers packed up their monitors and headed home to work remotely. While Kastle Access Control System Data shows occupancy levels have consistently increased over the last 12 months, it is currently only 50% of pre-pandemic levels. Owners continue to strategize with how to fill record levels of sublease space. While they have been able to hold steady on asking rental rates and getting creative with incentives, tenants have been hesitant to make decisions about their space and are committing to a smaller footprint. The work-from-home movement, already stirring pre-pandemic, has become the largest hurdle to the full recovery of the office market as employees demonstrated a strong preference for a hybrid work week. The increasing popularity of hybrid work has cemented the pre-pandemic trend of demand for amenity-rich Class A buildings to recruit and retain top talent.
Chicago’s retail market has experienced a resurgence after retail action came to a halt in 2020. Suburban retailers saw some of the strongest rebound activity supported by their residents and a spike in people purchasing large home items and starting home improvement projects. Oakbrook Center in Chicago’s western suburbs, one of the first ‘lifestyle’ shopping centers in the U.S., came out of the pandemic 100% occupied. Popular urban neighborhoods where high-income residents live have also recovered. Tourist areas such as Michigan Avenue and State Street had a slower recovery as foot traffic still has not returned to pre-pandemic levels. In 2022, consumers spent the most on food, beverage and apparel; suburban hotspots are seeing a larger portion of this spending than urban locations. Leisure and hospitality employment has also made a full recovery from pandemic losses.
In the past several quarters, the multifamily market has seen a rebound after the initial hit from the pandemic. As workers returned to the office, single-family home prices hit record levels with interest rates continuing to rise. Demand for downtown apartments pushed the market to record rent growth levels for existing space, increasing 5.8% year-over-year, 32 basis points over the 5-year average. Multifamily capital markets have always been sensitive to the debt markets, which has created a slower start to 2023 as interest rates rise. Despite this sensitivity and supply chain issues related to construction materials, investors and developers are showing confidence in the Central Business District multifamily market, and the development pipeline is currently 72% of the existing inventory. The suburban market has been less vulnerable, and given the investments being made in the market, the appeal of Chicago’s multifamily sector will rebound quickly.
Across the country, concerns over economic headwinds have resulted in transaction slowdowns. Thanks to the diversity within the Chicago economy, the market will likely be able to avoid any major peaks and valleys brought on by a slowdown. Locally, there are several challenges facing the commercial real estate market including population loss, high taxes, increasing interest rates coupled with slowing economic growth, and high crime rates. These concerns contribute to a slowing demand from tenants and give investors a reason to hit pause. While some segments like retail and industrial have maintained investor interest, the office market is facing a correction, particularly for obsolete suburban properties. As an established global real estate leader, Chicago is bound to have challenges, but the city will always recover. The first half of 2023 is expected to be a bit bumpy, but Chicago will be well prepared to face whatever gale force winds come our way, thanks to resiliency from those living in the windy city.