May 13, 2019
At the Connect Chicago event taking place on May 14, Podolsky Circle CORFAC International’s Alissa Adler will moderate a panel discussion on the impact of M&A activity on commercial real estate. In advance of Tuesday’s event, we asked Adler to assess the state of Chicago real estate from her vantage point as a senior-level CRE executive.
Q: What impact is the development/redevelopment push in Chicago and the region making on investment sales?
Alissa Adler: Certain areas are more impacted than others. In up-and-coming redevelopment areas in the city, such as Fulton Market and Pilsen, properties that have flexible zoning or are in a position to be combined with other properties for a bigger land assemblage command the highest pricing and investor interest. In some cases, investors will do what is called a covered land play where they will buy an income-producing asset and hold it until the time is right to redevelop. In other areas, such as O’Hare industrial, developers look for older, non-functional industrial buildings that typically sit on five or more acres for future tear-down and redevelopment. Pricing has been very solid for property that can benefit from this trend and we don’t see that stopping any time soon.
Q: Is Podolsky Circle seeking an uptick of development- and redevelopment-related transactions across its service lines, including leasing and development management along with investment advisory? If so, what factors are driving this?
Adler: Everyone talks about “experiential” real estate being in demand to replace vacant retail. De-malling and converting into other product types such as medical, health club, or multi-family are some of the uses we are seeing on the retail front. For office, we are seeing distressed and 1980s-vintage buildings being updated with new mechanical systems, technology and co-working spaces to attract tenants. And in the very hot industrial sector, heightened re-development activity along with healthy new construction has caused a shortage of labor and materials which in turn has caused construction pricing to rise.
Q: More generally, you have had a high-level and wide-ranging view of the Chicago/Midwest real estate sector over a few cycles now. Is it a fair statement that the Chicago region has been less volatile than the broader U.S. economy during that time?
Adler: In general, the Midwest has always been a low-growth but relatively stable investment alternative. Coastal investors see Chicago as a diversification strategy and a way to capture higher returns. Rent growth will likely remain flat, with the exception of certain pockets, because we lack high barriers to entry and have an abundance of developable land. On the positive side, the Midwest tends to not be overbuilt and benefits from wide range of industries, great highway and rail access, and a strong educated labor pool. The Chicago region may be less volatile, but the impact of state politics and the uncertainty of Cook County taxes has pushed some investors out for the foreseeable future.
Q: Has Chicago real estate also been more resilient compared with some other markets?
Adler: The industrial market has stayed strong and saw very little downturn during the recession. The resurgence of manufacturing has also been beneficial to the Chicago area. The CBD office market has seen controlled development, and some older product has been converted to student or senior housing which has also helped bolster occupancy. Suburban office still has an above average amount of vacancy, and while the metrics have improved, this sector will be negatively impacted in another downturn. The discipline of developers and lenders has curtailed new construction, and that has contributed to the resilience in the market across all product types. In terms of pricing, Chicago real estate has been more resilient than many other Midwestern cities that don’t draw institutional or foreign investors, but has lagged far behind many of the coastal markets.
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