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Chicago Real Estate Market in Flux

by Philip Utterback, Chicago, August 2020

 

All segments of the Chicago commercial real estate market are being impacted by the COVID-19 pandemic. Hotels, retail stores, and office buildings are suffering the most while some industrial properties seem to be booming, according to a recent article published in Crain’s Chicago Business.

 

Hotels

 

With conventions and other big events being cancelled to slow the spread of the virus, many hotels have been sitting empty for months. Average daily room rates in mid-June were down 55% year-over, according to data from hotel research firm STR.

 

Some hotel owners whose properties have closed in recent months are trying to determine when it makes financial sense to reopen. Others are facing the possibility of defaulting on their loans. Trepp research reported the delinquency rate on commercial mortgage-backed security (CMBS) loans secured by Chicago-area hotels surged to a record 50% in June, up from 33.5% in May and 2.5% in April.

 

Retail

 

When stores and restaurants were closed by government mandate, many retailers asked their landlords for rent relief, while others just stopped paying their rent. Stores were allowed to reopen at the end of May, but it has been difficult to attract customers who are out of work or fear getting sick.

 

Prominent retail chains like J.C. Penney, Neiman Marcus and J. Crew filed for bankruptcy and many companies like Starbucks have closed hundreds of their stores.

 

Office

 

Companies have been forced to have their employees work from home during the pandemic and many are finding it to be a productive alternative to the regular 9-5 office job.

 

It is bad timing for the market, which has 6.5 million square feet of new offices under construction, less than half of which have been pre-leased, according to CBRE.

 

Tenant representation firm Savills reported that in the second quarter, office leasing activity fell 75% from the first three months of the year. Some landlords who were hunting for tenants before the pandemic are now facing questions about whether they can even hold on to their properties.

 

Apartments

 

Rents and occupancies are falling in many places - a trend that is likely to continue. Some young professionals who moved back in with their parents may not renew their leases, opting to stay put until the pandemic eases or the economy improves.

 

By mid-May, the average net rent at a downtown apartment building had already fallen more than 7% from a year earlier, according to Integra Realty Resources.

 

Industrial

 

With house-bound consumers buying more items online and less at brick-and-mortar stores, the logistics firms that distribute goods are staying busy. These companies are dependent on industrial warehouse space.

 

Industrial vacancies are at 6.42%, near the lowest point since 2001, according to the Chicago office of Colliers International. Trepp reports the delinquency rate for CMBS loans on Chicago-area industrial properties was just 2.2% in June, down from 4.6% a year earlier.

 

As an indication of the area’s strong industrial market, CenterPoint broke ground April 1 on a one million-square-foot warehouse in Joliet, southwest of Chicago without securing any tenants in advance.