When it comes to real estate, Chicago isn’t one of the cool kids anymore.
The local real estate market ranked 49th out of the 79 biggest U.S. real estate markets in the annual “Emerging Trends in Real Estate” survey, down from 42nd last year and 19th the year before. The survey of investors, developers and lenders didn’t trash Chicago but found better investment opportunities in faster-growing metro areas like Dallas, Denver and Nashville, Tenn., which were all in the top 10.
Wherever they put their money, survey respondents were cautious about the direction of the broader market, wondering how much longer the good times will last. They’re not bracing for a bust, but they can’t see the market going much higher, either.
“ ‘Coming off a peak’ seems to be a theme,” says the report by PwC and the Urban Land Institute. “One major institutional investor whose base case is for a continuation of the upcycle acknowledged, ‘We are adjusting a little bit right now.’ But most interviewees express the opinion that coming off peak does not automatically mean a sharp correction. Plateau is a word often used regarding expectations.”
After a prolonged run-up in commercial property prices, the easy money has already been made, especially with interest rates on the rise. But as long as the economy continues to expand, demand for commercial space will stay strong, supporting occupancies and rent hikes. With the exception of retail, the major property sectors are in good shape in the Chicago area, though swelling development pipelines pose a threat to the office and apartment markets.
Investors also like Chicago because properties here offer better returns than those in other big cities, like New York.
“Chicago remains an attractive gateway market for investment, and interest appears to be on the rise as other gateway markets become increasingly expensive,” the report says.
But Chicago just isn’t as exciting as the top five markets of Dallas, Brooklyn, Raleigh/Durham, Orlando and Nashville, according to the survey. The Chicago area trailed Los Angeles (14), Washington, D.C. (18), Manhattan (32), and San Francisco (41). Based on interviews with 750 people and survey responses from 1,630, the report covered 79 urban areas. Hartford, Conn., came in last, behind Buffalo.
As investors perceive a real estate boom losing momentum, many will pull back to big markets, believing their money is safer there. But the survey suggests they are more focused on growth than safety.
“As the economy and real estate expansion prepare to stretch into another year, the market does not feel the need to get overly defensive and move into markets that are often perceived as safe havens in a down market,” the report says. “In fact, the opposite is true to a certain extent. An institutional portfolio manager offered, ‘At this point in the cycle, I am willing to go out a little ways on the risk spectrum, but the turnaround needs to be relatively quick. My thought is these faster-growing markets may be the best place to find those opportunities.’”
Property values have flattened out or even dipped a bit in Chicago over the last year. Last November, Lux24, a 73-unit apartment building in the West Loop, sold for $31.3 million, 10 percent less than it fetched in March 2016. And the city and state’s fiscal problems have made some investors wary of buying here, worried that they might be hit with big property tax increases.
But Chicago scored well compared with other Midwestern cities in the survey. The area ranked fifth, with an average rating of 3.67, among 13 Midwest markets, behind Minneapolis/St. Paul, Indianapolis, Columbus and Kansas City, Mo. Investors ranked the markets on a five-point scale, with 1 being “weak,” 3 being “average” and 5, “strong.”
But respondents had little enthusiasm for the area’s homebuilding market. The Chicago area ranked 66th out of 79 U.S. markets for “homebuilding prospects,” according to the survey.
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