Chicago is ranked 31st in the real estate investment survey

Some in Chicago’s real estate industry may see the ranking as confirmation that high taxes and crime are deterring investors, but the ranking may say more about Chicago’s status as a mature market. It is part of the “establishment,” a group of 20 metropolitan areas, including New York and Washington, “that have long been the nation’s economic engines,” according to the report.

Meanwhile, many Sun Belt cities are “magnet” markets, “migration destinations for people and companies” with strong growth characteristics that attract investors and entrepreneurs. The geographic differences are striking: Of the top 10 markets in the report, only one—Boston—is in the northern United States.

PwC and the Urban Land Institute released the 109-page report, the 44th annual Emerging Trends survey, based on survey responses and interviews with investors, developers, fund managers, brokers and other real estate professionals. The report identifies 10 key trends that will affect real estate in 2023. #1: A looming market slowdown amid rising interest rates and a potential recession.

“These conditions would be problematic for property markets: a slowdown or decline in economic growth reduces tenant demand, while higher interest rates raise the cost of developing or acquiring properties,” the report said. “Both factors would reduce returns and values. Indeed, rising interest rates and uncertainty about future market conditions are already killing deals as sellers are unwilling to capitulate to buyers’ growing demands for price discounts.”

Locally, rising interest rates are already squeezing some properties financed with floating-rate loans, such as the Willis Tower and the Oakbrook Center mall. And investors are struggling to complete acquisitions amid rising borrowing costs and tighter lending standards: In late August, a New Jersey investor put its $190 million acquisition of a 51-story River North apartment tower on hold amid of “economic pressure”.

The Emerging Trends report also discusses the ongoing impact of the COVID-19 pandemic. Although shoppers have returned to stores, online retail is here to stay, which “ultimately means fewer malls and retail spaces can survive.”

Business travel has also rebounded and more professionals have returned to the office, but hotel and office investors should not count on demand returning to pre-Covid levels, according to the survey. The office space will be converted into apartments or other uses.

“The pandemic has forced structural changes in how and where we live, work and play in ways that seem destined to endure at least on some level, even less extreme than our behavior during the peak of COVID,” it said. the report.

The study divides the 80 U.S. real estate markets into four broad categories: magnets; the establishment; a niche that includes cities such as Chattanooga (ranked 65), Las Vegas (ranked 21) and Pittsburgh (ranked 41); and a backbone that includes Albuquerque (72nd), Milwaukee (75th) and Louisville (63rd).

The magnets have attracted the attention of Chicago investors and developers, including Sterling Bay, which has projects in Miami, Atlanta and Dallas. Meanwhile, Magellan Development Group has been busy in recent years in Nashville, Miami and Austin.

Chicago has very good company in the dining category, including San Francisco (58th), Manhattan (27th) and Los Angeles (20th).

“Although growing more slowly than magnet markets, enterprise markets still offer tremendous opportunities,” the report said. “The average rating of this group is second among our four main groupings. However, the attractiveness of these markets to investors and developers has declined in recent years as growth has slowed in many of these markets while challenges have increased.”

The report also places Chicago, San Jose, Los Angeles and Seattle in the “multi-talent manufacturers” subcategory, reflecting their large, diversified economies.

“Although their high costs of doing business and closing deals limit their appeal to some real estate professionals, multi-talent producers continue to attract a disproportionate share of investment dollars,” the report said.

The report did not go into detail about Chicago’s shortcomings, but local business leaders, including McDonald’s CEO Chris Kempczynski and Citadel CEO Ken Griffin, have been outspoken about the city’s crime rate. In June, Griffin, who once described Chicago as “like Afghanistan on a good day,” announced plans to move The Citadel to Miami.

The departures of Boeing and Caterpillar add to the narrative that Chicago is not business-friendly, and rising real estate valuations in Cook County aren’t helping its image among investors either.

Whether they have their capital in Chicago or a magnet like Nashville, investors should lower their expectations for 2023 amid rising interest rates and a weaker economy. After all, real estate is a cyclical business. The Emerging Trends study summarizes the outlook with a quote from an unnamed developer.

“I feel like we’ve been on a bit of a sugar high with this stimulus and cheap debt. There will be a delay,” the developer said. “There has to be this normalization. So what does this mean? I think it will be a little bouncy; it will be a bit turbulent. But then we bottom out and start growing again.”

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