“The core of downtown Chicago is competing with global cities and we are a low cost leader,” says JLL Managing Director Keith Largay. At Bisnow’s recent State of the Market event, he outlined four investment trends that have investors feeling cautiously optimistic about the city’s future:
Everybody likes a discount
Compared with other major markets, Chicago offers a low-cost labor pool, competitive real estate occupancy costs and above average quality of life, according to Keith, and office tenants have started stretching north and west into even lower-cost emerging markets. Trends in how people commute to work will continue to evolve and shape the future of office, he says, with emerging technologies like Uber and Divvy Bikes changing traffic patterns and making historically off-the-beaten-path areas like Goose Island easily accessible.
Development pipeline in check
We’ve seen 6 million square feet of office tenants move from suburban markets to downtown, and four new buildings are under construction delivering 3 to 4 million square feet of space. But with 5 million square feet of office converted into hotels and residential and construction costs adding $50-$75/square foot to today’s development costs, downtown fundamentals are still pretty strong, Keith says.
Significant cap rate compression in secondary markets
Markets like the Chicago suburbs and Indianapolis are offering investors cap rates between 7.5 and 9 percent, compared with just 5 to 5.5 percent for core office property downtown. The opportunity for good risk-adjusted returns is there, you just have to be mindful of liquidity in those markets, Keith says. Investors can always exit a downtown deal, but secondary markets may only be liquid for a few years of their 10- to 15-year cycle. If you have staying power and long-term capital, those can be ideal investments.
High demand, but tread carefully
Investors and lenders are starting to get cautious, Keith says. But that doesn’t mean the extraordinary amounts of bids have slowed on key property types such as value-add office on Main and Main, High Street retail and stabilized multifamily. We’ll see national sales decline 15 to 20 percent this year, which shows the markets are respecting where we are—seven years into this investment cycle—and being prudent. Today’s buyers know that every opportunity is fully priced and have to be very careful about what risk they are willing to take, Keith says.
Explore more investment trends with JLL’s latest U.S. Investment Outlook.