Chicago’s commercial real estate market is frozen.Difficult Loans and Economic Conditions Many commercial real estate owners and investors hit the pause button last quarter.
Commercial real estate sales in Chicago fell by more than half in the first three months of this year compared to the same period in 2022, according to the latest estimates from MSCI Inc. The investment research firm tracked about $2.7 billion in investment property sales in the first quarter compared with $5.9 billion in the first quarter of 2022.
The office and industrial sectors were hardest hit, with sales down more than 70% in each. Meanwhile, transaction volumes for retail properties remained almost steady, falling around 7 per cent.
At least one factor is lenders being more hesitant to make loans tied to commercial real estate.
“I wouldn’t call them pencil strokes, but they’re very disciplined about what they’re doing now,” said Danny Spitz, chief executive of business brokerage Greenstone Partners. real deal.
The other is the Fed’s rate hike, which it chose to pause on Wednesday.
“It really affects the pricing that people can get,” said Ron DeVries of Integra Realty Resources. “If you’re not in a position where you have to sell, people are just holding right now.”
DeVries noted that Chicago’s slowdown is consistent with what’s happening across the country.
Rising borrowing costs, coupled with delays by office tenants in deciding whether to stay or leave their current leases, are also giving investors hesitation, said Jaime Fink, head of JLL’s Chicago capital markets division.
“Uncertainty around office tenant demand and what office tenants want to do has led investors to underwrite more conservatively. Conservative underwriting combined with higher capital costs in the office market has caused prices to fall. When prices fall, fewer owners are willing to Make a deal,” Fink told real deal.
Office property sales were down from $1.5 billion in the first quarter of 2022, totaling about $422 million last quarter, also as a result of tenant demand. The downtown Chicago office market is facing record vacancy rates and a glut of sublease space.
“Is there demand for office space? It’s here. The demand isn’t where it was before the pandemic, but part of it is office tenants trying to figure out what they want to do in the future,” Fink said. “That could be a better location or a newer property or a combination of both.”
He noted that while office leasing activity has improved over the past few quarters, investors are still taking a break from trading to gauge where valuations are falling.
“A lot of investors are trying to understand where pricing is going to change,” Fink said.
Pricing expectations also likely contributed to a drop in industrial sales to $484 million in the last quarter from $2.2 billion in the first three months of last year. A separate first-quarter report from business brokerage NAI Hiffman attributed the drop in investment volumes to a “disconnect between sellers’ expectations and buyers’ values due to rising interest rates.”
The retail and multifamily housing sectors have weathered the storm to some degree. Retail investment sales fell about 7% to about $452 million, while apartment building sales fell 31% to a total of $763 million.
Spitz said the decline in retail transactions had more to do with a lack of supply than downturns in retail fundamentals.
“There’s a lack of deals because a lot of people are stuck with cheap debt,” he said. “There’s no reason to sell.”
Overall, commercial selling brokers expect the pace to pick up once investors feel more buyers and sellers closing the gap in pricing negotiations.
“Everyone is looking for certainty right now,” de Vries said.