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Chicago’s residential, commercial real estate outlook in 2023 – Crain’s Chicago Business

Crain’s asked commerical and residential real estate experts what they expect in 2023. Here’s what they said:


Residential real estate

Much of what happens in the housing market in 2023 will depend on whether the Federal Reserve backs off from a series of rate hikes that chilled sales in 2022. If hikes continue, the chill could become an all-out freeze. If they don’t, buyers and sellers may get back in action, although nobody predicts a return to the frenzied market of the pandemic-era housing boom.


Redfin and Zillow, two online real estate marketplaces, both expect existing-home prices to hold up better in Chicago than in most major cities, largely because they didn’t rise frothily here, so there’s less air to be let out of them. As prices drooped elsewhere around the country, they only flattened in the Chicago area, at least for now.


In the new-home business, like in the overall housing market, “most of the damage that resulted from dramatic price increases followed by interest rate hikes occurred in other areas of the country, such as Phoenix and Dallas, where price increases were much higher than here at home,” said Erik Doersching, CEO of Tracy Cross & Associates, a Schaumburg-based consultant to the homebuilding industry. “In the Chicagoland area, while sales have slowed recently, price increases were not as dramatic and, more importantly, slower sales have resulted in large part from supply depletion,” not from buyers exiting the market.

Doersching sees one particular source of strength in the local homebuilding industry. While early in the 21st century there were many small, locally owned suburban building firms, a fallow decade after the housing downturn of 2007-08 shifted the profile. Now, national firms based in other cities build about three-quarters of the new homes in Chicago-area subdivisions. Because those large, publicly traded firms have deep pockets and a national perspective, they “have flexibility on pricing,” he says, which helps “our region’s ability to offer incentives, such as buying down mortgage interest rates, thus mitigating any significant falloff.”

Nevertheless, Doersching says smaller, privately owned builders could be impacted by “the broader tightening of money availability by lenders and investors.”


Commercial real estate

It will be far more expensive to do just about anything in commercial real estate in 2023. Want to develop a property? Construction costs have soared to historic levels. Need to refinance or sell a building? Interest rates just reached a 15-year high. Property taxes have jumped, too.

But the landscape for some types of property owners looks far different than it does for others.

Chicago’s office market, for example, is flooded with a record amount of available space. Weak demand and a surge of sublease offerings from companies trying to shed unneeded workspace are forcing landlords to shell out huge amounts of cash and other perks to get deals done, while pushing some to surrender their properties to their lenders rather than face foreclosure battles.

Retail landlords are just as anxious to see more office workers coming downtown regularly again. Loop storefront vacancies stood at a 20-year high during much of 2022, as the absence of daily foot traffic compounded the effects of online shopping on brick-and-mortar retailing.

“In 2 1/2 months, we’re going to be at the third anniversary of a really hard time” for retailers, says John Vance, principal of Chicago-based retail brokerage Stone Real Estate. “To hang in there that long is really hard.”

Hotel owners face big challenges in 2023, after leisure travel rebounded sharply in 2022 from COVID’s sting. It’s an off year for a couple of the largest conventions and trade shows at McCormick Place, as questions remain about whether business travel will ever be as strong as it was pre-COVID.

It’s a far rosier outlook for apartment landlords, who enter 2023 with rents in top-tier buildings at record highs. Surging demand for rental units has fueled a run of plans for new apartment towers, particularly in the West Loop, where there are more units planned than all other downtown neighborhoods combined. Integra Realty Resources forecasts developers will complete around 2,900 units in 2023—close to a pre-pandemic annual average—and another 4,000 in 2024.

In the industrial property sector, developers seemingly can’t build warehouses fast enough to handle the onslaught of demand for space to store and distribute goods bought online. Although companies’ ravenous appetite for warehouse space has ebbed a bit amid inflation and recession fears, demand would have to sink faster and for much longer before anyone worries about a warehouse glut.


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