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January 3, 2017

The 2017 Crystal Ball

By Jonathan Zimmerman

Here we go again. Another new year, another fresh set of predictions. Before we project what lies ahead for the next 12 months, let’s first see how we fared last year:

1)
Leasing activity will remain strong for the majority of 2016, but activity will start to show some very subtle signs of slowing down towards the end of the year. True.

2) 151 North Franklin will be the last new office building constructed in this development cycle. False, thanks to 625 West Adams.

3) Landlords will be forced to continue raising rents to account for the property tax increase. Generally true, although taxes are not the only reason for this.

4) Many tenants will be furious once they receive their pass through bills or net rent increases, thereby making life miserable for landlords, property managers and leasing agents. True for the most part, although the reaction has not been as bad as feared.

5) The tax increase will also have a direct impact on retail and residential real estate. Retailers will be forced to raise prices and apartment rents will rise, as Chicago will become one of the more expensive cities in America to conduct business. True.

6)
Sales activity will begin to decline in 2016. Because so many properties have changed hands over the past two years, there are simply not that many left to sell. True.

7) Firms not in dire need of expansion space will use the upcoming presidential election as a convenient excuse to put off decisions. With some exceptions, mostly False.

8) A notable technology firm will be the first to take the plunge and sign a significant lease in Goose Island, thereby laying the groundwork for this corridor to become the next growth market in downtown Chicago real estate. False. Still waiting.

9) A grocery store will sign a lease in the Loop this year to cater to the rapidly growing residential population in the central business district. False.

10) A combination of the tax increase, high crime rate and sustained issues with the police department and Chicago Public Schools will be cited as a key reason for a significant corporation pulling their headquarters out of downtown Chicago and relocating to either the suburbs or another part of the country. False, for now.

So, half of my predictions came true. Not bad for one of the most unpredictable industries out there. Let’s now see if I can improve upon my predictions in 2017:

1) With the increased supply caused by new construction and resulting shadow and sublease space, total vacancy will rise by approximately 1.5%.

2) Average rents will increase slightly in the first half of 2017, then begin to plateau for the second part of the year. Average tenant improvement allowances, rent abatement and other incentives will remain about the same as last year.

3) The Old Post Office will land a significant anchor tenant who will occupy over a quarter of the building. Other smaller tenants will commit as well over the course of 2017, as this notable redevelopment becomes a quick success.

4) The bloom will be off the Fulton Market rose just a bit, as several of the new office buildings either planned or under construction will struggle to fill space. This will lead to a slowdown of new development projects for a while.

5)
The sales market will remain quiet for most of 2017. In the fourth quarter, however, things will begin to loosen up just a bit and price expectations will be dialed back a notch. This will allow for some of the investors who had been sitting on the sidelines for the past few years to start getting back in the game.

6) Just when we thought Loop office development would be on hiatus for a few years, the market will be shocked by one more announcement: a new tower located on the General Growth site at 110 North Wacker Drive to be anchored by a well known, Fortune 500 tenant who will take occupancy in early 2021.

7) In spite of the planned redevelopment of the Tribune Tower, CIM Group will decide keep floors 3 – 7 for office use and sign WGN Radio to a long term lease. As part of the new deal, they will be forced to abandon their ground floor studio, which will be leased to a national retailer for $300 per square foot.

8) Leasing activity will remain slow in Goose Island. However, the city will announce a series of notable infrastructure improvements that will make this sector much more accessible to prospective users long term. Success will come, just not as fast as most hoped.

9) As part of the City of Chicago’s astonishing decision to legalizing sports gambling, plans will be announced to construct a land-based casino on the site of the former Michael Reese hospital, kicking off a billion dollar development which will include hotels, retail and housing.

10) Let’s try this one once more: A grocery store will sign a lease in the East Loop this year to cater to the rapidly growing residential population in the central business district.

To say the least, it will be interesting to see how this all plays out. Check back in a year to see how I fared. Best wishes to everyone reading for a happy, healthy and prosperous 2017!