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Zimmerman Says...

January 9, 2020

2020 Predicitons

By Jonathan Zimmerman

Happy New Year! As we ring in 2020, it is time once again to look into the future and forecast what lies ahead for the new year. First, let’s revisit my 2019 predictions and see how these played out.  Surprisingly, not too badly.

1) After an extended period of growth, leasing activity will begin to slow across the board in downtown Chicago. There will not be a full-blown collapse by any stretch, but absorption will be down and concessions will increase as competition becomes fiercer to attract tenants. Rents will generally remain steady as owners still struggle to cope with the unprecedented property tax increases. The rent and tax part was true, but there was no slowdown in leasing activity at all.  The market is still healthy and at least so far, showing no signs of letting up.

2) A slowing market combined with a weakening economy will bring on the first group of distressed sales downtown in quite some time. This will be the first step in sales prices becoming a bit more reasonable as compared to the past few years. The sales market did slow substantially, but no distressed sales at all.

3) An owner of multiple downtown office buildings will put their portfolio up for sale and exit the Chicago market. AmTrust did put their 7-building portfolio on the market in May, but has yet to complete any sales.

4) Some cracks will begin to appear in the co-working phenomena. WeWork will tap the brakes on expansion in 2019, while two of their competitors merge together and another shuts down entirely. No significant mergers or shutdowns yet, but the cracks did appear big time in the WeWork phenomena.

5) None of the planned developments on the outskirts of downtown (Lincoln Yards, The 78, Burnham Lakefront, River District) will be successful in landing an anchor office tenant. One of the developers, citing economic concerns, will completely shelve their project for several more years.  No deals, but all projects are still attempting to move forward.

6) While these planned developments struggle, the Fulton Market locomotive keeps on chugging, as another major corporation will announce plans to relocate their operation to a new Sterling Bay-developed property in the district. Well, I guess this one wasn’t too hard to predict. Several significant tenants did sign up with Sterling Bay in 2019 including Flexport and WPP.

7) Certain segments of retail will continue to struggle, but the Mag Mile starts to rebound. Multiple new, non-traditional concepts will sign leases and set up shop on North Michigan Avenue, all at significantly lower rents than in the past.  This generally occurred, with the new supersized Starbucks leading the way.

8) Speaking of North Michigan Avenue, the former Hancock Building will land a new anchor tenant of the tech variety and gain naming rights to this iconic property as part of the deal. All quiet on the 875 North Michigan front last year.

9) While on the topic of naming rights, let’s try this one again. The Willis Tower will have a new name by this time next year.  Still the Willis, although you have to wonder if the United Tower is on the horizon given their massive lease renewal.

10) A well-known tenant in the tech industry who occupies a significant portion of their building will substantially scale back in 2019 and put their space up for sublease.  Gogo, step right up.

 

Overall, not horrible.  I could easily recycle a few of these for this year, but I will try to keep it original.  Let’s now see what lies ahead for 2020:

1) The leasing market will begin to slow a bit and activity will gradually flatten out. Key decisions will be put off as a result of the upcoming presidential election, which is always a convenient excuse, as well as the continued uncertainty surrounding rising property taxes.

2) Office building sales will be brisker in 2020 as compared to 2019, but only by a small margin. Several owners who would like to sell will be faced with the difficult decision of unloading at a loss or hanging onto a property with declining net operating income and toughing it out until the market becomes more stable.

3) The Thompson Center will sell in late 2020 to a prominent casino developer. Plans will be announced shortly thereafter to locate the long-discussed Chicago casino at this site, with the existing structure preserved and converted into a hotel as part of a massive renovation.

4) Speaking of hotels, while the downtown market seems to be oversaturated, at least one   Central Loop office building will announce plans to convert to this use.

5) The Pittsfield Building will rise once again.  All legal issues will finally be worked out and a developer will step into the picture with plans to do apartments in the upper half of the building and a boutique hotel on the lower floors.

6) Still hurting over the rapid decline of WeWork, co-working expansion will tail off substantially.  More and more landlords will attempt to do this on their own and bring in a co-working management company to oversee the operation.

7) Are we at the end of the current development cycle? Not so fast, as the long-vacant land site on the corner of Washington and Franklin will sign up an anchor tenant which will launch yet another new building that will be completed in 2024.

8) Another national headquarter search will be launched by a significant tech firm with far less fanfare than Amazon.  Chicago will be a strong contender, but ultimately end up in second place.

9) Two mid-tier commercial real estate firms will announce plans to merge, thereby creating another larger-sized agency which will compete directly with the Big 3.

10) As always, this will be the year that a grocery store signs a lease to open up a location in the Central or East Loop.

Best wishes to all for a very happy and healthy 2020!