2016 Predictions
If 2016 is anything like 2015, we are in for quite a ride this year. Here are some of my predictions on what lies ahead in the world of downtown Chicago commercial real estate.
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. This will become more pronounced in 2017, with the delivery of new office product at 444 West Lake and 150 North Riverside, in conjunction with shadow space hitting the market as a result of firms vacating space to move to these new buildings. Equilibrium will return to the market due to increased supply and the playing field will become more level for landlord and tenants.
2) 151 North Franklin will be the last new office building constructed in this development cycle. It will be at least another 4 years before ground is broken on the next new office development, with the likely site on the northwest corner of Washington and Franklin.
3) Landlords will be forced to continue raising rents to account for the property tax increase. While most leases typically have some sort of pass through charge where tenants are billed for their pro rata share of the tax increases, Landlords are still forced to cover taxes on vacant space. They will need to raise additional revenue and a rent increase is the easiest way to accomplish this.
4) As a related point, 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.
The increased charges will force several businesses to critically examine their office space needs and evaluate whether downsizing, moving or shutting down altogether is their best option long term.
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.
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. With many buildings selling at record high prices, there is little to no opportunity to flip them for a quick profit. Instead, most of the new owners seem to be in an “improve the building, lease it up and hold” mode.
7) Firms not in dire need of expansion space will use the upcoming presidential election as a convenient excuse to put off decisions. This is a common occurrence during election years.
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. This effort will be supported by the City of Chicago, who will make necessary improvements for the infrastructure in the area to allow for enhanced access to the nearby North/Clybourn shopping district and Red Line station.
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.
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.
I will take a look back at these predictions towards the end of 2016 and see which proved to be accurate. With real estate being so unpredictable, I fully expect to be laughed at and asked what the heck I was thinking. Nevertheless, here’s hoping for a year which exceeds everyone’s expectations.