The Chicago heavyweight talks about the bottom of the office market and tough politics

The Chicago heavyweight talks about the bottom of the office market and tough politics

For a moment, it looked like J. Michael Drew was about to launch an attack.

The founder of the Chicago-based structural development firm — which has built many of Lincoln Park’s largest projects since the company began 21 years ago — had just accepted honors from the Chicago trade group Lincoln Park Builders, in recognition of his contributions to the neighborhood.

Drew deviated from the standard thank-yous and pleasantries in front of an audience of hundreds of other real estate professionals at the Theater on the Lake building on the waterfront in Lincoln Park. He quickly entered into his concerns about city policy proposals moving quickly through government channels under newly elected Mayor Brandon Johnson.

“In today’s dialogue, development is blamed for high taxes, unaffordable rents, the displacement of residents and the plundering of neighborhoods,” Drew said. “It is cited as a major contributor to today’s widening wealth inequality gap.”

Increasing Chicago’s transfer tax on properties sold for $1 million or more — a measure the City Council sent to voters to decide in the March election — was at the top of the list of issues he acknowledged were troubling the industry. And for a brief moment, it seemed likely that Drew was preparing to unload on Johnson and his thoughts.

“The real estate industry can no longer be reactive to such initiatives,” Drew said.

He then focused on the points of contention between real estate and Chicago’s increasingly powerful progressive political machine to point out where the industry has opportunities to sympathize with the economic conundrums of residents who support Johnson and the transit tax, along with other recent policy proposals that cater to business. The community was opposed.

Drew said developers should focus on how to compromise with those often seen as political opponents of the industry and prove that real estate should not be vilified.

“Be a proactive part in addressing (Chicago’s) issues, insisting on input and collaboration with policymakers rather than confrontation, providing financial data to support the industry’s position and contribution to its economy and finding alternative paths to financing today’s social justice challenges,” Drew said. “Change the dialogue from the development community as the problem and redefine it as part of the solution. The future of the city and its neighborhoods may depend on a new and better way to send messages and address the challenges ahead.”

The speech set the tone for the evening as a panel of real estate professionals continued to discuss Chicago’s position as the nation’s leader in the volume of distressed commercial real estate loans in any city, among other challenges the market faces amid an unprecedented crisis in the United States. The office sector and real estate values ​​are falling across all asset classes, thanks to rising interest rates.

Moderated by Chicago-based developer Steve Fifield — who helped build 727 apartments in West Madison that recently brought in $232 million from Zara founder Amancio Ortega — the panel was highlighted by R2 Companies president Matt Garrison. His Chicago-based firm is closing on the purchase of the 41-story office tower at 150 North Michigan Avenue at a significant discount from the more than $150 million that CBRE Investment Management has invested in purchasing and modernizing the property since acquiring it in 2017.

J. Michael Drew

Lenders in office buildings that are at least 80 percent leased and generating some revenue are willing to extend debt, but the capital from commercial mortgage-backed security lenders to buy office “is basically nonexistent,” Garrison said.

This will lead to a bumpy road in terms of resetting values, he said.

“This is going to lead to price discovery. This is real price discovery like you don’t normally see in real estate markets. It’s forced liquidations, it’s a forced sellers’ market. And we’re going to discover the real price in a forced sellers’ market without the capital markets. This is a crisis,” Garrison said. “.

He said after the painting The real deal Office prices changed so rapidly that “if it were a stock market, they would shut it down.”

Panelists Frank Campis, of Chicago-based multifamily landlord JAB Real Estate, along with Corey Oliver, who runs the multifamily firm Strength in Management that owns South and West Side rentals, noted that they are seeing multifamily cap rates moving in different directions because The nature of the assets they own.

“You’d have to kiss Essex Realty Group’s Jim Darrow or Marcus & Millichap’s Kyle Stengel on the lips if they could get a 6 percent cap rate,” Campis said. “We’re probably at 6.25 or 6.5, so it’s not pretty.”

Campis noted that rent growth has been strong recently. He attributed the trend in large part to the city’s 2021 implementation of the new Affordable Requirements Ordinance, which requires developers to set aside at least 20 percent of units in new rental projects as affordable housing. This slows down new development and therefore supply, meaning rents have more room to grow than under previous conditions, Campis said.

But JAB’s focus on the city’s established neighborhoods like Lincoln Park makes a different story about the strength of management’s asset portfolio in historically underinvested communities. The company began purchasing properties with cap rates of 12 and 10 percent, while property prices on the South and West Sides have recently increased to lower capitalization rates to 7 and 8 percent, in some cases due to out-of-state investors. He said paying prices, which Oliver contends are too high.

“There’s going to be a lot of opportunity in South Shore, Woodlawn, Bronzeville, Auburn Gresham, where some of these people who came to speculate will start losing their properties over the next 18 months,” Oliver said.

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