This year commercial real estate has been in a tough spot, as interest rates remain high and other factors such as the election cause hesitation. However, positive signs are emerging at least in Chicago.
Mike Kamienski, real estate industry leader and principal with advisory firm Baker Tilly, told GlobeSt. that he’s been noticing an “uptick in transaction volume” in the past 30 days in the metro area. It’s not exactly where the CRE sector would like it yet – but a positive development nevertheless. The activity comes as the Federal Reserve cut interest rates for the first time in four years in September after hiking them 11 times between March 2022 and July 2023 in efforts to tame inflation.
“There was a large gap for 12, or 18, months, between the buyer and seller in terms of what they thought the value of the underlying real estate was,” Kamienski said.
“That gap is closing, which is a good sign.”
Also, Kamienski cited another positive move for the Chicago market. In March, the electorate voted against imposing a real estate tax on deals worth more than $1 million. This was a part of Mayor Brandon Johnson’s “mansion tax” plan.
WINNERS AND LOSERS BY ASSET CLASS
While generally, CRE appears to be in a better place today in Chicago, it depends on the asset class.
For ones that are performing well, Kamienski listed student housing, industrial, e-commerce, and data centers. The latter one has been “going gangbusters.”
“There’s been transactions left and right,” Kamienski noted.
“Data data center transaction activity is really robust, with AI and all the things going around in the technology space, the data center space is really strong.”
On the flip side, it’s the usual suspect – office, as working habits have changed since the pandemic.
“We do really well on Tuesday, Wednesday, [and] Thursday,” Kamienski said from the point of view of the asset class. “Nobody [comes in] on Monday and Friday.”
Class B and C’s are the ones struggling the most. While Kamienski said that Class A spaces offering top-tier amenities are performing “well” – it’s still not where the industry would like it to be.
Also, multifamily has “slowed down a little bit” due to the high supply, which is outweighing the demand, according to Kamienski.
TIME TO IMPROVE ASSETS
With the CRE market not in an ideal spot for many landlords right now, Baker Tilly is advising its clients to focus on improving existing properties. This move allows a firm to maximize the value of assets and potentially sell them in the future.
Another thing Baker Tilly is noticing is that developers are also improving their back offices.
While getting inside the mind of a CRE firm, Kamienski raised the following questions: “How can we be a leaner organization? Should we outsource some of the responsibilities that we currently have in-house, and find a way to be a more effective, and efficient real estate organization?”
The moves could be a wise choice before the real estate market flips.
A BOLD PREDICTION
Speaking of which, when will that happen exactly? The next few months could present challenges with the election and the holidays, which is always a slow cycle for CRE, according to Kamienski.
But he’s still looking at it from a bullish lens and expects CRE to be in a “strong” place by the second quarter of 2025, in anticipation of more rate cuts by the Fed.
“There’s a lot of capital sitting there on the sidelines waiting to buy and transact real estate. So, once the rates start coming down, the money is going to get spent. So it’s going to pick up fast and furious,” Kamienski noted.