33 Realty’s Principals Drew Millard and Eric Weber attended the Fourteenth Annual REIA/DePaul Summit held last Thursday, September 27, 2018. At the event, real estate experts discussed the effects of overbuilding, interest rate increases, inflation and government policy (property taxes, state income taxes and potential rent controls) on the Chicago market.
- 44.2 percent of respondents said their outlook for the second half of 2018 trends toward concerned. Respondents cited a variety of factors, including being nine years into the cycle, rising construction prices, flattening rents, and increasing interest rates.
- 66% of respondents stated that they haven’t felt the impact of the changing interest rate environment although it is the number one concern cited by commercial real estate professionals.
- Overall respondents were split evenly about whether sustained organic growth (in areas like 1871, the West Loop and Fulton Market) or a surge in activity from Amazon would be most impactful.
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While 33 values the data collected in these types of surveys, we have always tried to stay ahead by monitoring key performance indicators from all our business lines. Other firms are looking solely at trends related to leasing or investment (siloed business units) but 33 can compile proprietary data from business units specializing in leasing, management, investment brokerage, and construction in order to get a more accurate and holistic state-of-the-market.
While macro environmental changes such as interest rates and government policy can have an impact, 33 is also analyzing micro trends. Slightly higher year-over-year utility costs, smaller than forecasted rental rate increases, a rising property tax environment, increasing rental concessions and longer vacancy holds are creating the perfect storm for a market correction.
In Drew’s opinion the study didn’t draw attention to other factors real estate experts should be concerned about such as adaptive reuse of assets like office buildings, industrial lofts, etc. that are amplifying the abundance of supply.
“Not only are we seeing thousands of new construction units come online,” Drew explained, “but old product is being revitalized and re-introduced to the marketplace. Properties that historically held the majority share of vacancy are now competing with newer product.”
While the second half of 2018 has picked up, going into 2019 33’s approach is to be conservative. Many experts agree that the current yield curve is at the end of a nine year cycle and 33 is starting to receive more receivership calls from lenders and hedge funds, which validates this concern.
Eric noted that we are witnessing similar characteristics on the construction side of the business that suggest a correction is looming. “Labor is continuing to diminish and material prices are surging, yet we continue to see new market entrants pursue value-add opportunities. These new entrants are underwriting projects on yesterday’s construction pricing and by delivery are unable to achieve their pro formas.”
Born out of the 2008 financial crisis, 33’s integrated service model was designed to weather the cyclical nature of the real estate market. We specialize in providing clients services in residential leasing, property management, investment brokerage, and construction. We also have extensive experience with distressed real estate services and can provide progressive management plans as well as income-producing strategies to get you through to the next cycle.
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