The commercial real estate market has been cruising at a high altitude, and everyone on board is wondering when, and how, the plane will land, said Andy Warren, director of real estate research at PwC. Warren took to the stage to examine the national and Chicago market at Urban Land Institute’s 2018 Forecast event at the University Club of Chicago on Thursday.
Unlike the nautical themes of years past, Warren compared the current market climate to being on an airplane—some have their seatbelt fastened and some are moving freely about the cabin. What it comes down to is what people expect, and right now it’s a mix. It’s been a long cycle, so it makes sense that some are anticipating a downturn. But then again, without any major signs of a slow down, why move cautiously?
Warren emphasized that the key to this long cycle, 101 months so far, is expanding horizons market by market, property by property. The more than 100-page report from PwC and ULI garnered more than 1,600 survey responses and includes information from 1,000 individual interviews, 590 organizations and, new this year, 52 market focus groups.
The top five words respondents used to describe the Chicago market were competitive, cautious, uncertain and overheated. That lines up pretty closely with how the national market was described, Warren said.
Despite how people view the market, the data shows that the recovery has been slow and not overly exciting. Essentially a “CFO’s dream recovery,” Warren said. Supply is very much in line with demand, and you can see the amount of new space is in concentrated areas, it’s not all around the country. Warren took a look at Chicago, and said even though the market was described as ‘overheated,’ the numbers don’t indicate it’s is overbuilt yet.
Warren highlighted a few findings from each sector, most of which can be found in 101-page report. But one of the more interesting comments was a warning about what assumptions we make about each generation.
“Be careful. Don’t assume that because Millennials want open work space that Gen-Z will be the same. The Gen-Z generation values privacy, they spend a lot of time online in their own space, so a communal work space might not be what they want,” said Warren.
The takeaway from this is that the industry shouldn’t be worried about what they don’t know—they should be worried about what they think they know. That’s what can hurt you, said Warren.
During the second half of the event, David Schreiber, managing director of acquisitions at LaSalle Investment, moderated a discussion panel. Elizabeth Holland, CEO of Abbell Associates; Blaise Keane, Executive Vice President at Heitman; and Sean Spellman, Chief Development Officer at CA Ventures fielded questions about the macro trends and what strategies they’ll implement in this cycle.
During a discussion about this particularly lengthy cycle, Keane suggested that the industry had possibly already gone through a modest downturn.
“There has been disruption around the globe with Brexit and social unrest. Our elections and the run up to it and other tumultuous events. It’s possible that we’ve already experienced a downturn,” he said.
Holland made a point that right now the market isn’t in a boom right now and that she doesn’t think we’ll have much of bust either. But there were a few signs pointing to a decline rather than a reacceleration.
“If you’re a seller you feel like we’re at the peak, but if you’re a buyer you don’t. And that’s the beginning of the end, when that disconnect starts showing up,” she said.
When it came to the Chicago market, all three panelists agreed that Chicago has great potential, and would be a good fit for Amazon’s HQ2, but a major issue for the city is its national perception. In conversations with institutional partners, Holland said that the city’s budget problems and its reputation concerning crime and violence were red flags for some investors.
When you get down to it, the numbers show that Chicago is an economic engine that has a solid cost of living structure and a great workforce, Holland said. The familiar challenge that lies ahead is convincing everyone else to move past their assumptions.