Chicago Commercial Real Estate Market Not as Thriving as Others
Hitting It on The Nose
Ever heard of the Smile States? Comprising the coastal and southern states that form a smile on the map of the United States, they are the ones getting many of the new and exciting commercial real estate opportunities that have skipped over the Chicago marketplace – considered the "nose" atop the geographic smile.
According to Greg Warsek, Illinois Market Manager for Associated Bank, the states that form that facsimile of a smile, down the east coast, along the southern edge and up into the west coast, are the ones attracting new business, particularly in the tech and startup worlds. Austin, Dallas, Charlotte, and Seattle are among the cities seeing some of that growth.
Warsek attributes several factors to Chicago being passed over a bit.
"We've been really slow to recover form the last recession," Warsek said. "And part of that is the lack of job growth, it's the economic climate in Illinois, and now you throw in the crime issues that are getting national attention for Chicago – and couple that with the fact that the coastal markets recovered more quickly and are much more active and are seeing significantly more economic and job growth.
Investors are looking for markets already performing well, as well as a climate that's sure to attract people.
"A lot of investors refer to this concept of the smile – Smile States. What that is, is really going from New York, Boston, down through Texas, and up through LA, San Francisco and to Seattle and completely missing the Midwest, if you will. They call Chicago the nose.
"But the Smile States are really where you've seeing the investment, and that's the coastal towns and the warm climate, and that's where they're seeing most of the growth," Warsek said. "So from an investor standpoint, in commercial real estate, a lot of the capital has flown to those markets, and Chicago is a little more secondary, if you will."
Austin, Texas is one of the leaders in this boon of startups, of tech and of commercial real estate in general, according to Warsek.
"A lot of it's driven by the tech industries that are headquartered there," Warsek said "Dell has been there for a long time. There's a lot of tech companies that have made investments there. It may not be their headquarters, but it's a strong secondary market for them. And there's been massive investment in new infrastructure, new buildings. We have a few clients that have developed down there, and the job growth is just unbelievable in Austin and in Dallas. And I don't see that stopping. There seems to be quite a bit of demand down there.
Apartments Going Up in the Burbs
The suburbs are the place to be for more and more people, according to Warsek. An increasing amount of residential development is occurring in the outskirts.
"It doesn't get the press of the downtown apartment market, but the suburban market is an interesting opportunity," Warsek said. "We've seen quite a few loan requests coming from the suburbs. And the deals are very interesting when you underwrite them, because you have to underwrite each submarket, each community and understand the dynamics of what's driving the demand in those specific communities. And there seems to be common trends. One is, in almost two decades in a lot of these submarkets, there hasn't been much new product built, so there's pent-up demand, there's a fair amount of people in newer, condo-quality product to rent not buy.
Another trend Warsek sees is proximity to transportation.
"Towns oriented near metro stations are always going to be viewed very positively," Warsek said. "So we're seeing some really nice in-town developments, where people can (go),if they're empty nesters or young professionals, it's a lifestyle that they really like if they've been in that community. And there's a lot of NIMBYism, you know, 'not in my backyard,' so there's pretty high barriers to entry. So when somebody does get approved, they're usually going to do pretty well, and there's not much competition coming in behind them.
There's also a trend among empty nesters opting to rent instead of own.
"So it's an interesting dynamic," Warsek said. "We've underwritten and done quite a few projects and the rental population that's coming into these are what you might expect, it's a lot of young professionals, but it's also a lot of empty nesters that want to stay in that community and they're downsizing from a big house and they're not buying a condo or a smaller house, they're renting. So it's really lifestyle changes. We hear about lifestyle changes for millennials, but the reality is the empty nesters are approaching this point in their life a little differently than they have in the past."
Continued Development of the Suburbs Likely in 2017
The desire to be removed from the city – but near public transit and retail opportunities – will continue to push people to the suburbs, Warsek said.
"I still see, and this is feedback from my clients is that they still see opportunities in the suburbs," Warsek said "There are still several suburban areas that have untapped demand that's still out there. And these aren't big projects. Generally speaking, you're talking about maybe 100 units on average. Those are not big projects, they're low rise, they're walk-to-town, walk-to-Metra (locations)."
"Some of the communities are starting to understand that they need some diversification in the product that's being offered within the community, so I see more of these, and frankly from a financing standpoint, I kind of like these because you can get them up quickly, you can get them leased and get out. Versus a big project downtown where it's going to take say three years to actually get it built, leased up and taken out to permit or sold, so from a risk profile these are a little lower risk."
Learn more about Associated Banks' Commercial Real Estate opportunities.
Loan products are offered by Associated Bank, N.A. Loan products are subject to credit approval and involve interest and other costs. Please ask about details on fees and terms and conditions of these products. Property insurance and flood insurance, if applicable, will be required on collateral. Member FDIC. Equal Housing Lender.