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Public Transit Elevates the City
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The Epicenter of Distribution
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Higher Education and Grad Retention
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Why Chicago is a Winner
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Sublease Market Downturn
The 606 Extension The multi-use 606 extension trail will link Bucktown and Wicker Park to Lincoln Park and the lakefront. It will connect to the historic swing bridge, which will be maintained in an open position as a viewing platform over the river.
606 Extension Proposal
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Kris Parker
Why Newmark - Chicago Volumes
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Read the latest insights, exclusive real estate features, and industry market trends, all within Why Newmark Chicago Magazine.
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A World-Class City: Health of the CRE Market
Chicago's Industry Diversity Fuels an Economic Powerhouse
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Chicago's Affordable Edge: Cost of Living and Doing Business
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Over the last two decades, Chicago has developed into a world-class tech hub, launching some of the most recognized technology firms and growing into a global competitor.
Chicago's Unique Tech Market: What Sets it Apart from its Competitors?
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Amy Binstein
John Daniels
Melissa Copley
Since 2020, hundreds of major new advanced manufacturing facility announcements have been made across North America, and with each comes investment, development, jobs and another step towards solidifying and expanding critical supply chains.
Self-Storage Trends
Q&A with Newmark's Melissa Copley
Q&A with Newmark's John Daniels
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The skyline glistens with the Central Business District’s high-rise office and residential towers. The downtown’s surrounding neighborhoods are home to local businesses and retail tenants, and the suburbs are abundant with innovative warehouses and amenity-rich office campuses. Like the rest of the world, Chicago’s real estate market has been impacted by the pandemic. While some property types like industrial and multifamily came out on top, the entire market has been fundamentally changed.
Chicago has a resilient commerecial real estate market
Industrial
The industrial market thrived over the past few years, entrenching Chicago as a national industrial powerhouse coming out of thepandemic. Industrial vacancy rates have consistently reached record lows quarter after quarter, as demand for new products and rent growth have both risen to record levels. In fact, in the last three years, asking rents have grown almost 10% according to Newmark’s historical data. Taking rents increased even more significantly, up by 24%. As supply rushed to keep pace with demand, a backlog of proposed new construction accumulated when supply chain issues caused a shortage of building materials. As supply chain issues have eased, the volume of properties under construction has grown to the highest levels in over 25 years.
Office
Chicago’s office market vacancy rates rose as workers packed up their monitors and headed home to work remotely. While Kastle Access Control System Datashows occupancy levels have consistently increased over the last 12 months, it iscurrently only 50% of pre-pandemic levels. Owners continue to strategize with how to fill record levels of sublease space. While they have been able to hold steady on asking rental rates and getting creative with incentives, tenants have been hesitant to make decisions about their space and are committing to a smaller footprint.The work-from-home movement, already stirring pre-pandemic, has become the largest hurdle to the full recovery of the office market as employees demonstrated a strong preference for a hybrid work week.The increasing popularity of hybrid work has cemented the pre-pandemic trend of demand for amenity-rich Class A buildings to recruit and retain top talent.
Retail
Chicago’s retail market has experienced a resurgence after retail action came to a halt in 2020. Suburban retailers saw some of the strongest rebound activity supported by their residents and a spike in people purchasing large home items and starting home improvement projects. Oakbrook Centerin Chicago’s western suburbs, one of the first ‘lifestyle’ shopping centers in the U.S.,came out of the pandemic 100% occupied. Popular urban neighborhoods where high income residents live have also recovered.Tourist areas such as Michigan Avenue and State Street had a slower recovery as foot traffic still has not returned to pre-pandemic levels. In 2022, consumers spent the most on food, beverage and apparel; suburban hotspots are seeing a larger portion of this spending than urban locations. Leisure and hospitality employment has also made a full recovery from pandemic losses.
Multifamily
In the past several quarters, the multifamilymarket has seen a rebound after the initial hit from the pandemic. As workers returned to the office, single-family home prices hit record levels with interest rates continuing to rise. Demand for downtown apartments pushed the market to record rent growth levels for existing space, increasing 5.8% year-over-year, 32 basis points over the 5-year average. Multifamily capital markets have always been sensitive to the debt markets, which has created as lower start to 2023 as interest rates rise. Despite this sensitivity and supply chain issues related to construction materials, investors and developers are showing confidence in theCentral Business District multifamily market, and the development pipeline is currently 72% of the existing inventory. The suburbanmarket has been less vulnerable, and giventhe investments being made in the market,the appeal of Chicago’s multifamily sector will rebound quickly.
What's next
Across the country, concerns over economic headwinds have resulted in transactionslowdowns. Thanks to the diversity within the Chicago economy, the market will likelybe able to avoid any major peaks and valleys brought on by a slowdown. Locally,there are several challenges facing the commercial real estate market includingpopulation loss, high taxes, increasing interest rates coupled with slowing economicgrowth, and high crime rates. These concerns contribute to a slowing demand fromtenants, and give investors a reason to hit pause. While some segments like retail andindustrial have maintained investor interest, the office market is facing a correction,particularly for obsolete suburban properties. As an established global real estateleader, Chicago is bound to have challenges, but the city will always recover. The first half of 2023 is expected to be a bit bumpy, but Chicago will be well prepared to face whatever gale force winds come our way, thanks to resiliency from those livingin the windy city.
A World-Class City Chicago's Industry Diversity Chicago's Affordable Edge Chicago's Unique Tech Market
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Table of Contents
Katy Pietrini - Senior Marketing Director, Newmark
In the first quarter of 2022, Illinois annual GDP reached $1.0 trillion, according to the Bureau of Economic Analysis. This is 12% larger than Pennsylvania’s economy at $915 billion, a state that is nearly the same number of workers with a similar population, according to the Illinois Economic Policy Institute. As one of the most diversified economies inthe country, only 13% of Illinois’ GDP comes from a single industry at the state level. Manufacturing, the state’s largest major industry, produces $132 billion in value per year, more than all the private and public sector economic activity in New Mexico. Real estate, which accounts for $120 billion in Illinois, is greater than the size of Idaho’s entire economy. And the healthcare industry in Illinois contributes more to the U.S. economy than all of South Dakota. Chicago’s well-rounded industry diversity gives companies who locatehere a leg up for a variety of reasons,in comparison to many other major metros where one or two major industries dominate. First, competition levels are healthy, resulting in strong companies and ideas surviving and thriving. Secondly, a diverse economy makes Chicago more recession-proof. In prior recessions, Chicago did not see the steep fallouts that some othersingle industry dependent metros encountered. However, the diverse economy also means that sometimes Chicago is slower to recover. Lastly, a variety of industries helps make Chicago an attractive place to the live, worldwide. Chicago offers jobs in almost any industry, meaning all people with all types of background scan work and live here. While Chicago has transformed overthe past few decades into a knowledge hub, the city is primarily and globally known as a manufacturing hub, which is the highest contributing sector to the state’s GDP. The top areas offocus for manufacturing in Chicago are food, metals and plastics. Many manufacturing incubators established themselves within the city due to the vast innovation occurring in the industry. With nearly half a million people working in manufacturing, the talent pool in Chicago is deep. Warehouses and factories, which remained some of the busiest operations in the city throughout the pandemic are catching up on backlog now that demand has softened. With its central location and position as a transportation hub, Chicago has embraced the ongoing development of its robust supply chain and logistics industry, which have become essential to support the high demand of on-line shopping in recent years. The growth of the logistics industry in Chicago can be seen in a variety of ways; an increase in trucks on the road, the massive warehouse facilities being built, the high-end offices opening up downtown and the educational institutions advertising new degrees in supply chain management. Chicago has also positioned itself as a knowledge hub. Nearly 10% of thenation’s computer scientists come from Illinois annually and the city graduates more engineers than MIT, Stanford and Cal-Tech combined, according to World Business Chicago. A collection of insurance carriers, hospitals, specialty hospitals, nursing facilities and pharmaceutical companies in Chicago are contributing to the MedTech sector. Additionally, Chicago is home to over 40 medical and health associations, which has helped the MedTech industry take off.
Chicago's Industry Diversity Fuels and Economic Powerhouse
Chicago is ranked 6th on the Cost-of-Living Index, with a rate of 118, above the national averageof 100, but below New York, Los Angeles, Boston, Washington D.C. and Miami. According toCNN Money, a $50,000 annual salary in Chicago is equivalent to $100,615 in NYC, $77,295 inSan Francisco and $63,000 in LA and Boston. Affordable housing is where Chicago most oftenbeats competitors and why it is no wonder that Chicago remains a desirable destination foryoung professionals and businesses looking to attract them. According to rent.com, Chicagoapartment renters paid an average of $2,801/month in 2022, whereas rents were $6,165 in New York,$4,564 in Boston, $4,251 in San Francisco and $3,474 in LA. Median home prices in the metro area arecurrently averaging $310,000, placing it 10th on the list of top competitors. Many Chicagoans that residein the downtown area reap the benefit of not needing a car, as the city’s convenient public transitsystem stops are within walking distance of most apartment complexes, and passes are pricedat $20 per week.
Cost of living
Chicago’s affordability for living is noteworthy, but so is the low cost of business. Combined, the two help draw companies from other metros, particularly coastal competitors. Chicago’s Class ACBD net office rents were around $40/SF at the end of 2022. With one of the lowest average asking rates among the top 10 U.S. office markets, Chicago tenants can save on real estate and operations costs. Industrial real estate in Chicago is also significantly more affordable than other major markets with average triple net rents of $6.24/SF, the rest of the nation is over $9.00/SF, which has helped fuel the industrial market’s record levels of growth over the past few years. The lower cost of living in Chicago translates into a lower labor budget for companies. According to a study from The Boyd Co., annual labor costs for 200 support staff employees at the headquarters office in Chicago would cost $17 million annually, $2 million lower than New York City. Chicago’s high corporate income tax rate is one of the city’s least sellable traits. According to the Tax Foundation, Chicago’s corporate income tax rate of 9.5% is more than 60 basis points higher than the next closest competitor, Los Angeles, at 8.84%. Chicago has recently lost some corporate tenants to Texas, where the franchise tax is 0.75% of net revenues. Chicago can not compete with other metros like Dallas, Austin, Miami and Nashville who don’t have a personal income tax rate. However, Illinois personal income tax rate at 4.95% is the lowest of other competing metros. The city is highly competitive in terms of its cost of living and doing business. With unlimited access to fresh water and the absence of natural disasters, Chicago is at an advantage to welcome climate change refugees. Additionally, with its central location in the country, Chicago will always be a top contender in the corporate world.
Cost of business
Over the last two decades, Chicago has developed into a world-class tech hub, launching some of the most recognized technology firms and growing into a global competitor. According to the Chicagoland Chamber of Commerce, the city’s tech sector grew 18% in the last ten years, adding more than 106,000 direct tech jobs and 147,000 multiplier jobs. Currently home to 23 tech unicorns, Chicago ranks first in the US for angel seed and stage funding for Black and Latino founders. It also has the highest concentration of women-owned startups in the world with 34%. And in 2021, Chicago was ranked as the number one metro by tech salary growth. So how did Chicago foster and advance this now crucial sector of the economy? From the start, Chicago’s tech ecosystem survived by importing startups and other tech companies through mergers and acquisition deals. In general, the companies have also been largely background or back-end companies that help other businesses operate versus consumer-facing companies, with a few exceptions like Groupon, Cars.com, and GrubHub. As a leader in the financial sector, fintech was a natural segway that led to companies such as Braintree Payments, now Paypal, and Morningstar. In the early 2000s, several organizations formed to start nurturing Chicago’s tech scene, the first incubator opened, creating the first incubator space in the city, offering workspace, mentorship, educational programs, networking opportunities, and business contact sharing. At the World Incubation Summit 1871 was recognized as the World’s Most Promising Incubator for Women Founders. But 1871 isn’t Chicago’s only top-ranking incubator. The city also has incubators focused on other strong industries. mHub is the nation’s fastest-growing manufacturing inclubator, with a focus on physical product development, matter is home to more than 200 healthcare startups, and Portal Innovations is a life science hub. These incubators, combined with efforts by the city and state, have fostered a competitive tech scene that recently had its best year ever. In 2021, Chicago was finally recognized as a global tech competitor. Chicago tech companies raised more than $9.7 billion in venture funding, over $1 billion more than Chicago startups raised in all of 2020 according to Crunchbase. This number was fueled by the record-breaking 12 unicorns, companies valued at over $1 billion created. These 12 unicorns pushed Chicago into the number three spot for producing unicorns, only behind San Francisco and NYC, outpacing Boston, Los Angeles, and Seattle. The return on venture capital in Chicago is the highest in the country. Because venture capital in Chicago is harder to find than in coastal markets, it makes the threshold to enter higher, leaving only the most significant innovators to succeed. So, what are the strategic advantages that Chicago offers? Its access to a highly educated workforce and a lower cost of living than coastal markets. with so many world-class educational institutions in Chicago, the city awarded almost 25,000 Bachelor’s, Master’s, and Doctoral degrees in STEM-focused areas, a new record for the state. The number of STEM degrees has increased annually by 3.5% since 2010. Last year, according to the Illinois Science & Technology Coalition, Chicago was also the number three producer of computer science degrees in the US. In addition to the city’s strong access to labor, Chicago’s apartment rents are 20% lower than other major US cities. To further complement, Chicago’s office rental rates are a fraction of New York City and San Francisco, a crucial factor as technology tenants.
Looking forward
These companies represent the trendsetters amongst Chicago office tenants, demanding high-end, amenity-rich spaces. Mega occupiers like Google, Uber, Salesforce, and Tempus Labs have driven office rental rates to record levels. While the pandemic forced the hand of many tech tenants to place space on the sublease market, there have also been some significant deals from others. Google’s recent commitment to take over the former Thompson Center in the Central Loop, leads many to believe that this move is the start of a major transformation for the area. In the last several years, the struggling submarket has lost numerous financial tenants who have flocked to the West Loop. This year Chicago has seen 1.2 million square feet of office leasing by tech tenants XX% of total leasing. While a majority of this movement was driven by Google, other notable leases include transactions from Basis Technologies, Vivid Seats, Stripe, and Snap. The tech sector plays a vital role in Chicago’s ecosystem. Tech companies offer high-paying jobs, which lifts the housing and retail markets and increases the amount of leased office leasing office space. This momentum generates revenue that gets reinvested in the city. It also helps foster other companies and industries and attract positive attention to the city of Chicago. While the current economic headwinds are impacting the tech market, I want to save the rest of this paragraph to see what happens with the economu before we make a forward statement.
What sets it apart from competitors?
Chicago's Unique Tech Market: What Sets it Apart from it Competitors?
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14.2 BSF of mixed use property $192M value, $1.4 billion in annual economic impact revenue Pending approvals, the Chicago Bears football team will acquire the entertainment district which will include an enclosed stadium, commercial, retail, restaurants, parks, and housing on the previously owned Arlington International Racecourse
Arlington Park | 326 acres
In a dense market like Chicago, where real estate is tight, and land is scarce, developers must get creative to provide occupiers with new opportunities. Repurposing land is a natural stage in the evolution of real estate markets as they adapt to changing needs and uses for space. As the pandemic gets further in our rearview mirrors, the standing markets have proved their resilience. The pandemic has shifted Chicago’s share of each major property type, prioritizing industrial as e-commerce grows and shifting office space to focus on hybrid and collaborative work. The divergence is driving developers and investors to turn office campuses into world-class logistics hubs, shopping centers into multipurpose town centers, and undeveloped swaths of land into new neighborhoods.
Developments that are reshaping the local landscape
A World-Class City Chicago's Industry Diversity Chicago's Affordable Edge Chicago's Unique Tech Market Chicago Megasites Public Transit Elevates the CIty The Epicenter of Distribution Higher Education and Grad Retention Why Chicago is Always a Winner
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Chicago Megasites: Developments that are Reshaping the Local Landscape
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113.0 MSF of mixed use property 10,000 multifamily units, 24,000 jobs This project will connect several untapped neighborhoods to Chicago’s Central Business District New development will fuse new homes, commercial spaces, cultural events, academia and outdoor recreation space
The 78 | 62 acres
14.5 MSF of mixed-use property $6 billion value and 23,000 jobs The project includes improved infrastructure and transportation, new businesses and residences, parks and open spaces The development connects 50 acres of riverfront development between three of the most popular neighborhoods - Bucktown, Wicker Park and Lincoln Park
Lincoln Yards | 53 acres
700,000+ SF industrial redevelopment of a former outlet mall to better serve the highest and best use in this location Two building redevelopment includes a 540,960 SF spec building and 177,320 SF build-to-suit opportunity Prime location & access along I-90, about 50 miles Northwest of Chicago Completion of the 540,960 SF spec building is slated for Fall 2023
Huntley Commercial Center | 60 acres
3.5 MSF of industrial space America’s largest inland port Access to BNSF and Union Pacific, direct access to Route 53 and is close to I80, I-55 and I-355 The project will give retailers, 3PLS and more, access to 68% of the US population within a two-day drive
Third Coast Intermodal | 532 acres
3.2 MSF of industrial space 10 building logistics park 1.2 MSF scheduled to deliver in 2023 The project will collect significant tax dollars, approximately $134 million from 2023 to 2040, on the previous unused Allstate campus
Logistics Campus | 232 acres
Chicago is renowned for being extremely walkable, but the Windy City also boasts some of the most efficient public transportation in the country. The Chicago Transit Authority is the nation’s second-largest public transportation system, serving 35 suburbs and all of the Central Business District. Residents can move around the city on one of eight ‘L’ train lines or hop on one of the 129 bus routes. In the warmer months, Chicago is a city built for bikers. With over 200 miles of protected and shared bike lanes, it is no wonder that Chicago was ranked as one of the top cycling cities in the U.S. by Travel Channel. Not only can you hail a taxi car in the Windy City, but also a water taxi. The Chicago Water Taxi and Shoreline Water Taxi provide some of the best sightseeing along the Chicago River, as well as being a fun way to get from A to B.
How Chicago's Public Transit Elevates the City
The city of Chicago is one of the largest hubs for businesses, people and products as they make their way from state to state and country to country. To further complement, access to the Great Lakes and the Chicago River, which links up to the Mississippi River, and ultimately the Gulf of Mexico, makes Chicago the epicenter of distribution, and a prime location for supply chain and logistics. Positioned nearly in the center of the United States, Chicago continues its long history as America’s most important transportation network shuffling freight by car, truck, rail, air and water, from coast to coast, and all points in between. This movement of goods is being supported by the largest industrial inventory with nearly 1.2B SF of warehouse space.
A logistics magnet in the U.S.
Chicago is the Epicenter of Distribution Network
Chicago is the only city where all six Class I railroads converge and exchange freight. With proximity to 10 interstate highways running through the Chicagoland area, the city has become a crossroads for the country and global supply chains.
The Illinois Department of Transportation recently announced Rebuild Illinois, a six-year, $33.2 billion transportation and Infrastructure Capital Plan. The program will add efficiency and capacity to the largest intermodal system in the U.S., the third largest interstate highway system in the nation and the largest inland container port in the nation.
Rebuild Illinois
$24.6 of the bill’s funds will go towards highways, bridge improvements, system supports and modernization of safety and systems. The remaining $8.6 billion of the funding will be put towards transit, passenger and freight rail, aviation and ports. This program will add efficiency and capacity to one of the largest intermodal systems in the U.S., third largest interstate highway system in the nation, and the largest inland container port in the nation.
By 2027
A World-Class City Industry Diversity Affordable Cost of Living & Business Unique Tech Market Chicago Megasite Public Transit Elevates the CIty The Epicenter of Distribution Higher Education & Grad Retention Why Chicago is a Winner
Chicago's Unique Tech Market
Amy Binstein - Midwest Research Director, Newmark
Following along the national trends Chicago’s office market fundamentals have continued to weaken as it grapples with the now seemingly permanent changes brought on by the pandemic. Most of the activity on the leasing side now involves some type of contractionary activity with tenants on average reducing their square footage by roughly 25%. The few tenants that are growing or expanding and tenants that are contracting have their sights set on high quality office space, moving into the premiere spaces in Chicago and spending a significant amount on build outs. Chicago landlords for the most part have been able to hold their high rental rates offering higher concession packages but as the debt situation continues to escalate some owners will not be able to finance these deals. Extra space continues to plague both the Central Business District and the suburbs. Suburban owners are attempting to get creative, offering up antiquated suburban office buildings as options for redevelopment into industrial and data center uses. The availability of sublease space in both the Central Business District and suburban markets has stabilized but with minimal sublease leasing the market is preparing for most of these availabilities to become direct vacancies in the next five years.
Chicago’s retail market is thriving coming out of the pandemic with availability hitting its lowest point since the mid-2000’s. This decline in availability has been driven by increased leasing volume and an all-time low in retail construction as financing is difficult to secure. Always a popular restaurant market Chicago has seen an uptick in restaurant dining that has correlated with an increase in restaurant leasing, not only in the Central Business District but in many suburbs. The surplus of vacant big box spaces has also come down as mall owners and demolish big box stores in favor of multifamily and entertainment areas at some of the area’s largest malls like Woodfield, Old Orchard, Hawthorn Mall and Fox Valley Mall.
Renowned for its strategic geographical location and robust infrastructure, Chicago stands as a pivotal hub within the national industrial real estate landscape. Despite the recent slowdown in commercial real estate demand, Chicago has held onto its industrial powerhouse status. Additions of over 42 million square feet of modern inventory since 2022 has allowed many new industrial tenants to move into the market to benefit from the market's well-established transportation network, including O'Hare international airport and an extensive railway system that bolsters the market's position as a prime distribution center, facilitating seamless connections to key markets across the nation. With a steady influx of investments propelling technological advancements and the development of state-of-the-art warehousing facilities, Chicago continues to attract both domestic and international businesses seeking to leverage its unparalleled connectivity and dynamic industrial environment.
Chicago’s multifamily market has been one of the fastest growing inventories in the nation after post-pandemic demand tightened vacancy rates and pushed rent growth to 20-year highs. Given the city’s diverse neighborhoods, cultural vibrancy, and robust economic landscape the market continues to be an alluring destination within the multifamily sector. Rich with urban amenities, including world-class dining, cultural attractions, and recreational offerings, the city attracts a diverse demographic, catering to various lifestyle preferences. Chicago’s multifamily market continues to exhibit resilience and growth, driven by strong demand for sophisticated, amenity-rich residential spaces. The city’s allure as a destination for all solidifies its status as a focal point for continued multifamily growth and investment.
State of the Market Real Estate Cycle Mega-Regions AI and the CRE Industry Self-Storage Trends Tenant Hybrid Model Life Science Market Distressed Assets Advanced Manufacturing
Newmark’s appraisal experts are facing a wide range of valuation challenges right now, from rapid inflation to a beleaguered ‘return-to-office’ performance, both of which are resulting in value volatility. Additionally, with the possibility of a recession in the near-term, the current real estate market creates an environment with limited investor certainty. In times of uncertainty, market participants turn to professionals that know their trade. When our clients turn to Newmark Valuation & Advisory, our most experienced and knowledgeable expert appraisers perform the necessary research and effectively communicate their findings and opinions. Our team of seasoned professionals has been through the ‘dot.com’ bubble in the early 2000s, the financial crisis of 2009 and the pandemic. In other words, this is not our first rodeo. In every downturn, there are the macro-level economic forces that drive change, and there are market participants that adapt to that change, thereby steering the market in a new direction. Understanding current market influences and the motivations of market participants requires research – talking to buyers, sellers, brokers and economic advisors, and digging into and interpreting the data to understand market capitalize on the current trends. One of the primary challenges in a fast-changing market is having access to good market data, which in ‘appraiser speak’ means ‘recent comps.’ Prior to the pandemic, ‘recent comps’ might have meant sale comps from within the last 24 months. Nowadays, sale comps from six months ago might be considered too dated. In a market with limited data, research involves interviewing several buyers and brokers to understand their new underwriting assumptions. As an example, the real estate sector that is currently the most opaque is the office sector. Our team is therefore taking deep dives into the sector’s changes with regards to tenant downsizings, negative absorption, declining occupancy levels, increasing concession packages and tax uncertainty, among other issues. Negative leverage is also driving investment rates into unchartered territory. Our appraisers are analyzing several office properties that are potential options for adaptive re-use as multifamily properties. While conversion of office to multifamily is not the silver bullet many were hoping for, it is a viable option in some cases based on a property’s location, the functionality of the space and the costs to reposition the property. Nonetheless, this is just one example of how a significant change in the market requires our experts to re-examine the highest and best use of a property. There is also a much higher degree of segmentation within each real estate sector than in previous times. For example, the office sector features a wide range of assets, from under-performing Class B and C office buildings on the brink of foreclosure, to Class A trophy assets without any available space to lease, all located within a CBD challenged by increasing taxes and public safety concerns. The class bifurcation carries into suburban markets in which some office properties often have an array of amenities, low operating costs and plenty of parking, while others are burdened with functional issues and major capital expenditure needs. While these issues of market segmentation have been with us for many years, it’s really the degree of segmentation that has been amplified in an environment with low physical occupancy and high mortgage rates. The stress that these factors have added is resulting in significant value spreads between the haves and have nots. Commercial real estate comprises a wide variety of subsectors, with retail, office, industrial and multifamily comprising the largest. While all are influenced by certain macro-economic conditions, each sector also has their own unique list of demand drivers. We are seeing improvements in the retail sector as institutional investors have shifted capital away from office and over to retail given increasing retail store sales, rents, and occupancy levels. Industrial has been a preferred sector for many years and continues to perform well due to healthy demand and limited new offerings. Multifamily is also benefitting from the high cost of home ownership which does not appear to be abating. While each core sector presents unique valuation issues, Newmark Valuation & Advisory also has a strong focus on additional subsectors such as self-storage, hospitality, C-stores, QSR’s, and data centers among others, through a strategy of intense specialization. In short, we address changes in the market with the same strategy that we address unique assets, and that is simply by specializing. Only by being laser focused on a property sector and the market that influences that property sector, can our appraisers best address our client’s needs, both in stable times and in a period of uncertainty.
John Mackris, MAI, MRICS, CCIM - Senior Managing Director, Newmark
Real Estate Cycle: Valuations Ride the Highs and Lows
The Midwest, arguably one of the most debated ‘regions’ in the U.S. in terms of which states are included, has one of the richest histories in the U.S. and is a powerful culture in country. The strengths of the Midwest include its agriculture and manufacturing prowess, access to fresh water, affordability, educational institutions, and natural beauty. The Midwest is also a robust business hub, home to more than 100 Fortune 500 companies that are supported by a strong workforce, transportation, research, and innovation. The Midwest has rebounded stronger than other regions post pandemic. According to Basking.io, which tracks regional return to office numbers, the Midwest posted a peak of 60% for the first half of 2023, more than double the peak of other regions.
Newmark’s professionals service all assets and transaction types in 10 metropolitan areas in the Midwest.
Chicago
The most diverse economy in the U.S. and ranked 9th on the 2023 Global Financial Centre Index. The largest industrial big-box market in North America with the second largest warehouse labor force in the U.S. (Newmark Research). Ranked 1st for business expansions and relocations by Site Selection Magazine for the 10th consecutive year. One of only two U.S. cities on Time Out Magazine’s Top Cities list for Public Transit. O’Hare International Airport (ORD) is the #1 airport in North America for cargo by value at more than $200 billion per year (World Business Chicago). Cincinnati. One of the most cost-friendly metro areas to do business, with an overhead about 40% lower than other major metros (Cincinnati Chamber of Commerce). One of the top 10 metros for corporate investments for the 20th consecutive year, according to Site Selection Magazine. 4th best city in the U.S. for recreation, according to WalletHub.
One of the most cost-friendly metro areas to do business, with an overhead about 40% lower than other major metros (Cincinnati Chamber of Commerce). One of the top 10 metros for corporate investments for the 20th consecutive year, according to Site Selection Magazine. 4th best city in the U.S. for recreation, according to WalletHub.
Cincinnati
25 higher education institutions and 25 business incubators. The second heaviest concentration of headquarters employment among top 20 U.S. metros (The Northeast Ohio Region). Home to the Cleveland Clinic Cleveland, a medical center with 270,000 biomedical and healthcare workers in the Northeast Ohio Region, ranks 4th in the U.S. for attracting investment for medical startups (The Northeast Ohio Region).
Cleveland
Rickenbacker International Airport (LCK) is one of the nation's only cargo-focused airports, with 150,000 tons of air freight each year (Columbus Regional Airport Authority). Strong business climate with 22,000 annual college grads, a 10% lower cost of living than the national average and top tech talent marketplace (Columbus.gov). Home to some of the world’s most recognizable brands like Scotts Miracle-Go, Express, Nationwide Insurance and Abercrombie & Fitch.
Columbus
Michigan is a top 10 state for business in the U.S. by CNBC for 2023. The manufacturing industry ranks 1st for total assemblers out of all U.S. metros, with the lowest turnover rates and more than 240,000 employees (Detroit Regional Partnership). Recognized as the top emerging startup ecosystem in the U.S. by Genome’s Global Startup Ecosystem Report.
Detroit
Indiana ranks 1st as the best state to start a business, according to Forbes Advisor. 2nd largest FedEx hub in the U.S. One of the top 10 largest cargo airports in the U.S. According to the Tax Foundations, Indiana ranks 9th in the U.S. on the 2023 State Business Tax Climate.
Indianapolis
85% of the U.S. population can get to Kansas City within two days or less (KC Smart Port). Home to four Class I railroads: Canadian Pacific/KC Southern (CPKC), BNSF, Norfolk Southern, Union Pacific. The only Midwestern city selected to host the 2026 FIFA World Cup.
Kansas City
One of the highest concentrations of Fortune 500 companies per capita in the nation. Conde Naste voted Milwaukee the 3rd best large city in the U.S. to visit in 2023. Competitive tax climate, low energy costs and access to fresh water from Lake Michigan.
Milwaukee
Six companies on Forbes America’s Largest Private Companies, including #1 Cargill. 13 companies on the Forbes Global 2000. 16 companies on Fortune 500.75 companies on Inc.’s 5,000 fastest growing. Coworking Café ranked Minneapolis the best metro for work-life balance.
Minneapolis
Within 500 miles of nearly one-third of the U.S. population (Greater St. Louis Inc.). The 15-county region is home to an intersection of three rivers, five interstate highways, five Class I railroads and five airports. The Cost of Living index of 84.1 is 15.9% lower than the U.S. average and 1.8% higher than the average for Missouri. (Missouri Economic Research and Information Center).
St. Louis
Sridhar Potineni - Chief Information Officer, Newmark
Text & Image Generation Building Logos Valuation of Properties Professional Headshots Energy Conservation Tenant Renders UtilizationSpace Visualization Self-Optimizing Buildings Data-Driven Property Marketing
Top 10 ways that AI will change the landscape of corporate real estate
In the corporate real estate brokerage world, we’re always looking for ways to streamline our operations and enhance our service offerings. The advent of AI technologies like nGPT presents us with a unique opportunity to do just that. Imagine having a team that never sleeps, tirelessly handling those routine tasks that we all love to hate - data entry, scheduling appointments, sending follow-up emails. It’s like having a tireless intern who never asks for a day off. But the potential of AI goes beyond just administrative tasks. It can be a powerful tool for data analysis, providing us with insights that would take a human analyst weeks to compile. It can predict market trends, identify potential investment opportunities, and even tailor recommendations to clients based on their unique preferences and financial situations. In essence, AI can be our secret weapon, helping us to stay ahead of the curve in a competitive market. It’s not about replacing us, but rather, enhancing our capabilities and allowing us to provide an even better service to our clients. (written by AI)
The generation of generation
"Newmark is at the forefront of integrating Artificial Intelligence in the Commercial Real Estate (CRE) landscape. Our commitment to leveraging cutting-edge AI technologies aims to revolutionize how we analyze data, optimize assets, and deliver unprecedented value to our employees and soon, our clients. We’re not just adapting to the future of CRE; we’re shaping it." - Sridhar Potenini
Kris Parker - Director, Newmark
The self-storage real estate market has emerged as a dynamic and rapidly expanding sector within the broader realm of commercial real estate. Fueled by shifting societal trends, urbanization and evolving consumer behaviors, self-storage facilities have evolved from mere physical space into sophisticated and versatile real estate assets. The self-storage sector’s well-documented growth has attracted the attention of investors and developers alike, as its resilience during economic fluctuations and potential for steady cash flow make it an enticinginvestment opportunity. Amidst this growth, the self-storage real estate market is undergoing wholesale transformation driven by technological advancements and changing consumer demands. Digital platforms have revolutionized how customers discover, book and manage their storage units, fostering a more streamlined and user-friendly experience. Additionally, innovative design and utilization of space have led to the creation of modern, climate-controlled facilities equipped with state-of-the-art security systems, appealing to a wider demographic and offering solutions beyond traditional storage needs.
6 trends in self-storage
On the surface, it appears that the storage industry has not evolved and adapted to the tech world it’s in. However, the reality is that self-storage facility owners are embracing technology-based equipment and information systems to effectively and efficiently, save time for employees, increase opportunities for customer-led lease-up, and revolutionize functionality and security systems. Today’s technology can greatly reduce Owners’ resource drain and improve profitability. It can also improve the customer experience, driving value perception and reducing turnover. From remote monitoring to self-serve kiosks to biometrics, harnessing technology will help self-storage companies transform the industry by creating a more modern and efficient self-storage experience.
Mobile apps
Many Self-Storage facilities are now offering mobile apps that allow customers to manage their accounts, pay bills, view unit availability, and access facility information on-the-go. Essentially every function that a customer needs is right at their fingertips. More advanced apps even detect when a consumer has approached the facility’s gate and allow them to access the facility in a touchless fashion.
"Given the current economic environment, it might not instantly seem like the ideal time to sell self-storage facilities, but rising interest rates can be favorable to sellers. The uptick in cap rates that correspond with interest rate hikes will assuredly cause a dip in the market value of a seller’s property. However, self- storage assets have held their value better than many other asset classes. In particular, triple net properties have seen a larger change than self storage.Self-storage sellers who seek to leverage a 1031 exchange to avoid taxation are able to replicate their current facility’s income stream while also liberating themselves from landlord responsibilities, a fairly compelling proposition." - Kris Parker
Remote monitoring and automation
There are several amenities and control software that are available for remote monitoring. These enable Owners to improve security and reduce costs. The same technology also facilitates emergency ingress and egress without necessitating a visit from the owner or an employee.
Biometric and bluetooth locks
While older than Apps, automated kiosk technology aids facility managers and owners by improving customer service and streamlining responsibilities such as basic application and access. Better still, Kiosk software can easily be integrated with a property’s security and management systems.
Automated self- serve kiosks
Mechanized modules
Companies such as Elevated Storage Solutions can provide your facility with a modular system that moves units along rows, and up and down columns. The system can be integrated with app technology so that a customer’s unit is waiting for them at ground level when they arrive. Remarkably the system saves on construction cost vs. traditional units and allows for facilities to deliver large amounts of Net Rentable Square Feet with much smaller footprints than traditional designs.
Online leasing for self-storage facility searchers
Greater adoption of digital processes can mean less reliance on staff (read: decreased payroll expense) while providing on-site and online lease-ups. On-line leasing also aligns with consumer preference as it is convenient, and is available 24 hours a day, seven days a week. Best yet, onboarding new customers via a website will allow you to convert more customers to credit cards (reducing late payments), and can help owners increase the adoption of tenant insurance and other profit drivers.
Self-Storage Why Chicago is Outperforming LaSalle Street Rejuvenation Sublease Market Downturn
Chicago currently ranks 4th in the nation for average daily office occupancy, lagging only behind Texas based cities.
4. Office
Among metros with 100M+ SF of retail, Chicago ranked 2nd inQ3 YoY absorption (3.5M SF).
5. Retail
The urban core is projected to gain 33k residents by 2027. Due to a subdued pipeline, it is estimated there will be demand for an additional 8,100 units than slated for delivery.
3. Residence
Chicago ranks #1 in YTD net absorption (1,384 units) and 3rd in total absorption (5,495 units) among all major metros
2. Occupancy
Chicago’s apartment rent growth (3.1%) is the highest among major metros and 3.4x greater than the national average (0.9%).
1. Rental Living
Five data points on why Chicago is outperforming
Chicago metro 2023
Fortune 500 company HQs in Chicago, 2nd to NYC
33
Tech venture capital in 2022, ranking 5th nationally
$10.2 Billion
3rd nationally, 20th globally
$764 Billion GDP
Median home value
$320,057
Median household income
$86,570
Average effective rent/unit (Urban)
$2,538
Average effective rent/unit (Metro)
$1,963
Average effective rent/unit (Suburban)
$1,758
MC | In a tight labor market, most employers are cautious about demanding a high level of return to the office. In that environment, it would be important to understand employee preferences for working remotely, as well as the employee preferences for a dedicated seat. Many surveys have identified the perceived value of a flexible work environment by today’s workforce, across all generations. Some employees may prefer to give up a dedicated seat or office in exchange for the flexibility to work remotely some or most of the time. Some individuals have even said they would give up a certain amount of compensation for the flexibility of where to work each day. Other employees have relocated their primary residence to another state, while still being a part of the office from which they came. All those individuals may be prime candidates for a non- dedicated seat or office.
Q | How tight is the tenant's labor market?
MC | Senior people working from the office is a huge draw for junior people. That is an exciting way to learn, get assignments, hear commentary and strategies and watch behaviors that impact professional development. If senior leaders are not in the office, rank and file employees may wonder “Why go in at all?” Identifying opportunities to increase senior level attendance is critical to increasing overall office usage. The performance objectives and location of the clients and direct reports of each senior leader may shed light on why the senior leader is not spending more time in the office.
Q | Are the tenant's senior leaders coming in?
MC | Commuting time has a large effect on office attendance. This is true at all levels, especially senior levels. Survey results reported increased productivity (i.e., more hours worked) during the pandemic when commuting was eliminated. To determine the impact of commuting on a tenant’s office occupancy, the tenant should map employee residence zip codes. Mapping employee residence zip codes by title would further enhance the data. Anything that reduces commuting time, such as a centralized location for the employee base, proximity to public transportation, adjacent/well-priced parking, streamlined security systems, and, yes, a hybrid office model, will support employee productivity.
Q | Is the location impacting office occupancy?
MC | Do all workers need or warrant a dedicated seat or office, or would some workers be best supported in a more fluid non-dedicated office environment? The occupancy data discussed above is most beneficial when names and titles are revealed. With names and titles, the data will allow a tenant to assess which positions and people do not require a dedicated seat or office to be productive. This exercise may enhance an organization’s culture. Flexibility on where people work is a highly valued benefit, as many surveys have shown, and a non-dedicated workplace will almost certainly allow a tenant to shrink its office space significantly.
Q | Is it really necessary to have dedicated seats and offices?
MC | Let’s be honest. While data reported by Kastle Systems may show that occupancy levels in the U.S. on average are back to 50% of pre-pandemic levels, what is not being reported is that pre- pandemic occupancy levels were generally at 60-70% of capacity, meaning current occupancy levels are actually at 30-35% of capacity (headcount of the office). According to Kastle, on Mondays and Fridays, occupancy across U.S. office markets falls substantially lower. This means tenants are often leasing more space than is used or needed on a weekly or daily basis. To help determine true occupancy, each tenant should review its own data since January 2022 – the date people generally stopped wearing masks. To do this, the tenant can use its actual card swipe data or, if accurate card swipe data is unavailable, employee server pings to see how many people were in the office each day. This process allowed one tenant to significantly reduce its dedicated office space while providing more collaboration and meeting space. By reducing its overall footprint, the tenant will save millions of dollars in rent and other occupancy costs during its lease term and reduce the amount of energy being wasted to heat and cool empty office space. What’s more, the overall space reduction and increased collaboration space should result in more employee interactions, information sharing and idea generation.
Q | What is the tenant's true occupancy level?
MC | This is the question hotly debated by tenants following the pandemic, as remote and hybrid work has taken hold in offices across the U.S. There is no one answer to this question. As such, the amount of office space a tenant should lease in the hybrid model warrants careful consideration and study. The amount of space leased is the key determinant of the cost of real estate. The organization’s culture and the tenant’s carbon footprint are also significantly impacted. Strategists inside or outside the organization must do the work to be able to answer the question for a particular tenant. Here is a list of questions that should be asked and answered to support the conclusions and decisions about the amount of space a tenant should lease in this new era.
Q | How much office space should tenants lease in a hybrid model?
Q&A with Newmark's Melissa Copley, Vice Chairman
MC | A CEO recently commented that one third of his corporate headquarters’ workforce will be 100% remote going forward and only come in on occasion for meetings. If collaboration is important to employee development and idea generation, employers may consider hybrid officing by teams, all-employee meetings, celebrations, and other ways of getting people together to elicit top performance by the workforce, recognizing that it may not be daily.
Q | Is productivity corelated with being in the office? If so, for which jobs, and for which jobs is being in the office not required?
MC | Where do the employees sit when they come into the office? One technology company was experiencing a full lunchroom but empty workstations. As a result, they decided to mothball two of their office floors and introduce lounge and other alternative seating on the remaining office floors. This matches up with one of the big U.S. consulting firms that counts every seat in the office for seating capacity, not just the offices and workstations, knowing that people tend to meet in groups and teams when they are in the office, rather than using the office for individual heads-down work.
Q | How is the space used by people when they are in the office?
MC | Legacy office space design is almost certainly out of step with any hybrid work model. Moreover, if a tenant is swimming in space, it is virtually impossible to enhance the culture. A common observation is that lower office occupancy begets even worse overall attendance! A compressed footprint may be the first step or linchpin to enhancing culture through office space.
Q | Does the size and design of your office space support the desired company culture?
MC | With some people in person, some on zoom, some in conference rooms, and some spread throughout the office, good technology that “just works” when you enter the room is crucial. Wi-Fi needs to work well everywhere. Conference rooms need to equally include both remote and in-person attendees with good visibility, voice, and presentation tools. Reservation systems need to be intuitive and seamless.
Q | Does your office have the technology required to thrive in a hybrid model?
MC | As one senior vice president in charge of real estate noted, an increase in non-dedicated workspace is anticipated in the future and therefore an increase in the office space is not expected within the next 10 years, even with a growth in headcount. In case more space is needed in the future, expansion rights can be negotiated into a tenant’s lease. Moreover, tenants can find ways to increase seating and private office capacity within the space by repurposing underutilized areas as needs evolve.
Q | Is more office space really needed to accommodate employee growth?
MC | If the hybrid model of office occupancy is here for the foreseeable future, determining the right amount of office space to lease is of the utmost importance. Many tenants will find that downsizing may create opportunities to re-invest in new approaches to enhance productivity, collaboration, and culture. It takes courage and conviction to make office space decisions. The data and the answers to these questions will support the right solution.
Q | What does it all mean for the size of the office requirement?
Q&A with John Daniels, Director - Capital Markets, Newmark
Loan sales and the distress in the market is now a major topic of interest across the industry, tell us your thoughts on what’s taking place.
Do you think the current banking crisis could have been prevented?
Yes and No? I’m not an economist nor a historian but know that history does tend to repeat itself. Hindsight is 20/20 and people tend to look back and say “we should have or could have done this better.” That may be the case here, but markets are competitive and in a historically low interest rate environment coupled with a decade-plus of commercial properties rebounding from the GFC, owners capitalized and banks (and non-bank lenders, too) provided liquidity. Some lenders are in a better position than others depending on how aggressive they were during this time.
01 02 03 04 05 06 07 08 09 10
Foreclosures and the Debt Market Rejuvenation of the CBD and Mag Mile Sublease Market Downturn ChatGTP and the CRE Industry Renovation Redevelopment Real Estate Cycle and Valuations Transformation of Major Malls Self-Storage Bio Hub and R&D Mega Region - Milwaukee
Right now, it is primarily about the public sector – i.e. the government. Newmark has a number of government loan sales and valuation contracts and those were most active during the years following the great financial crisis (2009 – 2015). We have already seen activity pick up with our current representation of the FDIC in the sale of the former Signature Bank, N.A. assets. The recent additional failures of Silicon Valley Bank and First Republic and added pressure on the banking system, the public sector will remain active in the secondary markets for the foreseeable future.Q | You mention the public sector as being the most active. What is going on in the private sector? JD | There is certainly a lot of activity and “noise” surrounding the private sector; however, there is still clearly a price disconnect between sellers (lenders) and the buyers. We have been able to recently complete some private sector loan sales, but those have been more challenging than they would be in a liquid, connected marketplace. It is a good sign that sellers are starting to respond to the current market conditions through transactions.
Foreclosures and the Debt Market
What is your prediction of the future state of the banking crisis, let’s say in the next 1-2 years and also the state in 5 years.
It is hard to say but clearly there is a lot of pressure on the banks. The Government has many effective tools to utilize, such as Joint Venture Loan Sales or the Loss Share Program, and i trust they will make the decision that is best for the economy and banking system as we’ve seen in prior cycles.
Are owners really giving high rise buildings to the bank?
Many owners have taken the view and approach that they are unwilling to put more money into certain CBD office assets, for example, which at minimum is what is needed to attract tenants and attempt to stabilize those assets (even that may not be enough due to systemic office issues). For the most part, they aren’t “just giving them back” without thoughtful strategizing and discussions with the lenders, but owners certainly have more leverage than is realized in this situation – because most lenders do not want to own these assets either.
Is there a specific asset class that is struggling more than others?
I don’t think you have to be a loan sale advisor to figure this one out….it is clearly office for a variety of reasons (remote work trends, declining values, illiquid capital markets, etc.), but another asset class that has experienced a decade + of positive growth and will be interesting to track is multifamily. Absent of the Signature Bank multifamily product, much of which is rent controlled / rent stabilized and therefore unique due to New York law changes, we have not yet seen significant market rate multifamily distress.
You currently reside in Chicago, what is going locally and peripherally in the Midwest?
We have been very active valuing assets in the Midwest, particularly discussing lender exposure here in Chicago, namely the Loop. Many owners are under water on their downtown Chicago office assets and discussions are ongoing as to what the best approach to manage through these assets might be. Newmark is currently in the market with a downtown Chicago office tower (Receivership sale) and hope that helps generate some transaction volume here in the Midwest. Secondary markets including Minneapolis, Indianapolis and Cincinnati are also feeling some pain in their respective CBDs.
Chicago's life science real estate market
Chan Zuckerberg Biohub Network
In the first half of the year, Mark Zuckerberg and Dr. Priscilla Chan committed to providing $250 million of funding for the Chan Zuckerberg Biohub Chicago, leasing over 50,000 square feet, with over 25,000 square feet in Fulton Labs at 1375 West Fulton Street and 28,000 square feet at 400 North Aberdeen. Both buildings are owned by Trammell Crow. The Biohub, built out from scratch with clean rooms for specialized purposes, aims to attract top-tier scientists to work on today’s most significant health problems. Some of these include inflammation, which will be studied by researching cells and tissues. The biohub’s goal is to have 50 to 60 people working on site by 2025, and plans to occupy it in January.
Home to various pharmaceutical companies, research institutions and universities, Chicago has emerged as a life science hub for research and innovation. The city’s talented workforce, access to venture capital funding, quality of life and varied ecosystem further support the life science industry, and with the surge of research and innovations, demand for specialized inventory is rapidly increasing. Most of Chicago’s life science real estate is centralized in the CBD and Lake County, where many pharmaceutical companies are headquartered, including top employers Abbott, AbbVie, Baxter, Takeda and Pfizer. Accounting for 708,000 jobs, Chicago ranks third in the nation at the metro level for life science-related occupations, including healthcare, according to World Business Chicago. Life science companies in the region are supported by the higher education institutions in the region, which granted over 30,000 STEM degrees in 2022, with 6% in biotech-related industries. Another indicator of the success and growth of Chicago’s Life Science market is the transfer and commercialization of technology from universities. According to Heartland Forward’s research, Northwestern University and the University of Chicago ranked in the top 25 on their Technology Transfer and Commercialization Index, ranking 13th and 24th, respectively. The index analyzes which universities transfer the most technologies and ideas into the commercial sphere, creating new companies and jobs with the most tangible outcomes for the surrounding communities. Chicago’s Life Science market is at an exciting time as new developments arrive. In the last few years two new life science buildings have been completed which both still have significant leasing to do. Additionally in 2023 Trammell Crow broke ground on their new $225 million, 300,000-SF life science building in Hyde Park, which is expected to be delivered in 2024. Cambridge Innovation Center will manage and operate a 20,000-SF lab and office space in the building. While there is some vacant space weighing down the city’s life science market Chicago has significant access to venture capital, research and innovation occurring and an expanding talent pool. The city’s diverse economy and ability to support many industries will continue to make Chicago a top contender for life science companies.
Clusters and Biohubs
IL Medical District – The district encompasses a large area on the Near West Side of Chicago and is a hub for medical research, healthcare and education, housing various hospitals, research centers and universities. Chicago Innovation Exchange (CIE) – Located at the University of Chicago, the CIE connects researchers, entrepreneurs and investors to accelerate the development of new technologies and startups in life sciences and other fields. Chicago Biomedical Consortium (CBC) – The CBC was a collaborative initiative involving Northwestern University, the University of Chicago and the University of Illinois at Chicago. The goal is to stimulate collaboration amongst scientists at the listed universities and other Chicagoland institutions to accelerate discovery and expand the Chicago-based science ecosystem. Polsky Center for Entrepreneurship –The Polsky Center at the University of Chicago supports the growth of startups and entrepreneurial ventures in various industries, including Life Sciences. Chan Zuckerberg Biohub – CZ Biohub Chicago will focus on engineering technologies to make precise, molecular-level measurements of biological processes within human tissues, aiming to understand and treat the inflammatory states that underlie many diseases.
Lifescience Market
Q | Loan sales and the distress in the market is now a major topic of interest across the industry, tell us your thoughts on what’s taking place.
Q | Do you think the current banking crisis could have been prevented?
JD | Yes and No? I’m not an economist nor a historian but know that history does tend to repeat itself. Hindsight is 20/20 and people tend to look back and say “we should have or could have done this better.” That may be the case here, but markets are competitive and in a historically low interest rate environment coupled with a decade-plus of commercial properties rebounding from the GFC, owners capitalized and banks (and non-bank lenders, too) provided liquidity. Some lenders are in a better position than others depending on how aggressive they were during this time.
JD | Right now, it is primarily about the public sector – i.e. the government. Newmark has a number of government loan sales and valuation contracts and those were most active during the years following the great financial crisis (2009 – 2015). We have already seen activity pick up with our current representation of the FDIC in the sale of the former Signature Bank, N.A. assets. The recent additional failures of Silicon Valley Bank and First Republic and added pressure on the banking system, the public sector will remain active in the secondary markets for the foreseeable future.Q | You mention the public sector as being the most active. What is going on in the private sector? JD | There is certainly a lot of activity and “noise” surrounding the private sector; however, there is still clearly a price disconnect between sellers (lenders) and the buyers. We have been able to recently complete some private sector loan sales, but those have been more challenging than they would be in a liquid, connected marketplace. It is a good sign that sellers are starting to respond to the current market conditions through transactions.
Q | What is your prediction of the future state of the banking crisis, let’s say in the next 1-2 years and also the state in 5 years.
JD | It is hard to say but clearly there is a lot of pressure on the banks. The Government has many effective tools to utilize, such as Joint Venture Loan Sales or the Loss Share Program, and i trust they will make the decision that is best for the economy and banking system as we’ve seen in prior cycles.
Q | Are owners really giving high rise buildings to the bank?
JD | Many owners have taken the view and approach that they are unwilling to put more money into certain CBD office assets, for example, which at minimum is what is needed to attract tenants and attempt to stabilize those assets (even that may not be enough due to systemic office issues). For the most part, they aren’t “just giving them back” without thoughtful strategizing and discussions with the lenders, but owners certainly have more leverage than is realized in this situation – because most lenders do not want to own these assets either.
Q | Is there a specific asset class that is struggling more than others?
JD | I don’t think you have to be a loan sale advisor to figure this one out….it is clearly office for a variety of reasons (remote work trends, declining values, illiquid capital markets, etc.), but another asset class that has experienced a decade + of positive growth and will be interesting to track is multifamily. Absent of the Signature Bank multifamily product, much of which is rent controlled / rent stabilized and therefore unique due to New York law changes, we have not yet seen significant market rate multifamily distress.
Q | You currently reside in Chicago, what is going locally and peripherally in the Midwest?
JD | We have been very active valuing assets in the Midwest, particularly discussing lender exposure here in Chicago, namely the Loop. Many owners are under water on their downtown Chicago office assets and discussions are ongoing as to what the best approach to manage through these assets might be. Newmark is currently in the market with a downtown Chicago office tower (Receivership sale) and hope that helps generate some transaction volume here in the Midwest. Secondary markets including Minneapolis, Indianapolis and Cincinnati are also feeling some pain in their respective CBDs.
Q&A with Newmark's John Daniels, Director - Capital Markets
How are Distressed Assets Influencing the Current Environment?
According to Green Street, commercial values have fallen 16% on average since March 2022. Although the current value of U.S. properties in distress is $71.8 billion, the opportunity for investors and buyers that are willing to take risks is large.
Trade tensions between the U.S. and China and the rising costs of Chinese labor were already established headwinds to the global supply chain status-quo at the onset of the pandemic in 2020. The ensuing two years of turbulence revealed the fragility of the global supply chain. Geopolitical tensions, natural disasters and a general increase in economic instability have had heightened impacts for consumers, markets and governments – intertwining economic aims with security goals. The shifting landscape has led to a resurgence of government-led industrial policy and an effort to diversify and strengthen supply chains. Many firms are acting to bring production closer to consumption through reshoring, nearshoring, foreign direct investment and domestic expansion. Recently passed federal legislation is targeted at rebuilding infrastructure, hastening the transition to a green economy and boosting domestic manufacturing in critical sectors, which is galvanizing massive investment in advanced manufacturing facilities. Via the Infrastructure Investment and Jobs Act (IIJA) signed in November 2021, the Inflation Reduction Act (IRA) and the CHIPS and Science Act signed in August 2022, an initial total of half a trillion dollars is available through federal funding and incentives for advanced manufacturing and followon upstream and downstream suppliers. Significant provisions have been made within this legislation for a portion of materials sourcing and production to be in the U.S. and partner countries to achieve full financial benefit.
What is driving this momentum?
Since 2020, the Midwest has accounted for 20% of all North American advanced manufacturing facility announcements with a minimum initial investment of $100 million. Ohio and Michigan have led the way for the Midwest, attracting large projects like the $20 billion Intel battery manufacturing plant in New Albany, Ohio and the $4 billion General Motors EV battery plant in Lake Orion, Michigan. Illinois specifically accounted for $3.3 billion of announced investment over 4 projects during that same time span, adding a proposed 4,000 new jobs to the state. The Chinese EV battery manufacturer, Gotion, recently announced a $2 billion factory in Manteno brought on by $563 million in boosted Illinois tax incentives through the Reimagining Electric Vehicles in llinois Act (REV) signed at the end of 2022. This deal would add a proposed 2,600 new jobs to the Manteno area, nearly doubling the jobs added through advanced manufacturing project announcements in Illinois prior to the signing of the REV Act.
Midwest
A panorama of definitions and perspectives exist on what constitutes “advanced manufacturing”, with the recurring focus on the use of modern technologies to improve manufacturing processes, enabling more competitive products. While most manufacturing output in the U.S. falls under the “advanced manufacturing” rubric, and growth is manifesting in a diversity of industries, certain advanced manufacturing sectors emerge as particularly innovative, future-oriented and, crucially, incentivized through recent legislation to develop a presence in the U.S. and partner countries. Four key advanced manufacturing sectors—high-tech/digitalization, automotive/transportation, energy, biomanufacturing—are driving the greatest volumes of investment and development, capturing over 90% of the major investments pledged since 2020.
A note on “Advanced Manufacturing”
Monumental growth in North American manufacturing is underway
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The state of Office, Retail, Industrial, Multifamily asset types today, year-end and 2024.
Chicago's Industry Diversity
Real Estate Cycle
