RealEstateNews 6.24.14
Weekly News Roundup
- Politics and Real Estate in Chicago
- Outlook for Commercial Real Estate
- China’s Housing Market Worsens
Politics and Real Estate in Chicago
Downtown Chicago is being threatened by a real estate crisis. The Midwestern metropolis has seen its vacancy rate soar to 16.2%, while the national average is 13.8%. Businesses are leaving the city. The reason? Too much crime and taxes. Big business is looking for more favorable venues. Thus, in 2022, Boeing transferred its headquarters to Arlington, Virginia, just across the river from Washington and next door to the Pentagon, which provides it with many military contracts. That same year, Caterpillar, the global construction vehicle giant, moved its headquarters to Dallas, Texas, where the tax code is more advantageous.
In 2023, Citadel, the company founded by financial genius Kenneth Griffin, packed up for Florida. More recently, in 2024, software company Salesforce decided to sublet 13,000 of its 46,000 square meters. As a result of all this, the city where the first skyscraper was built in 1885 now fears becoming a ghost town. According to KBRA Analytics, three-quarters of Chicago’s securitized mortgages (those listed on the stock market) are at risk of default, the highest level in the country, reports the Wall Street Journal, adding that some premises have been sold for just a quarter of their highest estimated value. A ten-story building near the Willis Tower, long the world’s tallest skyscraper, was sold in January for $2.5 million (€2.3 million), having been bought for $22.3 million in 2013.
The city’s current mayor, Brandon Johnson, a former employee of the radical Chicago Teachers Union, was elected in 2023 on a very left-wing mandate and had said he was keen to make businesses pay. He is now trying to reverse course, like other progressive mayors, particularly San Francisco’s London Breed. “He doesn’t want to be the mayor who loses downtown,” said attorney David Reifman to the Wall Street Journal. Reifman previously worked as a real estate executive, back when Rahm Emanuel was mayor. Source: Le Monde
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Outlook for Commercial Real Estate
Persistent inflation continues to influence the Federal Reserve’s decision making in 2024, amidst ongoing moderation in overall economic and labor conditions. These factors create a complex and mixed outlook for commercial real estate assets according to Cushman & Wakefield’s mid-year Macro Outlook report. “Cracks are forming beneath the surface, as consumers and businesses remain under pressure from the cumulative effects of higher interest rates and inflation,” said Rebecca Rockey, Deputy Chief Economist and Global Head of Forecasting at Cushman & Wakefield.
The rationalization of office space usage is continuing in 2024, and consistent with Cushman & Wakefield’s prior outlook, with net absorption projected to be negative this year at -63 million square feet (msf) and -7 msf next year. Trifurcation remains a key theme, however, there are bright spots in the office sector, including 30% of Class A buildings that have essentially no vacancy and another 20% that have sub-15% vacancy. The bottom 10% of office assets account for over 730 basis points (bps) of current vacancy, reflecting a growing weight that these highly challenged and likely obsolete buildings have on headline statistics.
Demand for retail space remains robust, in part because of a strong pipeline of store openings by large retailers. Year-to-date there have been roughly 850 more store openings planned than closures. “The tenant mix continues to diversify, limiting the downside risk of sector-specific weakness. Beyond traditional retailers, consumer service providers—including restaurants, education/healthcare, beauty and wellness—are leasing more space in retail centers. Consumers will continue to rotate back to service-oriented spending that has lagged post-pandemic, benefiting retail centers featuring these offerings,” said James Bohnaker, Senior Economist. Source: Cushman & Wakefield
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China’s Housing Market Worsens
China’s broken housing market isn’t responding to some of the country’s boldest stimulus measures to date—at least not yet. The Chinese government has been stepping up support for housing and other industries in recent months as it tries to revitalize an economy that has continued to disappoint since the early days of the pandemic. But fresh data for May showed that businesses and consumers remain cautious. Home prices continue to fall at an accelerating rate, and fixed-asset investment and industrial production, while growing, lost some momentum.
“China’s May economic data suggest that policymakers have a lot to do to sustain the fragile recovery,” Yao Wei, chief China economist at Société Générale, wrote in a client note on Monday. Key to the sluggish economic activity data in May—and China’s outlook going forward—is the crisis in the property market, which has proven hard for policymakers to address. The property rescue package in May included letting local governments buy up unsold homes, removing minimum interest rates on mortgages, and reducing payments for potential home buyers. It also included as its centerpiece a $41 billion so-called relending program launched by the People’s Bank of China, which would provide funding to Chinese banks to support home purchases by state-owned firms. The hope was that by stepping in as a buyer of last resort for millions of properties, the government would manage to mop up unsold housing inventory and persuade wary home buyers to re-enter the market.
The worst pain is in the property sector, which has been struggling to deal with oversupply and weak buyer sentiment since 2021, when a multiyear housing boom ended. The market still doesn’t appear to have found a floor, even after Beijing rolled out its most aggressive stimulus measures so far in mid-May in hopes of restoring confidence. In major cities, new-home prices fell 4.3% in May compared with a year earlier, worse than a 3.5% decline in April, according to data released Monday by China’s National Bureau of Statistics. Prices in China’s secondhand home market tumbled 7.5%, compared with a 6.8% drop in April. Home sales by value tumbled 30.5% in the first five months of this year compared with the same months last year. Source: Wall Street Journal
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