RCA Insights

What’s Wrong in Chicagoland?

By on November 25th, 2019

Investment activity in the Chicago metropolitan area fell at double-digit rates in the third quarter, marking an acceleration of the slowdown that started in the second quarter. Investment activity nationally is on a stronger path, leading many in the commercial real estate industry to ask if Chicago is still the stormy, husky, brawling city immortalized by poet Carl Sandburg.

There are great reasons to be in the Chicago market, but investors are clearly finding the market less attractive. Is it unfunded pension liabilities in Illinois, uncompetitive labor markets, or high taxation driving the change in perceptions? Is it some combination of these and other factors pulling down the whole region?

The Chicago metro area, or Chicagoland in local parlance, provides something of a natural experiment to answer these questions. The region is spread across three states and within each state, there are individual counties with unique property tax regimes and varying degrees of business friendliness. Looking at patterns in activity across the region highlights some local challenges.

Looking at the county level, something is amiss. Cook County has represented 69% of the deal activity in Chicagoland over the last five years, with the next highest share of activity coming in DuPage County at 13% of the market. Cook County has been the main source of weakness in the market with volume down 42% for the year to date. Lake (IL) was down more but is much smaller than Cook County with only 6% of all metro activity. (We look at single asset sales only in this analysis to get past the impact of portfolio and entity-level sales which may not be motivated by the health of the local economies.)

This decline is not just a City of Chicago issue: Cook County includes a number of suburban business hubs. All parts of the county, though, are facing a revision in property taxes which will lower net operating income. Commercial property taxes in the Loop are estimated to face a 9.7% increase from this change.

Outlying counties with lower tax rates and more friendly business practices have done better than Cook County, but there are challenges in these areas. Combined, DuPage, Kane, Lake (IL), McHenry, and Will Counties have represented 27% of the market over the last five years. Single asset deal volume was down 8% in the first three quarters of 2019 relative to the same period a year earlier. This pace of activity is well below the 5% pace of growth seen nationally, suggesting that investors are still spooked by the picture in Illinois overall.

Most of the deal activity in the region is in Illinois. Deal activity in the Wisconsin and Indiana portions of the market has represented only 3% of all single asset sales in the market over the last five years. For these areas outside of Illinois without the same unfunded pension challenges and unfriendly business environment, investment volume was up 30% for the first three quarters of 2019. Granted the growth is from a smaller base with only $275 million in sales through the third quarter, but clearly these areas are not holding back the region.

There is nothing wrong with Chicagoland, investors simply hate uncertainty. Investment activity is pulling back here as investors are struggling to come to grips with future tax liabilities at the state and local level. Potential sellers will minimize the impact of these liabilities, buyers will overestimate them and in combination, buyers and sellers will move further apart in price expectations.

Deal volume and not pricing is the initial relief valve for this disconnect on price expectations. Indeed, the RCA Capital Liquidity Scores highlight this disconnect between buyers and sellers, with less liquidity in this market through midyear 2019 than a year earlier. Still, there are advantages to size. While liquidity is falling, we still rank Chicagoland as the ninth most liquid market in the global investment universe. City of big shoulders indeed.


Wyatt Avery provided additional data analysis for this article.

Also on RCA Insights:

US Prices Climb in October While Deal Volume Wavers

Portfolio Deals Dominate Third Quarter US Activity

Jim Costello

Jim Costello

Senior Vice President

Jim Costello has worked in the CRE space on issues of urban economics since 1990, including a 20-year stint at Torto Wheaton Research. Jim expanded the reach of the Torto Wheaton Research team developing forecasts of global market fundamentals. He also developed approaches to pair the forecast results with frameworks to answer investor questions on asset values and relative investment opportunities.

In the aftermath of the Global Financial Crisis, Jim provided advice to the Treasury Department and helped educate these professionals on commercial real estate performance. Jim is a member of the Commercial Board of Governors of the Mortgage Bankers Administration, where he helps policy makers understand the commercial real estate industry.

Jim is expanding the capabilities of the Real Capital Analytics team on issues of real estate market dynamics. Jim has a master’s degree in economics and is a member of the Counselors of Real Estate.