Chicago to Offer Most Generous Subsidies in U.S. to Save CBD

Chicago is offering the most generous subsidies in the nation to convert them into apartments and hotels.

Jordan B. & Han-Gwon Lung
May 30, 2024

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Good morning. Chicago is leading the nation with an unprecedented public subsidy program to revitalize its struggling downtown office district by converting obsolete office spaces into apartments and hotels.

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REVIVING DOWNTOWN

Chicago to Offer Most Generous Subsidies in U.S. to Save Downtown Business District

Chicago gave birth to skyscrapers in the late 19th century. Now, the city is offering the most generous subsidies in the nation to convert them into apartments and hotels.

Occupancy woes: Chicago’s commercial property values have plummeted, with major corporations like Citadel and Boeing relocating their headquarters. Currently, 75% of office space mortgages converted into securities are in default or at risk of default. The city’s office vacancy rate has risen to 16.3%, significantly higher than the national average of 13.8%, according to CoStar. Some downtown buildings have sold for less than a quarter of their previous valuations.

Revitalization: To combat this distress, the city is going beyond any other by providing public subsidies for office conversion projects. Mayor Brandon Johnson is leading this charge. His administration has secured broad support for a $1.25B bond for affordable housing and central business district development. Recent commitments, like $150M to convert four vacant office buildings into 1K apartments, showcase the city's commitment to revitalizing its CBD.

Zoom out: While Chicago's downtown office district struggles, property values in neighborhoods outside the CBD have surged since the pandemic. Cook County Assessor Fritz Kaegi's latest assessments for residential and commercial properties west, southwest, and northwest of the Loop show a 27% increase, rising from $8 billion to $10 billion.

Drivers of growth: The booming neighborhood of Fulton Market, home to McDonald’s headquarters and Google’s regional hub, has seen massive growth. Residential property values rose by 21%, standalone commercial values by 25%, and industrial property values by 71%. Factors influencing these assessments include property use, estimated income, vacancies, and expenses.

➥ THE TAKEAWAY

Big picture: The gains outside the CBD could offset declines in other parts of Chicago, where commercial vacancies are at record highs. Kaegi’s office assessments are crucial for calculating the tax burden on residents and businesses. The Loop's assessment, expected later this year, will shed light on the pandemic's impact, especially in the central business district.

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✍️ Editor’s Picks

Debt dilemma: Concerns over government debt are mounting, with debt nearing $34.6T, potentially driving up CRE loan rates.
Casino controversy: State Gaming Commission won't accept casino applications in downstate NY until 2025; effort to bypass Sen. Ramos underway.
Home prices soar: Annual home prices surged 6.5%, matching the fastest increase since November 2022, with the Northeast leading growth.
Revitalizing urban cores: Urban areas grapple with record-high office vacancy rates of 19.3%, while mixed-use districts show improved fundamentals, according to CBRE.

🏘️ MULTIFAMILY

Luxury vertical living: Florida's Shell Point Retirement Community planned a $275M project with a 14-story tower and 125KSF center.
Nation of renters: National apartment rents were up 1.2% in May, with Syracuse and Columbus leading growth (>20%), while CA markets saw declining demand.
Keeping it together: Skya Ventures plans 194 apartments in LA’s Koreatown, including 23 affordable units, 160 parking spaces, and retail space.
Renters rebel: Five years ago, an NY state housing agency sued Zara Realty for illegal rent overcharges. But now the tenants, fed up with the five-year delay, are suing the housing agency.

🏭 Industrial

Data-driven job growth: Data centers have 'economic ripple effects' and are projected to double in demand by 2030, creating 3.5M jobs across the country.
Stabilizing storage: The self-storage sector is stabilizing after the pandemic building boom. Demand remains high in smaller markets like Springfield, MA, with only 2.7 SF of storage space per capita.
Industrial innovation: Constellation Real Estate Partners purchased land for a new industrial park in Orlando for $33M, which is set to be completed in 3Q25.
Fund success: Pennybacker Capital Management's sixth value opportunity fund, Pennybacker VI LP, closed with $1.6B, surpassing its target and attracting new investors.

🏬 RETAIL

Auto parts boom: Auto parts retailers Autozone (AZO), O'Reilly (ORLY), and Napa reported strong sales performance despite high auto prices and demand.
Gold coast gem: A former 97KSF, 6-story Barneys building on the Gold Coast is set to list for over $160M, or around $1.65K PSF.
Nintendo levels up: Nintendo of America will open a store in San Francisco's Union Square in 2025, 20 years after opening its famous NYC location.

🏢 OFFICE

Offices to homes: Owners of 64 NYC office buildings seek to convert empty spaces to residential units thanks to a new city program that aims to create 20K new apartments.
Latest listing: Sage Realty is selling 767 Third Ave for $100M, a half-empty 40-story tower facing challenging market conditions.
Expanding HQ: Hines (ZHGIIX) is expanding its Hudson Square office space, linking 345 Hudson to 15KSF at 555 Greenwich.
Any takers? Deutsche Bank (DB) wants to sell a $87.5M loan on a 292 Madison Avenue office building due to a default by Vanbarton Group.

🏨 HOSPITALITY

Blackstone's success: Blackstone (BX) sells Turtle Bay Resort in Hawaii for $725M, with total sale proceeds reaching $768M.
Riverfront luxury: A new $215.1M Four Seasons Hotel & Residences (FS) project in Jacksonville includes 170 rooms, 26 residential units, and various amenities.

📈 CHART OF THE DAY

The Burns + CRE Daily Fear and Greed Index shows investors believe values fell most in the office sector (-21% YOY) and least in the retail and industrial sectors (-2% YOY).