REAL ESTATE’S COVID CONUNDRUM
Commercial, residential markets in flux as pandemic drags on
We’re four months into this pandemic. In some ways, that feels like an arduous slog. In other ways, it’s just a blip in time.
For example, experts are saying it’s still too early to assess the pandemic’s effects on our choices for where we live and work. COVID-19 is a conundrum for the world of residential and commercial real estate.
A couple of words about those markets come to mind. One I’ve heard in several conversations is “visibility,” usually in the context of lacking it, such as, “We don’t have much visibility into demand over the next few months.”
The opaque outlook comes through in a report about the downtown area’s office market through the end of the second quarter. The analysis by the firm Savills, which represents office tenants in lease negotiations, found that much business is on hold.
Robert Sevim, vice chairman at Savills, said many companies are delaying decisions about space needs as long as they can. Employers are reopening offices, but they’re still figuring out who might continue working from home and whether that arrangement suits their business.
The report said overall leasing in the downtown area was down 75% in the second quarter compared with the prior quarter, marking the lowest level in 15 years. With downsizing companies putting space on the market, vacancy rates are rising and rents have just started to head down, reversing a landlord-friendly trend of many years, Savills found.
On the residential side, postcoronavirus market data for the Chicago area has shown steep declines in total sales but prices mostly holding firm, indicating little panic selling is taking place.
Experts still worry about the evolving crisis, with layoffs continuing and spreading into new parts of the economy. People worried about job security tend to put off buying or selling a home. Some think foreclosures could spike in the months ahead.
The other word that comes to mind about real estate is “churn,” and I’ve used it in some conversations. So if a leasing agent lays it on you, blame me. It describes employers pondering if they need less space — because business is down or more staffers are working from home — or more of it because workers are worried about infection in close quarters. It’s the central question of the downtown business district.
Sevim said companies are biding their time and doing their analyses, but most will be making changes in their space requirements. “It’s going to depend on each company’s preference. You will not find a singular approach,” he said.
A few years ago, office users were demanding rooftop party decks and tenant lounges. Now, they’ll be asking about cleaning practices, ventilation and touchless elevators.
Corporate culture and productivity come into play. Some executives will conclude the workfrom-home experiment worked wonderfully, while others see value in keeping a team together. “The ability to create and innovate and build on a culture is very hard to exercise when everybody is working remotely,” Sevim said.
The “churn” has other implications. Will employers and hipster workers still flock to heretofore hot areas such as Fulton Market? The Savills report said Fulton Market and River North are especially vulnerable to layoffs that have hit tech companies and co-working spaces.
Other firms could find smaller buildings to be more appealing than downtown skyscrapers. Darren Sloniger, president of Marquette Cos., a residential developer in the city and suburbs, said he’s breaking ground in August on a Fulton Market development near Union Park. “We’re not seeing some big flight out to the suburbs,” he said.
My inbox lately has received several publicity pitches, one from Realtor.com, saying that searches of home listings show people have an increased interest in the suburbs, on the theory that the virus has made the separation of single-family homes and backyards more popular.
But searches are not sales. People move or stay put for a lot of reasons, many of which will still apply after the pandemic.
Geoffrey Hewings, emeritus director of the Regional Economics Applications Laboratory at the University of Illinois at UrbanaChampaign, doesn’t buy the shift-to-the-suburbs argument. Hewings, who analyzes sales reports for the Illinois Association of Realtors, recalled the energy crisis of the 1970s and how people used that to wrongly predict the end of suburban sprawl.
“Moving is not cheap. Most people will not make a precipitous decision a month or two into something where you’re not quite sure how it will resolve,” he said. “Let’s wait a few more months and see what happens.”
In a way, that’s the most hopeful message we can internalize in the COVID-19 era. This, too, shall pass.
A WORD THAT COMES TO MIND ABOUT REAL ESTATE IS “CHURN.” IT DESCRIBES EMPLOYERS PONDERING IF THEY NEED LESS SPACE — BECAUSE BUSINESS IS DOWN OR MORE STAFFERS ARE WORKING FROM HOME — OR MORE OF IT BECAUSE WORKERS ARE WORRIED ABOUT INFECTION IN CLOSE QUARTERS. IT’S THE CENTRAL QUESTION OF THE DOWNTOWN BUSINESS DISTRICT.
A rendering shows a northeast view of proposed Fulton Market developments.
A rendering shows a northeast view of proposed Fulton Market developments, with a project at 1234 W. Randolph St. in the foreground. But how many projects will proceed in a virus-inspired recession is an open question.
Robert Sevim SAVILLS