The malaise goes beyond La Salle Street.
It’s been well established that La Salle, the historic artery of the city’s financial district, is in trouble because it was built for needs no longer in favor. City Hall has recognized this and started a program to use public dollars to help owners convert obsolete office space into residences, especially affordable units, and to add amenities. It will take time to see how well the program works.
The core problems — unused offices and empty retail storefronts — go beyond La Salle to the entire central business district. The situation is rooted in the pandemic and jarring changes in economic cycles. It’s made things worse in the field of high finance because banks now have on their books more commercial property that’s worth less than their mortgages. After recent federal bailouts, any issue that rattles banks will snap people to attention.
Among them will be advisers to incoming Mayor Brandon Johnson. He campaigned on investing in poor areas and narrowing the racial gaps in wealth and opportunity. But he’ll find as he settles in on the fifth floor of City Hall that tending to downtown will be high on the to-do list. It’ll go beyond the headline issues of whether Bally’s can deliver on a casino and entertainment center and what it will take to keep the Bears in Soldier Field.
Why would Johnson be solicitous of a business community against his election? Because downtown determines Chicago’s business climate and raises much of the tax revenue for Johnson’s menu of social programs. He can’t afford the Loop having an existential crisis.
Other cities are going through their own malaise. The effects on banking are drawing wide notice. Devoted tweeter Elon Musk and hedge fund manager Bill Ackman have commented about the risks in real estate portfolios while noting that much of the debt is held by smaller banks.
A Bank of America analyst called commercial real estate loans the “next shoe to drop” for smaller banks. J.P. Morgan, Goldman Sachs and Blackstone have expressed similar alarm. Bond fund manager Pimco said to control risks, banks will curtail new loans, possibly causing a credit crunch that pitches the country into a recession.
Running through the commentary is the fear that more banks could see a classic “run” by depositors pulling their money. Experts say most banks, including those active in Chicago, can absorb the hit because they lend to diversified sectors.
Granted, some outlooks could be overwrought. Analysts like to remind people they are paid to worry, and they worry well. But they’re all mindful of statistics like those from data firm Trepp that show a record amount of real estate debt, some $2.56 trillion, will come due over the next five years. Most of that is held by banks and, at least for office buildings, refinancing will be hard when property incomes have dropped and inflation and interest rates are higher.
“When the Federal Reserve hits the brakes, something goes through the windshield,” J.P. Morgan Asset Management CEO George Gatch said in a Financial Times report.
A bracing analysis came from Moody’s Investors Service, which keeps an eye on anything that touches municipal budgets. Aware of how work-from-home is sticking at some companies, Moody’s said many office buildings built before 1980 are “obsolete.” Talk like that kills property values.
In Chicago, Bob Chodos, vice chairman at real estate firm Newmark Group, said, “Getting a construction loan now is super hard. Banks are just not lending.” He attributed that not to distaste for commercial real estate but to inflation and interest rates making deals riskier.
Chodos sees a lengthy period of weakness, something that history says isn’t unusual. “We’ve had cycles where it takes 10 years to catch up,” he said. As for office usage, Chodos sees activity slowly returning as more companies order people to come in part of the week. But as an aside, he said the three-year construction project on the Kennedy Expressway won’t help.
In the meantime, the city will miss the rent that’s not collected, the shops not visited and the meals and tickets never bought downtown. “These are sectors that need to do well for the city to do well,” Chodos said.
For Johnson, matters get tougher when you remember that downtown property owners lean heavily on appealing their tax assessments. It’s a game they play well, even when buildings aren’t in distress. Cook County Assessor Fritz Kaegi has opposed the commercial interests, but even he may be unable to dispute declines in property values.
If an ailing downtown cuts its tax burden, neighborhoods make up the difference. It’s not what Johnson needs as he deals with facts of life and math: pensions, public safety, labor costs and the price of his promises.
