Chicago plans to offer $150 million in subsidies to real estate developers who will convert unused office space in its once-bustling downtown district into hotels and apartments in an effort to revitalize blighted areas.
The plan is the city’s most generous response to the commercial real estate crisis caused by the pandemic, with taxpayer money helping to build 1,000 apartments in four buildings, about a third of which will be set aside as affordable units. According to the Wall Street Journal.
The move comes as the Democratic-led Windy City has struggled in recent years with rampant crime and the departure of major companies, including Ken Griffin’s hedge fund The Citadel and aerospace giant Boeing Co. Griffin said what finally prompted his decision to move The Citadel to Florida in 2022 was when a coworker who went to get coffee was robbed with a gun held to his head.
In addition to Chicago’s lawlessness, the city’s office market is struggling with weak demand, rising interest rates and difficulties refinancing, The Wall Street Journal reported.
Mayor Brandon Johnson, the progressive who defeated Lori Lightfoot last year, ran on a platform of raising taxes on businesses, but has been forced to work with the real estate industry to protect the downtown commercial office district.
Earlier this year, Johnson appointed a real estate executive to head the city’s Department of Planning and Development, and his subsidy plan has been praised by the business community..
In March, Chicago businesses backed Johnson’s plan to issue up to $1.25 billion in housing and economic development bonds designed to spur economic growth and the construction of more affordable housing.
“He doesn’t want to be the mayor who loses downtown,” David Reifman, who served as city planning and development commissioner under former Chicago Mayor Rahm Emanuel, told The Wall Street Journal.
Other U.S. cities, such as New York, which is converting some of its unused office buildings into residential property, have faced similar challenges since the pandemic, but Chicago’s plight is the worst.
At the beginning of 2020, Chicago’s office vacancy rate was 11.9%. In the second quarter of this year, the vacancy rate was 16.3%, well above the national average of 13.8%.
Fewer than five large office buildings were sold last year, according to the Chicago Building Owners and Managers Association, and the deals that did close were at losses of 50% to 90%.
Three-quarters of mortgages secured by office space in Chicago are in default or at risk of default, according to data from KBRA Analytics.
In Chicago, the birthplace of the skyscraper, some tax revenues have dried up due to declining commercial property values.
In a sign of how tough the commercial real estate market is nationwide, Starwood Real Estate Income Trust, run by real estate mogul Barry Sternlicht and his firm, Starwood Capital Group, announced it would impose tighter restrictions on investors’ ability to withdraw money from its $10 billion fund.
The move appears to be an effort by SREIT to delay selling assets at a loss: As of the end of April, SREIT had just $752 million in liquidity. According to Bloomberg News.
Before this measure, investors could withdraw up to 2% of their net worth. Now they can withdraw just 0.33%.
In an emailed statement, Sternlicht said the firm believes “the real estate market has bottomed and will continue to improve” and that “further leveraging our investment vehicles or selling assets in our portfolio to meet monthly redemptions would have a negative impact on all investors.”
Treasury Secretary Janet Yellen said earlier this year that she expected further stress and financial losses at banks due to weakness in the commercial real estate market, but that she did not think this posed a systemic risk to the banking system.
Yellen told a Senate Banking Committee hearing that regulators were working with banks to address risks posed by rising vacancy rates in many office buildings in big cities since the pandemic and rising interest rates on refinancing loans.
