Sunday, 3 March 2024

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Remote work and commercial real estate crunch lead to collapse in construction

Remote work and commercial real estate crunch lead to collapse in construction

When Rahm Emanuel ran Chicago and wanted to boast about the health of the city, the then-mayor pointed to the number of construction cranes across the skyline — 60 at the end of 2017.

Almost five years after he left office, that number has dwindled to the single digits. There was just one groundbreaking on an office building last year, and zero are expected in 2024. 

It’s a stark turnaround for the Windy City and a sign of its economic struggles as higher interest rates, inflation and weak demand for office space squelch appetite for new development.

The commercial real estate crisis brought on by the rise of remote work and higher borrowing costs has sent US office values tumbling across the US, leading to mounting turmoil for banks and making it less appealing for lenders to offer financing for new buildings. Construction has slowed from San Francisco to New York, where JPMorgan Chase & Co.’s new headquarters, opening in 2025, is set to be the largest office tower to debut for several years.

“Office is toxic,” said Bob Clark, executive chairman and founder of developer Clayco, which moved its headquarters to Chicago about a decade ago. “A lot of people had their projects based on low interest rates, and today that actually just doesn’t pencil.”

The decline in new development is particularly steep in Chicago, where only nine cranes were operating as of August, according to the last official count from construction-advisory company Rider Levett Bucknall. That compared with 29 in February 2020, just before the onset of the Covid-19 pandemic. The 69% drop was more pronounced than anywhere but Manhattan among 12 major US business centers tracked by the firm.

The next crane count is taking place this month and is expected to show even more declines in Chicago, said Warren Todd, head of Rider Levett Bucknall’s Chicago office.

In a city where Emanuel touted the number of cranes as a sign of “economic vitality, vibrancy and versatility,” the lack of construction presents a challenge to reviving a downtown plagued by high office vacancies. Mayor Brandon Johnson, nine months into the job, is confronting falling fiscal revenue and — like his predecessor, Lori Lightfoot — a relatively strained relationship with the business community. 

Jason Lee, a senior adviser for Johnson, said counting cranes is a good measure of economic development, but not the only one. He pointed to corporate expansions,…

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