The third 75-basis point increase in the federal funds rate, and the Federal Reserve’s fifth overall increase for 2022, is skewing Chicago commercial real estate professionals’ greatest concerns for the industry, which remain hyper-focused on matters related to inflation and interest rates. 

In updating comments related to the findings of the 2022 Chicago Mid-Year Sentiment Report, Rick Sinkuler, senior managing director of the Real Estate Center at DePaul University, said, “Inflation is the number one concern and risk factor for real estate professionals internationally and right here at home. Wednesday’s action demonstrates that the Fed will do everything in its power to tame inflation.” 

The question now, Sinkuler said, is, “Will the Fed be able to land the plane softly to avoid significant disruption to commercial real estate and the economy?” 

In early July, The Real Estate Center and the Urban Land Institute Chicago District Council released the Mid-Year Sentiment Report, including an assessment of the greatest concerns impacting Chicago real estate. On a scale of 1 to 5, rising interest rates and rising inflation scored a 3.98 and 3.92, respectively. 

Underscoring how sentiment may have been skewed since then by the back-to-back rate hikes, those scores ranked rising interest rates and rising inflation number three and four out of eight different factors that could impact commercial real estate in 2022 and 2023. The rising cost of materials and labor ranked number one and two. 

“The top concerns are inextricably linked, with perhaps a greater emphasis today on inflation, because as inflation goes, so go the other factors,” said Sinkuler. 

However, Marcus & Millichap regional manager Steven Weinstock, a participant in the Sentiment Report, said that despite the rate increases there is still plenty of activity and interest in assets that range from $1 million to $20 million, although that may be somewhat tempered by location and property type.   

For investment activity at all levels, though, he said the unknown factor is when the cost of capital will start to impact pricing.  

“As lending gets more expensive, borrowers will plant their feet and not pay the extra freight,” Weinstock said. “With fewer financing options, pricing should come down and/or the bid-ask gap should narrow.”