Just as Chicago and Illinois began realizing the potential of their real estate and construction industries, the world was thrown into its biggest economic crisis in recent history. Will the state’s market potential, product innovation, and investment opportunities be strong enough to weather the storm?
The city has strong bones. The steel beams, bolts, and rivets of the “Chicago Skeleton” gave rise to the modern skyscraper era, which built the framework of the world’s metropolises and their economies that endure today.
At 138 feet and 10 stories tall, the Home Insurance Building wasn’t the tallest or longest lived. But its architectural style of a metal frame with brick skin has been the staunchest. While skyscrapers rise and fall, the design ingenuity born on the corner of Chicago’s Adams and LaSalle streets has survived 135 years through world wars, terror attacks, and financial crises.
As the world faces the new coronavirus pandemic, Chicago and Illinois are channelling that resourcefulness and creative thinking into real estate and construction opportunities to ensure the city and state don’t just survive, but thrive, beyond the unknown consequences of 2020.
Building in a Time of virus
The first major casualty of the pandemic was the build-out of Uber’s new office spaces at The Old Post Office in downtown Chicago, which the company temporarily postponed. While construction is considered an essential business under Illinois Governor J.B. Pritzker’s stay-at-home order, more disruption may follow due to shut downs, workers not reporting to job sites, or a probable national recession, according to the RLB Crane Index.
Before the pandemic, Chicago had seen a slight boost in the number of cranes operating in Q1 thanks to residential work on the Gold Coast and office projects in the Fulton Market neighborhoods, according to the index, which tracks the number of operating tower cranes in major cities across North America.
It was a positive sign amid the industry’s uncertainty over increasing construction costs and the specters of rising property taxes. Office buildings were being converted to residential and hotel use on LaSalle Street. Rush Hospital and Steppenwolf Theatre were expanding in Lincoln Park. And two new residential towers were underway at Lake Shore East. Looking ahead, ground was broken at the O’Hare Airport Expansion, Lincoln Yards, and One Chicago Square.
It was a positive sign amid the industry’s uncertainty over increasing construction costs and the specters of rising property taxes. Office buildings were being converted to residential and hotel use on LaSalle Street. Rush Hospital and Steppenwolf Theatre were expanding in Lincoln Park. And two new residential towers were underway at Lake Shore East. Looking ahead, ground was broken at the O’Hare Airport Expansion, Lincoln Yards, and One Chicago Square.
Dearth and Taxes
But while parts of the downtown and metro have seen activity, the rest of the state has been lagging the country. Chicago ranks ninth-last of the largest 53 metropolitan areas with an average 19 housing units built per 10,000 residents in 2019, below the national average of 41.9 per 10,000. Illinois meanwhile added 16.4 units per 10,000 residents, making it the second-lowest state in the country, according to a study of the U.S. Census Bureau Building Permits Survey by research firm Construction Coverage.
Illinois homeowners and developers pay the second-highest property taxes in the country with a state average of 2.30 percent (or $4,705 on a state median $187,200 home) compared to a national average of 1.59 percent (or $2,375 on a national median $204,900 home), according to a survey of U.S. Census data by financial advisory group WalletHub.
For people and companies looking to invest in Chicago, the lack of surety around property taxes and the potential of a further increase is the single trend that could have the biggest impact, according to McCaffery Interests CEO, Dan McCaffery. The developer behind the upcoming Twelve01West, Lincoln Common, and 1115 W Fulton Market, McCaffery expects at least stability over the next five years.
Chicago has absolutely exceeded everybody’s expectations in the last eight to 10 years. It’s a fabulous city. It has a workforce for sure. It’s got beautiful geography, and it has great schools. Young people who graduate from these schools either don’t want to leave or they’ve been to another school and come back. Everyone gravitates to energy.”
DAN MCCAFFERY, CEO of McCaffery Interests
“I’m an optimist. I do believe in the power of Chicago itself. You’re not going to take a fire hose and put out the fire that is Chicago today just that quickly,” McCaffery said. “But, now we have good times, and sadly, we have to increase taxes on incoming businesses and those taxes are for yesterday’s problem.”
Mo’ Problems Mo’Solutions
In her inaugural State of the City address, newly elected mayor Lori Lightfoot vowed that she would try to avoid a new property tax hike to address an $838 million budget deficit in the 2020 fiscal year.
“But if we don’t get the structural changes that our pensions need …we will be presented with very hard and limited options,” Lightfoot said after her first 100 days in office. “All of Illinois is looking for solutions. And to really solve these problems, we all have to be partners in reform.”
Her administration favors a graduated transfer tax that puts a higher burden on luxury real estate sales. But with the sudden and worldwide economic downturn in the wake of COVID-19, solutions will need to get more creative to avoid an all-out property tax hike the industry worries could slow momentum.
A key to stimulating new growth may be the first major overhaul to the Chicago Building Code in 70 years, which is designed to increase cost-effective developments by allowing a wider range of materials and technologies to be used in design and construction, along with new allowances for sprinkler systems, and attics and basements.
Jackie Koo, founder and CEO of Koo Architects, said the new codes will allow methods like prefabricated bathrooms or room modules that have been common elsewhere but were prevented in Chicago due to the old code. Perhaps more significant, the new ordinance becomes mandatory in August and adopts the International Building Code’s widely used terminology and classification systems, which could attract national and international investors to do business in the city for the first time.
“It will make it a lot more flexible for people outside of Chicago. Even the terms were different, so it was very hard to come from outside and work here so easily. It now opens it up to more people to work from outside the country,” Koo said.
Where Skyscrapers Belong
New investment would likely find its way downtown to Chicago’s 42nd Ward, which accounts for 60 percent of the city’s economic activity with 100,000 residents, 40,000 businesses, and 70 major development projects in the pipeline.
“This is where the skyscrapers belong,” said ward alderman Brendan Reilly. “Downtown generates all the revenue that pays for everyone’s police, everyone’s fire, everyone’s cameras. We’re actually subsidizing the rest of the city in a really big, impactful way.”
Part of that subsidizing comes in the form of the Neighborhood Opportunity Fund, which allows developers to pay a fee to avoid the Affordable Requirement Ordinance (ARO), which stipulates new developments allocate a portion of stock to affordable housing.
“All that money is being spent in the neighborhoods that need it the most. They are making smart investments in neighborhoods like Englewood, Chatham, Austin. None of that would be possible if we didn’t have this overheated development going on downtown,” Reilly said.
Golub & Company president and CEO, Michael Newman, explained they have contributed significantly to the fund for several downtown deals, but that there was no quick fix to housing affordability.
RMK Management Corporation Chairman Tony Rossi said they have projects further out of the city, but the challenges with the ARO remain in the wider metropolitan area. “At the end I said it’s just not feasible for us to build affordable here, and we ended up with like a $90,000 contribution to their fund. They were happy and we were happy,” Rossi said.
The paradox of the ARO is that by paying into the opportunity fund, developers pass that cost onto to home buyers or renters, ultimately making housing more unaffordable and increasing the possibility of even more severe measures to address the issue, according to Steve Rappin, CEO of Evergreen RE Group, which has about 8,000 affordable housing units in its portfolio.
Chicago is and has always been, a great place to invest in, and it’s an unbelievable place to work and get an education. We believe in Chicago. Chicago has persevered through the great fire, depressions, and recessions; and each time it has come out stronger on the other side. These are tough times, but history has proven time and time again we can do this—together.”
Brian Goldberg, CEO & Partner of LG Development Group
“Rent control would be a real concern for everybody. It is very top-of-mind. It very possibly could happen,” Rappin said.
One Door Closes, Another Zone Opens
While the 42nd ward may account for 60 percent of economic activity, that leaves 40 percent throughout the city waiting to be capitalized on.
The introduction of “Opportunity Zones,” created by the Tax Cuts and Jobs Act of 2017, is opening new opportunities for impact investors. There are 327 zones throughout Illinois—more than any other state in the Midwest. The zones allow for long-term private investments in lower income areas to claim significant tax advantages, like temporary deferral of capital gains and a tax exclusion for investments held at least 10 years.
“It’s both for real estate and for businesses, so you’ll see a lot of the really innovative ideas, and some of what we’re considering in certain markets is creating incubators. You go out and you do a Cortex-like life science campus, where you’re bringing all these really interesting incubators together,” CRG President Shawn Clark said. “It’s a new kind of money, for the most part, that will be following this investment strategy than the previous dollars that were there.”
DL3 Realty Managing Partner Leon Walker, who launched an impact fund in 2019 for investors to participate in developments that provide both an attractive financial return and positive social benefits, said strategic private investments in combination with public subsidiaries and charitable initiatives can pay huge social dividends.
Chicago, IL metro is home to more than 400 major corporate headquarters, including 66 Fortune 500 HQs and 300 corporate R&D facilities, with the most well-known being Walgreens, Boeing, and Sears Holdings Corp, according to World Business Chicago.
“The tipping point for most neighborhoods is more achievable than many think, and research confirms that when 10 percent or more of households in a community have an adult that goes to work every day wearing a shirt with a collar and jacket, then you will also see teenage pregnancy, dropout rates from high school, and crimes get halved. Just by seeing the presence of people who indicated that, there’s upward mobility. That society, and its institutions, work— and there is a path to a stable life. That is the hope we need, and that is the message we deliver when we invest in underserved communities,” Walker said.
One way to make that impact will be to bring jobs and activity back to the hundreds of malls slowly declining across the state. Chad Firsel, president of Quantum Real Estate Advisors, said the days of The Northbrook Court, Hawthorns, and Woodfields are over.
“We have roughly three times the amount of retail per capita than Asia. We really need to trim about 3 billion square feet out of the country. Well, what’s the biggest chunks you could take? Big box and mall anchors. And so now what’s happening is, the mall is going to get reinvented,” Firsel said.
Doing the reinventing are developers like The Lord Companies. President and managing partner, Keith Lord, said that of the 28 malls in the Chicago metro area, five are profitable and the rest are struggling. “If you think that these malls are recoverable, and this is what’s controversial, they’re not. There are no big box tenants coming back. The department, as we know it, is functionally obsolescent,” Lord said.
The company has revitalized a mall on the Southside of Chicago by creating a sense of “place” with a sports complex, hotel, retail, medical, services, and a residential component with bike paths, an amphitheater, and senior housing.
Untapped Potential
Affordable housing for the country’s ageing population is an important driver of innovation taking place in real estate development. Vermilion Development President and CEO, Dave Cocagne, said technology was changing seniors’ assisted living with solutions that help identify, monitor, and proactively address worsening conditions.
“How often does someone use the bathroom at night? If that increases that can be a sign that they have an infection of some sort. There are real benefits to technology in the way that we can monitor their condition. Ultimately it will help them to live more independent lives,” Cocagne said.
Smart home innovations are propagating throughout new developments, with Vermilion Development’s building on East Lakeview being fully Alexa-enabled with Amazon lockers, a dry-cleaning delivery system, and smart features that lets residents remotely control thermostats or lock doors from their phones.
This luxury, high-end retail market is expanding to areas like the West Loop as people sell their McMansions in the suburbs to be closer to restaurants, entertainment, and newly created jobs at tech companies relocating to Chicago. “The mega mansions that were so popular are kind of on their way out, and they’re not as attractive to people looking for more a comfortable, low maintenance space,” said Sotheby’s Senior Vice President, Chicago Sales, Natasha Motev.
Spaan Tech CEO Smita Shah said the arrival of companies like Google, Uber, and Salesforce in Chicago was a result of the city’s biggest opportunity; it’s access to universities including the University of Chicago, Northwestern, Loyola, University of Illinois, and Illinois Institute of Technology that bring science, math, engineering, medicine, law, and biotech to the city.
“As a result, you get this tremendous access to a talent pipeline, to young people who want to come here to enjoy the amazing restaurant scene. And by having built out the West Loop and creating these opportunities for tech companies, we’ve untapped that potential,” Shah said.
The world’s first skyscraper was built in 1885 in the aftermath of The Great Chicago Fire. The current coronavirus threat may not raze the real estate and construction industry to the bone. But if it does, the city knows how to rise from the ashes.
