Why the Downtown Chicago Market is a Prime Investing Opportunity

Topic:  • By Kyle Verhasselt • November 7, 2018 Views

Downtown Chicago and Urbanized Suburbs Attract Private Investors

When private investors look for growth opportunities in commercial and multifamily real estate, they tend to bypass mature cities. However, Chicago’s private real estate prospects rival those of emerging U.S. markets due to the Midwest city’s anchor location and global scale.

Neighborhoods near downtown Chicago are redeveloping for a millennial workforce along the lines of Atlanta, Denver and other surging cities. At the same time, walkable development near transit hubs are budding in several Chicago suburbs that have become job anchors on their own.

The scale of Chicago’s economy, with 36 Fortune 500 corporate headquarters, ranks alongside countries like Saudi Arabia, Argentina and Sweden, according to World Business Chicago. Chicago real estate construction continues to show high absorption rates in Urban Land Institute research, and ranks in the same top tier as Austin, Atlanta and Dallas.

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Corporate Relocations Spur Downtown Chicago Growth

Office investment volume in downtown Chicago properties is at a three-year midyear high, according to CBRE. Activity is rising across submarkets such as the West Loop, where McDonald’s has moved its headquarters and expanding Google has its Midwest offices; River North, where Conagra Brands relocated from Omaha, Nebraska to the Loop; and River West, where rising waterfront skyscrapers are likely to fit into software developer Salesforce’s plans for 5,000 new jobs.

Chicago multifamily real estate development is concentrated downtown as well, with a record 4,350 apartments built in 2017, with 3,000 set to deliver this year and 4,200 more expected to be completed in 2019, according to Integra Realty Resources. Incentives for transit-oriented development allow higher-density apartments near Chicago subways and elevated lines, where young professionals have flocked. This has spurred development for Chicago investment properties, which have drawn an infusion of capital in part because of the high rents these neighborhoods command. Units are typically studio and 1-bedrooms that average $1,500 per month and 2-bedrooms go for $2,400.

Major new office projects accepting renters now, such as 625 W. Adams St., 151 N. Franklin St. and the Old Main Post Office at 433 W. Van Buren St. — already announced as Walgreen’s new downtown location for 1,800 workers — will also bring residents to the area.

But not all Chicago multifamily real estate is geared toward millennials. Chicago’s high-end market for larger units continues to thrive, as downsizing empty nesters move to the city from upscale suburbs. Three-bedroom units rent for more than $5,000 a month, and condos sell for more than $1,000 per square foot.

Yet private investors must be careful about their assumptions in the Chicago real estate market. After a decade of economic growth, rent increases are leveling off and can’t be expected to continue at their current pace. And thanks to Chicago’s large unfunded liabilities with respect to its pension funds — an estimated $18,596 per resident – the only safe assumption is that real estate taxes will continue to have steep increases.

In fact, increasing real estate taxes is the single largest issue impacting commercial real estate investment in Cook and its collar counties. Yet there are pockets in the city that will grow, and increase the city’s tax base, thanks to economic catalysts such as the redevelopment of Union Station, the Old Chicago Main Post Office and Cook County Hospital, and major new developments that include Lincoln Yards, The 78 and a yet-to-be-named project on the 100-acre former Michael Reese Hospital site. Suburban growth centers include Oakbrook, the O’Hare submarket and “urbanized” suburbs such as Evanston and Naperville.

Infill That Spurs Urbanization Drives Suburban Chicago Real Estate Market

Overall, CBRE says suburban Chicago office vacancies are at their lowest in a decade. A strong northwest suburban office market will be bolstered an $8.5 billion O’Hare airport expansion. Growth could explode if Chicago finalizes a deal with Elon Musk to build high-speed transit connecting O’Hare and downtown Chicago.

Infill projects that spur density and attract urban-style amenities, especially in the north, northwest and west suburbs stand out as viable Chicago-area investment properties. So do projects close to prime outdoor amenities, which Origin seeks out. These include The Clayson, an apartment complex on the edge of a forest preserve; Iroquois Club, a landscaped 16-acre apartment complex in Naperville, home to Nokia, BP and other major employers; and OneNineteen on Main, steps from Naperville’s downtown Riverwalk.

Demand for a walkable environment is prompting redevelopment of suburban downtowns as employers shift locations. The former 225-acre Motorola Solutions and 120-acre AT&T campuses near Chicago O’Hare International Airport both have plans for redevelopment with housing, offices, restaurants and entertainment — the AT&T project modeled directly on New Jersey’s repurposed Bell Labs complex.

Chicago’s Future: Urbanized Suburbs

Looking ahead, densely developed downtowns such as Naperville, Evanston or Park Ridge — all with excellent rail access to downtown Chicago — will be prime locations for private investors. Outlying suburbs lacking the urban feel aren’t seeing the same degree of population or economic growth. Success stories include north suburban Wheeling, where commercial real estate under construction across from a rail station is 80% leased.

As young professionals become more established in their careers, they look for the amenities that drew them to the city, but with high-quality school and recreational choices. Downtown expansion and urbanized suburbs will give private investors a choice of multifamily and commercial real estate projects in Chicago.

Posted By

Kyle Verhasselt
Assistant Vice President - Acquisitions

Kyle Verhasselt, Assistant Vice President – Acquisitions, is responsible for sourcing, structuring, and execution of new acquisitions in Chicago, Minneapolis, and Nashville.