Why We’re Choosing the Orlando Real Estate Market Instead of Chicago
Origin has spent years developing and honing a city selection model that helps us to decide where to invest in private real estate. It is a crucial decision, as we require that our acquisition executives live and work in the regions that we invest. Once in the area, the team maps our target submarkets and inventories the opportunity set that fits our investment criteria.
Our acquisition executives establish local relationships which provide off-market deals and insight, and gain valuable market domain knowledge, making it difficult to leave a city. Even more importantly, it’s difficult to move the Origin employees and their families who live in and cover these regions. For these reasons, Origin rarely drops target investment markets. This changed earlier this year, when we abandoned Chicago and added the Orlando real estate market in its place.
Our independent market selection model contains more than thirty inputs and we use a weighted average of each criteria’s score to determine a total market score. We talk more about our model and the crucial fundamentals that inform our target market choices in this article. Although Chicago is Origin’s headquarters and has always been a city we invest in, when we ran Chicago through the model, Chicago had fallen out of the top twenty markets and the Orlando real estate market consistently scored in the top three. The data behind our city selection model could not be ignored.
Importantly, we see similar capitalization rates in both Chicago and Orlando, which we think is a mistake and does not accurately reflect real estate demand decreasing in Chicago and increasing in Orlando. At Origin, we would rather invest in Orlando today, given the better economic outlook and similar capitalization rates.
Population Decline in Illinois is Worrisome for Real Estate Investors
At Origin, we acquire commercial office and multifamily rental buildings. One of the primary demand drivers for multifamily rental housing is population growth. Below is a table detailing the population changes for the states where Origin acquires assets.
Population Changes for the States Where Origin Acquires Assets
Data from U.S. census 2010-2017
From 2010 to 2017, Florida has grown its net population by 11.3%, while the population of Illinois has declined by .3%. More troubling than Illinois’ population loss in general is the large portion of the loss coming from ultra-high-net-worth households. A 2016 study from New World Wealth found that Chicago was the third city in the world for millionaires leaving the city. New World Wealth estimated that 3,000 people with a net worth above $1 million had left Chicago in the prior 12 months.
Illinois’ Higher Taxes Will Continue to Cause Population Decline
We believe some of Illinois’ population decline, notably from ultra-high-net-worth households, is due to tax increases. U.S. states collect revenue from taxes on personal income, corporate income, properties and homes, retail sales and estate taxes. Below is a breakdown of each tax category in Illinois and Florida. Florida benefits from the 100 million tourists that visit the state each year, generating revenue that allows the state to be a zero-income tax and zero-estate tax state. Many of Origin’s high-net-worth clients are moving to avoid the Illinois Estate Tax in particular, which is up to 16% on wealth that exceeds $14 million. For high-net-worth individuals and families, this is a high price to pay when states like Florida have no estate tax.
2019 Illinois and Florida Taxes
|Illinois||4.95%||7%||2.3%||8.7%||Up to 16%|
While these taxing policies are a reason for leaving Illinois today, the belief that the future will bring even higher taxes to Illinois further exacerbates the crisis. So far, Illinois elected officials have signaled to the business community their desire to seek a progressive income tax, with the top tax rate being 10% on income above $1 million. In addition, it has been suggested that the tax code change may also make the tax non-graduated, meaning if income exceeds $1 million, then all the income would be taxed at 10%.
Illinois also currently has more than $130 billion of unfunded pension liability and unpaid bills. According to Pew Charitable Trusts, Illinois has pension obligations funded at only 36% and is currently ranked 48th in terms of the level of assets the states has in proportion to their total pension liability. In contrast, Florida is ranked 13th, with their pension obligations funded at 79%. Worse, Illinois administration and legislature have not signaled that they are open to discussing changing these unfunded pension liabilities.
For these reasons, we believe the only change coming will be even higher taxes for a state with already high taxes on a relative basis. Raising taxes will continue to drive out residents and prevent new businesses from forming in or relocating to the state. These higher taxes could also affect the net operating income of commercial real estate, and the risk simply is not priced into our asset valuations. Furthermore, as millionaires leave Illinois, the taxable base continues to decline and it is possible that the state will collect very little net revenue, even with a higher tax rate.
Chicago vs. Orlando’s Residential Real Estate Market
At Origin, we invest exclusively in commercial real estate, but we monitor the residential market closely because the residential market reflects the confidence in the city of its residents, as well as population and job growth.
All our target markets have enjoyed a steady increase in commercial and residential real estate values over the past eight years, with one exception: Chicago. Commercial real estate values have increased in Chicago, while residential real estate values have not. A realtor.com report forecasts the Chicago-Naperville-Elgin Metropolitan Area will experience the worst housing market slowdown among 100 of the nation’s metropolitan areas in 2019. The housing slowdown is anticipated to be nearly four times worse in Chicago than in the rest of the nation.
Furthermore, as median home prices are expected to appreciate by 2.2 percent throughout the nation, the typical Chicago area home will likely lose nearly two percent of its total value in 2019, according to the realtor.com forecast. I’ve seen this personally as well, as a Chicago resident. Recent neighbors and friends have either lost money or broke even on homes they purchased five to 20 years ago. Because so many millionaires are leaving Chicago, the luxury home market is the weakest. When homes do not appreciate, owners become renters. Chicago is becoming a city of renters, across both millennials and baby boomers.
In contrast, Florida residential real estate has seen median prices appreciate for 82 consecutive months with Orlando as one of the strongest markets. Orlando’s median residential real estate price appreciated 8.9% in 2018 and Zillow projects 5.9% appreciation in 2019.
Higher Rent Growth Expected in Orlando vs. Chicago
At Origin, we believe that the two most important drivers of future multifamily rent growth, which is clearly crucial for multifamily real estate investments, are population growth and employment growth. We can see the correlation between population growth, employment growth and rent growth reflected in the chart below. Looking at the data, it’s evident that Orlando has enjoyed greater population and employment growth than Chicago over the past three- and five-year period and this trend is projected to continue for the next three- and five-year period. Population and employment growth in Orlando have translated into higher rent growth, which also is expected to continue.
Correlation Between Job, Population and Rent Growth in Orlando and Chicago
|2019 Base Year||Orlando||Chicago|
|Rent Growth (avg)|
|Trailing Five Years||5.32%||2.15%|
|Trailing Three Years||5.32%||1.69%|
|Forward Five Years||2.98%||2.05%|
|Forward Three Years||3.01%||1.79%|
|Population Growth (avg)|
|Trailing Five Years||2.46%||-0.07%|
|Trailing Three Years||2.32%||-0.10%|
|Forward Five Years||2.12%||0.02%|
|Forward Three Years||2.14%||0.00%|
|Employment Growth (avg)|
|Trailing Five Years||4.08%||1.27%|
|Trailing Three Years||3.79%||0.95%|
|Forward Five Years||1.69%||0.49%|
|Forward Three Years||1.66%||0.44%|
Data from Real Page-Axiometrics
Orlando’s Amenities Continue to Grow, Attracting New Residents
For decades the argument for living in Chicago has been that, although taxes are high and growth is low, residents benefit from amenities that include the richness of our Universities, restaurants, diverse population, sports teams, and cultural institutions. While this remains true, cities like Atlanta, Austin, Charlotte, Dallas, Denver, Nashville, Orlando, and Phoenix, have narrowed the gap. As their populations grow, so does their infrastructure, which improves their amenities, brings diversity, and improves the quality of life in these new cities. This then produces more population demand, as they remain low-tax and business friendly.
Orlando has seen this growth in cultural diversity and in its richness of cultural offerings. Orlando’s theme parks aren’t its only attractions. The metro area has experienced extraordinary growth in the past decade, introducing a new arena for the Orlando Magic and touring shows, and the Dr. Phillips Performing Arts Center. Orlando has a regional bus transit system called Lynx and a commuter rail system called SunRail. When SunRail’s first phase opened in 2014, its 31 miles connected Volusia County to Orange County. Ongoing expansions will increase its distance to 61 miles and extend south into Osceola County.
We also can’t ignore the most obvious difference between Orlando and Chicago – the weather.
Average Temperatures in Orlando vs. Chicago in Degrees Fahrenheit
Data from Currentresults.com
Annual Days of Sunshine in Orlando vs. Chicago
|Full Day||Partial Day||Totals|
Data from Currentresults.com
Sunshine affects human outlook and mood. In Orlando, there are one and a half months of more days with sunshine each year. There is a reason Florida is called the Sunshine State.
Residents reap the benefits of Florida’s nice weather by being able to utilize best-in-class golf resorts, tennis and trails year-round. The weather also helps attract students to Orlando, as it has one of the largest concentrations of college students in the country anchored by the University of Central Florida, the largest college in the country with 68,000 students, as well as Valencia College, Seminole State College of Florida, Full Sail University, Stetson and Rollins College.
This vast education system and large population feed into one of the fastest-growing life sciences and health care industries in the U.S. and the area is home to over 4,800 companies who employ just under 100,000 employees. Orlando now has three professional sports teams – Orlando Magic (basketball), Orlando City (soccer), Orlando Predators (arena football), and hosts many collegiate football games at Camping World Stadium. And although it’s doesn’t have quite the same foody scene as Chicago, Orlando is taking serious strides to accommodate the increase in population with over 5,000 restaurants.
In conclusion, ultimately we stopped investing in Chicago because the city continues to experience population loss caused by a high-tax environment that will worsen over the next ten years and cause lower demand for real estate. We believe Orlando, in contrast, will continue to gain population and real estate demand because it is a low-tax state that attracts business and people. Chicago is on the wrong side of these population flows, and we believe investing in this market is a big risk. We will trust in our data, vote with our checkbooks, and invest in Orlando instead.