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The Top 5 Chicago Real Estate Stories Of 2017

Chicago

The past year in Chicago commercial real estate was one of intense highs and free-falling lows. But patterns emerge and themes stand out when it comes time to review the top real estate stories of the year. Following are the top five stories in Chicago commercial real estate in 2017.

5. Construction Costs Cutting Into Margins

Spiegel catalog warehouse, Chicago
Blue Star Properties bought and is rehabbing the former Spiegel catalog warehouse in Bridgeport.

record number of tower cranes in the air this year overshadowed an uncomfortable fact: Developers increasingly found themselves struggling to stay within their budgets thanks to rising construction and materials costs. In January, Mortenson Construction's construction index predicted a 4% overall increase in construction costs, and showed significant increases in plumbing and electrical systems, HVAC, aluminum entrances, earthwork and resilient flooring.

But construction costs exceeded even those predictions in the first half of the year and Mortenson adjusted its prediction a half percentage point higher in its Q3 index. Construction costs in Q2 jumped nearly 5% over the same time frame last year.

It is not only materials pricing driving overall construction costs upward. The sheer number of projects being built, along with a shallow labor pool, are contributing factors.

4. The North Branch Industrial Framework Passes

The Chicago River between 600 and 700 West Chicago Avenue
The Chicago River, between 600 and 700 West Chicago Ave.

When Mayor Rahm Emanuel floated the possibility of relaxing zoning restrictions in planned manufacturing districts in April 2016, it was music to developers' ears. A year later, Emanuel made good on his promise with the passage of the North Branch Industrial Framework.

The framework loosened zoning to allow for mixed-use in the North Branch Industrial Corridor, encompassing 760 acres from the Finkl Steel site in the Clybourn Corridor — rechristened Lincoln Yards by Sterling Bay — to the Tribune Freedom Center site and 700 West Chicago Ave. The lower portion of the North Branch may be the most interesting section to watch. It has the fewest large contiguous land tracts not under developer control, which could be the future home of massive mixed-use projects.

3. A Mass Of Downtown Multifamily Inventory

A rendering of The John Buck Co's 3Eleven multifamily project in Chicago
Rendering of The John Buck Co.'s 3Eleven multifamily project

A packed pipeline of luxury apartments in Downtown and adjacent neighborhoods like River North began to empty. Over 6,500 apartments were added to Downtown inventory this year, and 31% of those were in River North alone.

The flood of new apartments resulted in flat rent growth and lease retention rates declining in Class-A buildings, even as the pace of lease-ups remained the same. Renters are willing to move from building to building to receive favorable abatements and keep their overall costs down.

Downtown multifamily rent spreads are cyclical: they increase in the first half of a year, and decrease in the second half. In 2017, the rent spread declines in Q3 and Q4 to date have been large enough to wipe out any gains from the year's first half.

2. Amazon HQ2 Mania Hits Chicago

700 West Chicago, Chicago
Riverside Investment and Development will redevelop this former Chicago Tribune facility at 700 West Chicago.

Amazon sent cities across North America into a frenzy last September when it announced a RFP for a second headquarters location. When the submission process ended a month later, there were 238 proposals, including one from Chicago.

The bid, submitted by Mayor Rahm Emanuel and Gov. Bruce Rauner, listed 10 possible sites ranging from Lincoln Yards and the Tribune Freedom Center site to high-profile Downtown redevelopments like the Old Main Post Office redevelopment and dark-horse candidates like Schaumburg's Motorola Solutions campus and the Thompson Center.

Emanuel used every opportunity he could to promote Chicago's number of massive sites as one reason why the Second City should house Amazon's second HQ. Emanuel and Rauner commissioned a 600-person committee to lobby Amazon. And the Chicago bid includes at least $2B in tax incentives, including a $1.32B "personal income tax diversion" that would allow Amazon to pocket the income taxes paid by its workers.  

If Chicago emerges as a finalist for Amazon HQ2, it will be because of these types of incentives and the large land tracts the city can offer Amazon. Experts believe the Tribune Freedom Center site may be the most attractive of the 10 sites submitted in the city's bid. It can connect River North and Downtown to the West and North sides, has ease of access to public transit and the young, educated workforce Amazon craves, and Amazon employees can fly directly to Seattle from O'Hare and Midway Airports.

1. Sterling Bay's Massive Ambitions

Prudential Plaza, Chicago
Sterling Bay's acquisition of Prudential Plaza was the biggest downtown office deal of 2017.

We declared 2016 "The Year of Sterling Bay." Looking back, that may have been premature, because 2017 was a command performance for Sterling Bay. 

No longer content to be an adaptive reuse expert, in 2017 Sterling Bay began targeting trophy buildings and landed two of the most notable assets on the market. In July, Sterling Bay acquired Prudential Plaza for $680M in the year's biggest office trade. Last week, Sterling Bay agreed to buy Groupon's headquarters at 600 West Chicago Ave. from Equity Commonwealth for $500M, leaving Sam Zell with one remaining office asset in the Chicago market.

Sterling Bay continued its acquisition of land in the North Branch Industrial Corridor. The firm made the first major acquisition in the corridor after the North Branch Industrial Framework passed, when it agreed to buy a city fleet management facility for $105M. Sterling Bay now controls 60 acres in the North Branch Industrial Corridor and has massive plans for Lincoln Yards, including a 20,000-seat, retractable-roof soccer stadium for a United Soccer League club in which Sterling Bay has an ownership stake. 

Sterling Bay is even branching out into industrial real estate and brought aboard former Bridge Development Partners co-founder Ron Frain to build the team.