'Chicago Is About To See An Increase In Density Like Never Before'
The possible exit of the Chicago Bears from the city was uppermost on the minds of many at Bisnow’s Chicago State of the Market event today, but Department of Planning and Development Commissioner Maurice Cox wasn’t giving out much information.
“We have folks in the city working mighty hard to accommodate them,” he said. “It’s an ongoing negotiation, so I don’t have a lot to report. But there is a strong chance we’ll succeed, and I think Chicago will be happy with the result.”
If the outlook for the Bears remains a bit gloomy, the outlook for many commercial real estate sectors seems a lot sunnier than just a few months ago. Multifamily has already bounced back, according to Kiser Group principal and Managing Broker Lee Kiser.
“Occupancy and rent levels in every category now exceed pre-pandemic levels,” he said.
Studio apartments were the last to recover, he added, but in the past few months many were filled by young people moving back to the city — the final signal that the initial exodus from Chicago’s dense core was over and a change that has investors eager to begin buying up properties again.
This year’s deal volume is currently below the historical average, Kiser said. But the market is on the cusp of change. Cap rates for Chicago-area properties are about 80 basis points higher than comparable properties in coastal markets and investors are taking notice. Capital started flowing about three to four months ago. With all the pent-up demand, the coming fourth quarter could see a near-record volume of closed deals.
“We have clients in 83 foreign countries and they are looking to invest in Chicago,” Kiser said.
The company is currently closing in on the sale of an apartment community with more than 700 units in the Chicago suburbs, a deal worth more than $100M, he added: “We had every segment of the market looking at that. It was refreshing.”
The office market, as well, has hopeful signs, but like all large cities, Chicago’s prognosis is tempered by the caution among tenants as they plan out responses to the delta variant. One positive aspect, according to Riverside Investment & Development CEO John O’Donnell, was that a lot of new construction went forward unimpeded throughout the coronavirus pandemic.
“We had no supply chain issues,” he said. The company had pre-bought what it needed to go forward with new office towers, such as the 51-story BMO Tower near Union Station set to open next year and the 57-story Bank of America Tower at 110 North Wacker Drive. And the emptiness of downtown during the crisis's worst days may even have smoothed out construction efforts.
“The logistics of building were enhanced,” O’Donnell said.
That doesn’t make tenants more likely to return. Not only are well-leased downtown buildings still empty, but many office users that should be in the market and were touring possible spaces in the spring have now decided to hang back to see whether the pandemic is truly behind us.
“A lot of the larger tenants have been deferring decisions,” O’Donnell said. “And our offices may be 100% leased, but they're still only 25% occupied by tenants.”
Chicago’s Central Business District had a vacancy rate of 17% in the second quarter, its highest ever, according to Colliers International, but O’Donnell attributes much of the vacancy to older or obsolete downtown buildings. The newer, Class-A towers are still well-leased and in demand, so if commuters get over worries about using public transportation and office users settle on how they will utilize space post-pandemic, portions of the downtown market could see bursts of activity in the coming year.
“I think there’s going to be a mad dash,” O’Donnell said.
Worries other than Covid-19 hover over Chicago’s development community. The city’s introduction this year of a new advisory group, stocked with academics, artists and architectural luminaries such as Jeanne Gang to review major development proposals, touched off concerns it would cause delays and headaches. But Cox said the group will both quicken the pace of approval and bring Chicago’s approval process in line with other cities’ standards.
Developer Trammell Crow was the first up before the committee in August with its proposal for two towers in Fulton Market, one a 650K SF office building, and the other an adjacent 377-unit apartment building. The committee came back with several suggestions that the developer has incorporated into the plan, including moving some parking underground and increasing the amount of parkland.
Making such changes will lead to better design, which should ease the passage of major development proposals when they come before the Chicago Plan Commission.
“We’re trying to begin that conversation early in the process,” Cox said. “It should be an honor to have your project reviewed by your peers.”
Several mega-developments circling the downtown core are beginning to rise, including Sterling Bay’s Lincoln Yards, Related Midwest’s The 78 and JDL Development’s One Chicago, work that continued despite the pandemic, he pointed out. And with several of these developers focused on transforming the city into a life sciences hub that will compete with coastal cities, multifamily owners can expect an influx of affluent renters.
“Chicago is about to see an increase in density like never before,” McElroy said. “There might be ebbs and flows, but it’s not going to stop.”
“When I became commissioner two years ago, to my surprise, unlike other major cities such as Seattle, New York and Boston, the conversation around design was not a public discussion,” Cox said. “It happened behind closed doors. I thought it was strange for the nation’s third-largest city, and one renowned for its architecture, to not have a forum where design can be discussed peer-to-peer.”
The 24-person Committee on Design is still a pilot program, he added, and only developments likely to be architecturally significant or ones heavily supported with public funds will come before it. The committee has met three times so far, and considered three projects, while the overall planning department, under Cox, has during that time reviewed about 60 new proposals.