What Do Chicago's Big Demographic Shift, Declining Population Mean For CRE?
Chicago has undergone a tremendous demographic shift since the 1990s. Former industrial districts like Fulton Market now teem with thousands of office workers each day, many of whom live nearby in glittering new apartment towers. Downtown itself transformed into a true residential neighborhood with grocery stores and entertainment venues like Millennium Park.
A similar shift took place in other Rust Belt cities like Detroit and Cleveland, as young college graduates all over the region increasingly rejected suburban lifestyles in favor of the dense urban cores' amenities, restaurants and retail districts.
All this movement was good for business, as real estate developers, brokers and investors moved in to service this growing group of educated and relatively affluent residents with both new and renovated homes, along with trophy office towers for the companies recruiting this workforce.
Since 2010, the number of jobs in the Central Business District jumped to 613,000, a 28% increase, according to a capital market overview by HFF. And, using census data, the firm found almost 40% of Chicago's 25-plus-year-olds now have a bachelor’s degree, more than New York City or Los Angeles.
But another demographic shift in Chicago has also been underway.
Even as the downtown and its adjacent neighborhoods attracted young, educated new workers, other areas, especially those home to low- to moderate-income African Americans, have lost population.
The city as a whole, Cook County and collar counties are either stagnant or declining, according to census figures.
“This loss of population is significant, and the group most affected is the African American community,” Charlton Hamer, senior vice president of The Habitat Co.’s affordable housing unit, told Bisnow last week.
Taken together, the two demographic movements mean the Chicago market is experiencing a big switch.
“While lower-income residents have moved out to west and south suburbs, nearly as many higher income, well-educated people have moved to downtown and nearby neighborhoods,” according to Steve Fifield, founder and CEO of Fifield Cos., which developed several West Loop apartment towers in the past decade.
Bisnow asked a group of commercial real estate professionals whether those signs of decline are a concern, or whether the burgeoning population of young, educated people is more important to their business.
Lisa Davidson, Vice Chairman, Director, Savills
“I do think the decline is concerning and needs to be studied further to understand the overall impact to Chicago’s economy. However, as an office broker, I have not seen this decline in population impact companies’ decisions to remain in Chicago or relocate here from other cities.
The rise in the young and educated as a percentage of the population has definitely had a positive impact on the office market. Companies from both coasts are recognizing the tremendous talent pool we offer, and we are seeing those companies fueling new development by locating hundreds of thousands of square feet of office space in the CBD. When compared to other Tier 1 cities, Chicago provides a unique value proposition when you combine the young, educated talent pool with the availability of new office space and potential development sites.”
Lennox Jackson, founder and CEO, Urban Equities
“The decline is a concern for me. First, population decline has a direct negative impact on the U.S. Census count which, in turn, reduces Chicago’s ability to procure federal government dollars that are used for a variety of purposes, including infrastructure repairs and schools. These are critical to any sustainable growth and my future business plans.
The population decline is an even bigger concern in the African American community. Chicago’s personality is fundamentally reflected in its diversity. If city policies are not enacted to reverse these conditions, the Chicago we all know will become extinct.
Predominately, my customers are African American renters and homebuyers. My business reach will be adversely impacted if this population decline continues unabated.
The growth of young, educated people would be more important to me if these individuals were moving into South Side neighborhoods in search of the apartments I rent and the homes I sell. I have not observed a rush to the South and West sides of the city. Instead, I notice that these workers are concentrating themselves in the CBD and/or near the location of their employer. This, in turn, centralizes spending and inhibits the spread of disposable incomes to other communities that are in need of being strengthened.”
Aaron Galvin, CEO, Luxury Living Chicago Realty
“Downtown Chicago's population is growing and new apartment developments are benefiting from that growth. According to our data, more than 20,000 high-end apartments were added near the city core and surrounding neighborhoods over the last four years and nearly all have been leased faster than anticipated.
As a luxury leasing brokerage, we are seeing an increase in corporate relocations to Chicago. Nearly half of our clients come from outside of Chicago. These individuals are primarily high-earning, educated millennials.
Rents are approaching $4/SF, and in certain circumstances such as micro-units and penthouse units, surpassing that rate. A growing luxury renter base is great for business.”
Andy Gloor, CEO, Sterling Bay
“As a Chicago-based company, Sterling Bay cares deeply about the future of our city. While Chicago continues to lead the nation and world in many positive areas, we must continue to find ways to spur development and create economic opportunity for everyone.
It is great that Chicago is attracting young, educated people, but it is also important that we ensure the city remains inclusive with opportunities for all of its people. At its core, good development is about reflecting the culture of a community and responding to its needs.
As a community-driven developer, Sterling Bay always strives to respond to the needs of communities where we work. For example, in Fulton Market, we restored buildings with significant structural issues to preserve the history of the area and its unique character. We listened to local residents who wanted a library in their neighborhood, and built the West Loop Branch and donated it to the Chicago Public Library.
Most recently, we are working to expand our work to other parts of the city. We are excited to partner with DL3 on our first development on the South Side, which will be a mix of retail, housing, job training services and office space for small businesses — all of which would benefit the local community.
It’s investments like these that define our work. We are community-driven and believe working with and giving back to the communities in which we work is the best way forward for the city.”
David Doig, President, Chicago Neighborhood Initiatives
“While Chicago has lost population overall, the story is different in Pullman, where the investment in new businesses, housing and schools has led to the creation of more than 1,300 new jobs. [CNI is a nonprofit community developer working to revive the Far South Side Pullman neighborhood.] Those new jobs have spurred a slight increase in population. Clearly, people want to live in neighborhoods that are safe, affordable, have good schools and are proximate to their jobs. We have that in Pullman.
There is virtually nothing like education to drive growth and catalyze reinvestment and rebirth. We’ve certainly seen that in Pullman, and we believe that the percentage of workers with college degrees is a powerful predictor of a community’s success. The number of college graduates living in Pullman has increased 10% between 2006 and 2015, and it’s no coincidence the number of six-figure households has increased 58%, according to the Metropolitan Planning Council.
As a result, Pullman has gone from being primarily a steel manufacturing town to one with a diverse mix of businesses — ranging from manufacturing environmentally friendly products at Method and Gotham Greens to one serving the food industry at the new Whole Foods Distribution Center, the Kellogg’s ice cream cone plant and more.
Pullman is more vibrant than it has been in decades.”
Jordan Gottlieb, Principal, Essex Realty Group
“Population loss is never a good thing for any city, but I think it is important to look beyond the popular headlines people like to rely on in their critiques of Chicago. At Essex, we have not seen Chicago’s small population loss impacting our clients’ desire to invest in Chicago apartment buildings. In fact, we believe there is more money attempting to invest in Chicago multifamily right now than any time in our history.
While there are a lot of headwinds in Chicago dealing with high taxes and pension issues, I believe this is more likely to affect homeownership rates and home pricing rather than a renter’s desire to live in Chicago. A renter simply does not feel the impact of the pension crisis or higher real estate taxes the way a homeowner does.
For much of the past decade, developers have added thousands of apartment units annually to Chicago’s rental supply. Every year these apartments are absorbed with minimal concessions and in general, rents continue to push upward while vacancy trends downward.”
Tara Hovey, President and Chief Operating Officer, Optima Inc.
“We want to see overall population growth for Chicago with that growth spread across Chicago's neighborhoods. This would reflect broader economic strength for all Chicago communities, enhancing residents’ quality of life, and expanding areas of business opportunity. In the near term, however, we don’t see the overall population decline as having an adverse impact on our business.
The census data showing the city's population of young, educated people soaring is more important to our business in the near term than the overall population decline. This demographic is a primary driver of rental housing demand. This population growth also continues to support employment growth, business growth and relocation to Chicago, further driving housing demand.”
Michael D'Agostino, Senior Director, Kiser Group
“As a multifamily broker focused on the North Side neighborhoods of Chicago, the population loss has not been seen in my market areas. The downtown core market continues to see new apartment developments and strong renter interest. The North Side neighborhoods also have strong renter demand, and I don’t see any signs of decline.
More companies are incentivized to come to Chicago and expand in the city because of our growing tech community and educated workforce.
With all of the job growth, new developments from office and apartment continue to be on the rise. Construction costs are soaring, and this is concerning. There is a lack of supply of skilled labor. No matter how much money we have flowing into the city for these developments, we need people to build these buildings.”
Ben Warriner, Executive Vice President/Partner, Morgan/Harbour Construction
“Most of the information out there relative to the declining population in Chicago cites a myriad of reasons including government corruption, crime rates, economic instability, long commutes and cost of living. That said, the bigger cause specific to the local construction industry is the tax situation in Illinois. This issue is not only impacting the population decline, but we are also seeing many companies locate to neighboring states like Indiana, Michigan and Wisconsin for relief.
Chicago’s CBD markets continue to see an influx of corporate headquarters and tech companies relocating to this area and looking to capitalize on the younger talent pool. As such, our downtown office has seen an uptick in work opportunities, not only in corporate HQ’s, but also landlords upgrading their amenities and spaces to cater to these tenant prospects. We recently completed these types of building upgrades at 200 West Jackson and are in the middle of a similar cluster of projects at 150 North Michigan.”
Bob Chodos, Vice Chairman, NKF
“The decline in Chicago’s overall population, according to the U.S. Census, is driven by the fact that more people are moving to, than are arriving from, other states, and can be attributed, in part, to Illinois’ tax climate. ...
In the midst of the overall population decline, the population of young, educated professionals is growing in Chicago. These professionals place a high value on quality of life, and the growth of this demographic is an important indicator in the commercial real estate industry. Chicago’s economic landscape, with a lower cost of business — including occupancy and housing costs — than coastal markets, and transportation access through a global airport hub and efficient public transit are both driving factors bringing the population to the city. As a result, Chicago has a robust labor market, with proximity to some of the most prestigious schools in the country and 200,000 graduates annually entering the labor pool within a 200-mile radius.
This demographic boom — 73% of Chicago’s West Loop zip 60661 code are millennials — means more companies are looking to Chicago for office locations. Eighteen midsize tech companies pledged to hire over 2,000 people in 2018 and 2019 and other large expansions this year have already added a total of 2,100 more jobs. Over the past 10 years, the city of Chicago has witnessed the migration of dozens of headquarters operations into the city from surrounding suburbs and locations outside of Illinois, notably McDonald’s, Ferrara Candy and Wilson’s Sporting Goods. The organic growth from firms like Facebook, Google and Salesforce also bodes well for the region. The professional and financial services sectors continue to prosper in Chicago as do education and healthcare. Private equity and venture capital continue to be attracted to the region and the incubation of startups has been hitting all-time highs in Chicago these past years. These are all office-using sectors of employment which translates to an increased need for square footage and demand for more office space in the Chicago market.”