Chicago Needs To Confront Deep-Seated Problems Before It's Too Late
Hovering over all the good economic news emanating from Chicago’s Central Business District are the perpetual worries over the city’s present and future financial condition.
“That’s the No. 1 concern we hear from institutional investors around the country,” JDL Development President James Letchinger said.
He was speaking at Bisnow’s State of the Market event Thursday, and that sentiment was echoed by other panelists, who shared his apprehensions about the city’s upcoming property assessments, tax increases and a possible recession.
Mayor Lori Lightfoot received a considerable amount of praise from McCaffery, Svec and several others for Wednesday’s budget speech, in which she promised a balanced budget, with a little help from Springfield, without property tax increases.
But the city’s reputation among big equity providers seems mixed, especially those from New York City, according to Letchinger. JDL Development recently broke ground on One Chicago Square, an $850M, 76-story, 1.5M SF mixed-use tower, in the city’s River North submarket, and Letchinger made the rounds to secure its funding.
“There has always been an East Coast attitude about Chicago, but it’s really bad right now,” he said.
Some of the problem lies at home. McCaffery said he believes that amid all the chatter about its fundamental strengths, some measure of complacency crept in, which could blind people to certain dangers.
He's noted the growth in several smaller cities, including Nashville, and these boomtowns have already started drawing in companies and residents that would not consider Chicago, due to its endemic violence and the decline of so many neighborhoods located beyond the vibrant downtown.
World Business Chicago President and CEO Andrea Zopp said the city is watching its population bleed away, primarily African American families from the South and West Sides, who are leaving to find better opportunities elsewhere. Although young millennials are buoying the overall population by moving into the downtown in large numbers, eventually the losses will become overwhelming.
“We can’t continue to afford that outflow, we’ve got to change that to a positive number,” she said.
So far, the city’s economy hasn’t suffered much from these struggles, but what progress the new Lightfoot administration can make toward solutions is the key to its prospects.
“We have to fix the crime and disparity problem in Chicago,” McCaffery said.
Still, deals are getting done, and new buildings are coming out of the ground, largely driven by the city’s sterling reputation as a repository of diverse talent and the continued growth in high-paying office jobs.
One Chicago Square, one of the city’s largest new projects, eventually secured Wanxiang America Real Estate as a partner, and last spring, New York-based Square Mile Capital Management agreed to make a $260M investment in the development. Meanwhile, multifamily developers have broken ground at a record pace, barely keeping up with the demand from millennial tenants who prefer rental apartments.
“They don’t feel like they’re wasting money by paying rent,” Letchinger said. “If we didn’t have December, January and February, we’d have 15 million people living here.”
Letchinger said the city’s core is as strong as it has ever been, and recently saw the strongest spring leasing season in seven years. That could mean eventually garnering $5 per SF rents are no longer out of the question.
“We are still far below other major cities,” he added.
Charging that much means Chicago developers will have to be prepared to provide top-flight amenities. Panelists cautioned against simply continuing to wage an amenities war against the competition. Instead, they advised builders to be a little more thoughtful.
Moceri + Roszak partner Thomas Roszak, the designer and developer of 145 South Wells St., the new 20-story office building that hosted Bisnow’s conference, said flexibility is the most important quality.
145 South Wells is meant to appeal to creative office tenants, and the concrete structure provides a loft-style look, as well as a full suite of amenities on the 20th floor, including an outdoor terrace. But Roszak said he was prepared to ditch any particular amenity if tenants’ tastes change, and tastes always change.
“What we were all doing three years ago is different than what we’re doing today,” he said.
McCaffery also advises being more careful with what amenities go into a building. Like many developers in the past few years, he loaded up his projects with perks such as luxury fitness centers with Peloton exercise bikes, but rarely saw tenants take full advantage of the offerings.
“It bitterly disappoints me, the lack of use,” he said.
McCaffery believes developers are just beginning to understand how attached tenants are to their personal fitness clubs, partly because sweating it out in the gym is not something many people want to do with co-workers.
“A fitness center in the building is almost too personal,” he said.
None of the panelists, however, felt amenities were a waste of time. McCaffery said whatever tenants’ attitudes toward a building’s creature comforts after moving in, a full suite of offerings is key to closing the initial deals.