A Gap Between Supply And Demand Has Chicago Developers Headed West
Chicago-based residential developers are increasingly looking south and west as they seek out new markets with great returns.
The Chicago metro area isn't a bad place to be, with vacancy rates falling and rents rising in the multifamily sector and condo sales moving at a healthy clip in key neighborhoods on the city’s North Side. But the local market doesn’t have a key ingredient sought by developers: population growth.
The state’s population grew from 6.4 million in 2010 to 7.6 million this year, according to U.S. Census Bureau figures, and Phoenix was the nation’s fastest-growing large city between 2010 and 2020, adding 163,000 residents. Other Sun Belt regions such as Denver, Nashville, Tennessee, and Texas are also magnets, drawing in new residents to their job-rich economies. By contrast, Illinois' population was stagnant between 2010 and 2020.
Belgravia just launched Portico – North Scottsdale, a community of 112 condominiums in Scottsdale, a Phoenix suburb of 258,000 people, marking the company’s first project outside the Chicago region. And although Lev said development has gotten a bit tougher in the Chicago area, along with heightened concerns among developers about where property taxes are going, Belgravia isn't abandoning Chicago. It just makes good business sense for developers to follow all the migrants streaming toward cities with better weather.
“We’re not giving up on Chicago, but we’re no longer going to put all of our eggs in one basket,” Lev said. “I’ve been pushed by our crew here, who’ve been saying for years that we have to look at other places and branch out a bit.”
Last month, Belgravia announced sales surpassing the 80% mark at its CA6 West Loop condominium development at 305-323 South Racine Ave., a 72-unit, seven-story building in Chicago’s West Loop. And it began welcoming the first move-ins at its 72-unit condo building at Triangle Square, a mixed-use development in the North Side neighborhood of Bucktown.
There are still opportunities in Chicago. Developers will complete more than 6,000 new apartments in 2022, according to a Marcus & Millichap forecast, a slightly faster pace than 2021, although it is still about 2,000 units below the five-year trailing average. The metro area’s vacancy rate will fall to 3.7%, the lowest it has been in more than 20 years, and Marcus & Millichap also reported that rents will rise 4.2% this year, although it partly attributes that upward pressure to expected tax increases and somewhat lower new construction levels.
Sales of condominiums, townhomes and co-op apartments are also humming along, especially on the city’s North Side. Lakefront neighborhoods north of downtown saw 11,584 total sales in 2021, up 44% from the pandemic year of 2020, with prices increasing 8.9% over 2019, according to a report from broker Mary Jo Nathan of Compass.
Though it isn't a bleak picture, the amount of residential activity in Chicago can’t compare to the potential of Phoenix. The metro area will add nearly 50,000 households this year, according to Marcus & Millichap’s 2022 forecast, a pace more than double the national average. The number of jobs will expand by 88,000 while developers will complete more than 20,000 rental units, pushing up the inventory by 5.5%, the fourth-quickest pace among large U.S. metro areas. In addition, net absorption is expected to be 19,000 units, the most in more than two decades.
“Robust in-migration is the driving force, with many relocating from colder weather climates or more expensive metros along the coasts,” the Marcus & Millichap report says.
That is the trend Chicago-based condo developers also like to see, Lev said. Other factors, such as construction costs, which used to be significantly lower in Arizona, and price per SF, which used to be significantly higher in Arizona, are less important because the gaps between the two regions have narrowed.
Another major factor is a big shift in the Phoenix area’s layout. Instead of endless suburban-style sprawl, it is now dotted with dense, walkable neighborhoods that snowbirds, empty nesters and other migrants became accustomed to in Northern metros, Lev said.
“There are now pockets where you can walk to amenities or retail, and that didn’t really exist even a few years ago,” he added.
Portico – North Scottsdale, which will be a collection of nine five-story buildings near Scottsdale Road and Loop 101, will also be five minutes away from the Mayo Clinic facilities and a collection of neighborhood retail. That kind of development made Belgravia’s new site appealing.
“Years ago, we probably wouldn’t have even looked at it,” Lev said.
Other Chicago developers are taking advantage of Phoenix opportunities.
Real estate developer Optima has offices in both north suburban Glencoe, Illinois, and Scottsdale. Last summer, it sold out its 7180 Optima Kierland, a 205-unit condo development in Scottsdale, part of its $500M Optima Kierland development. It then broke ground on 7120 Optima Kierland, a 216-unit apartment tower and the development’s fifth residential building.
Chicago-based The X Co. just completed the first phase of a new mixed-use residential high-rise at 200 West Monroe St. in Phoenix’s downtown core. Designed by Fitzgerald and Associates, the 731K SF, 20-story project will offer 330 units. Clayco constructed the building and this spring will break ground for The X Co. on Phase 2, a 26-story tower directly adjacent.
Average rental rates in the Phoenix area jumped more than 20% in 2021, according to Marcus & Millichap. That means apartment developers can expect to draw an increasing amount of attention from investors.
“An enlarged buyer pool with an appetite for assets throughout the [region] has translated to robust price appreciation,” the company stated. “In 2021, the average sale price jumped to a level more than twice as high as the same metric in 2016.”
The same is true across much of the Sun Belt. Origin Investments principal Michael Episcope told Bisnow earlier this month that the Chicago-based firm now concentrates on ground-up development and newly constructed apartment communities in markets such as Dallas or Florida that cost $260K per unit to build and can sell for $400K.
“In the Sun Belt, it’s not unusual to see 25 bidders coming to the table,” he said.
Launching apartment developments in new markets is a bit easier than breaking ground on a set of condos, Lev added. Selling condos requires a lot of heavy lifting in terms of marketing, outreach and other pre-sales activity. He only started operations in Scottsdale after having a home there for many years and bringing aboard people who understand the local market.
“Condo developments are a labor-intensive part of real estate compared to others,” he said.
But now that the company is up and operating in Phoenix, Lev said it is committed to continuing the work there. Portico – North Scottsdale’s sales office will open this spring, and Belgravia is already scouting a new Phoenix-area site for another condo development.
“This is not going to be a one and done,” Lev said. “This is going to be the first of many.”