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Residential Developers Now Looking For Opportunities Outside Once-Hot Downtowns

The coronavirus pandemic initially shut down Chicago’s condo market, and even though sales returned to many outlying neighborhoods and suburbs, the downtown is still threatened because once-dependable buyers such as affluent empty nesters continue to stay away. 

“Right now, they’re not moving into the city,” Belgravia Group Chairman Alan Lev said during Bisnow’s Multifamily Annual Conference Dec. 3. “If you want to move into the city, it’s for theater and restaurants, and you can’t do any of those things.”

The company recently finished developing two downtown condo buildings, he added, and it has had trouble selling the last few remaining units.

“Fortunately, the loans are paid off and the equity returned,” Lev said.

Triangle Square

He expects the downtown condo market is likely to pick up again when the crisis subsides, but even if it doesn’t fully return to where it had been, the outlying neighborhoods still present developers with plenty of opportunities. A chief reason is that these developments tend to appeal to a younger demographic, a group more willing to take chances.

“In these neighborhoods, you have young buyers in their 30s and 40s, and it’s a different mindset than being downtown, and they seem to have a commitment to remaining in the city,” he said.  

The spread of COVID-19 did impact condo developments outside downtown, he added, but it was temporary. Belgravia broke ground just before the pandemic hit on Triangle Square, a seven-story rental and condominium development nestled between Lincoln Park and Bucktown, near the site of Sterling Bay’s $6B Lincoln Yards. There were no sales in March and April, but activity then picked up.

“We’ve sold a good number of units since then,” Lev said. “We haven’t had to stop or even slow down.”

Sales have gone well enough elsewhere that Belgravia is set to launch new Chicago developments, even as the pandemic continues to spread. After no sales in early spring, the company by October had sold 35% of the units for its CA6 West Loop, a 72-unit building planned for 305-323 South Racine Ave. in the West Loop, according to Lev. The company intends to break ground next month.

The pandemic has also failed to change other long-term trends. Chicago developers turned off by their state’s seemingly endless budget woes and the possibility of higher taxes eating into their bottom lines continue to eye Sun Belt metros, Lev said. Belgravia is examining the feasibility of launching significant projects in Phoenix.

“We’re looking to work in other markets, and it has nothing to do with the pandemic,” he said. “It has to do with the underlying issues in Chicago that were there before and have become worse with the pandemic.”

Clockwise from top left: Ryan Cos.' Toby Veit, KeyBank Real Estate Capital's Rob Garrison, JK Equities' Jerry Karlik and Belgravia Group's Alan Lev

JK Equities co-founder Jerry Karlik said his company also kept building condo projects straight through the pandemic and has done well outside the downtown core, especially for its 1400 Monroe, a 42-unit, seven-story luxury condominium now rising in the West Loop where buyers continue to show up.

“We’re putting up exterior walls as we speak, and we should be done with that project by July or August,” he said. “We’re very optimistic about that project being sold out before we’re done.”

But things haven’t gone as planned elsewhere. JK Equities and its partners, Time Equities and Oak Capitals, broke ground in late 2019 on the Helmut Jahn-designed 1000M, a 74-story condominium tower at 1000 South Michigan Ave. on the downtown’s southern edge, but halted construction earlier this year.

“That’s been a challenge for us, and principally because of the same experience Alan had with condominium sales in the downtown,” Karlik said. “So, we’re pivoting that job into either a mixed-use or full rental building.”

“Financing for large projects is kind of difficult today,” he added. “While we have a lender, he’s slowed us up at that project. Lenders are out there, but they’re holding their purse strings close to the vest.”

Karlik said he also expects the market to eventually come back strong as COVID-19 eases up, but the downtowns of gateway cities will suffer a longer hangover than outlying neighborhoods.

“The suburbs are going to do well, because from a personal experience, we see the younger generation moving into the suburbs and into the neighborhoods, trying to get away and be safe, to get away from the hubbub, the pressure of downtown, the office buildings, and work out of home and feeling more comfortable living in an open, green environment,” he said.

“I think we’re going to stay away from downtown and gateway cities with urban infill-type situations for a while,” he added.