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Three Threats to Multifamily Development in Chicago

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    Three Threats to Multifamily Development in Chicago

    Chicago's multifamily housing market is soaring, with renters willing to pay a premium for new luxury developments with extra amenities. Still, last week several industry vets warned of three Chicago-specific challenges to new development.

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    1. The State’s Pension Problem

    It’s no surprise that Illinois’ $100B pension deficit is a serious problem. But how is that affecting commercial real estate? “It’s bad for the market, and it’s the single greatest deterrent to people investing in Chicago right now,” says First Western Properties president Paul Tsakiris, speaking at Bisnow's Mutifamily Summit at the JW Marriott on Thursday. Berkadia SVP Ralph DePasquale, also a panelist, agrees. He says with all of the uncertainty wrapped up in how the State—and recently elected governor Bruce Rauner—will address the state’s pensions, budget shortfalls and taxes, developers are unsure how to underwrite protection plans against unforeseen losses. In Chicago, Essex Realty Group principal Jim Darrow says he's holding his breath until after the mayoral runoff today, reasoning that the city’s mayor will need skills to address the pension problem on a local level.

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    2. Rising Construction Costs

    We’re seeing construction costs grow 20% to 30% this year, says Laramar Group CEO Jeff Elowe, among our panelists. Higher costs for new developments means higher rental rates, he adds, and Chicago developers could soon run the risk of pricing most residents out of their market. “That’s just a thinner income demographic,” says Waterton Associates CEO David Schwartz. As a result, he predicts a growing interest in Class-B units, which are seeing strong rental growth but are still more affordable than most luxury rentals being developed.

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    Marquette Cos CEO Nick Ryan says developers may have to plan for slower rental growth after 2015.

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    3. The Affordable Housing Ordinance

    Chicago’s City Council recently passed a landmark ordinance requiring developers to set aside a portion of units in certain new apartment buildings as affordable housing. And it could change everything, says AMLI Residential CEO Greg Mutz. Greg warns of the potential for unintended consequences once the ordinance takes effect next year, particularly because it has the potential to discourage development. But in the short-term, before the law takes effect, “it’s going to be one hell of a kick in the ass for new developments.”
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    The Habitat Co president Matt Fiascone adds that, if developers race to set new projects in motion before they have to comply with the ordinance, Chicago will likely see a sharp increase in supply over the next couple of years, followed by a steep drop-off. That set of conditions could make housing in Chicago less affordable in the long run, David says, adding, “Every city is struggling with this.” David says he would have preferred Chicago to follow in New York City’s footsteps and offer tax abatements for affordable housing construction, rather than set a mandate—particularly due to Chicago’s high taxes.

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    In the first panel of the morning, we also learned which Chicago neighborhoods are going to see multifamily development really heat up this year.

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    Logan Square is red hot, says Jim, with over 400 units proposed throughout several developments. Logan Square boasts diverse public transportation options, a neighborhood-feel, and particularly easy access to the West Loop, a growing hub for offices. Paul adds that the wide potential for parking-lite TODs in the neighborhood makes it appealing to developers and the Millennial renters they’re hoping to attract.

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    Paul is also seeing a lot of interest in Pilsen, and by extension the traditionally working-class neighborhood of Little Village to its west. Property Markets Group recently announced plans to build 500 new apartment units in Pilsen, and Jim says some residents are already finding themselves priced out of the neighborhood, on the city’s Near Southwest Side. “I think we’ve closed five deals in the past two months there,” he says.

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    Those getting priced out of Pilsen are moving to west Little Village and south to Bridgeport. Paul also points to Bronzeville’s 49th Street Corridor, which extends from Martin Luther King Jr Drive out to the lakefront, as an affordable and “adventurous” choice for developers.

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    And Cornerstone Real Estate Advisors managing director Pam Boneham says she expects the next five years to be particularly good for developments centered around the downtown area.

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    Several of the panelists also weighed in on what amenities attract Millennials. Crescent Heights principal Tomer Bitton says he's seeing more and more tenants interested in renting from companies that have paperless billing down. It cuts down on waste and time. Hunt Mortgage Group senior managing director William Hyman says his tenants want perfect Internet connectivity, and the freedom to choose their provider.

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    And with rents continuing to push higher, Kiser Institutional Group managing partner Todd Stofflet says renters are becoming more interested in the option to rent smaller, more affordable units in high-end buildings.