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Chicago Real Estate Developers: Tax Uncertainty Pushes Diversification

Chicago Developers Branch Out, Diversify

January 2020

Sterling Bay, Magellan, CA Ventures, and other real estate developers and investors have been big names in Chicago for decades. But now, as property taxes are increasing, they’re finding that it’s harder to finance new buildings locally, according to a recent Chicago Tribune article on commercial real estate development. So they’re branching out into other cities in the Midwest and across the country.

Among the growth markets cited are Denver, L.A., Nashville, Austin and Atlanta.

These Chicago real estate developers have reimagined entire neighborhoods including the Fulton Market District, Lincoln Yards, and Lakeshore East. While they still see great potential in the city, these developers feel a growing uncertainty over increasing property taxes, city and state pension obligations, and policy changes like affordable housing requirements and TIF reform. This has led to a sharp decline in investment sales from $12 billion in 2018 to $3.9 billion in the first three quarters of 2019, and a harder environment for financing developments.

Chicago Real Estate Developers Expand Markets

Because of this more difficult financing, Chicago real estate developers are looking farther afield for the next big neighborhood. Miami’s Wynwood District, Dallas’s Deep Elum, Milwaukee, Minneapolis, and Los Angeles have all been on the radars of Chicago companies looking to diversify. Many of Chicago’s recently transformed former industrial neighborhoods could be just as profitably replicated in other cities, the developers say, and sometimes at a lower price.

Some real estate developers are hoping that structural changes at the state and local level will resolve the escalation of property taxes and pension obligations. But with capital still flowing in to the city, the slowdown in investment and development might be an inevitable part of the commercial real estate cycle.

Google Makes $13 Billion Real Estate Play

Feb. 18, 2019

Google’s commercial real estate expansion continues, with plans to invest an additional $13 billion in data centers and offices throughout the U.S. in 2019, according to Globe Street.

While the tech giant has been a force in many real estate markets across the country, this announcement carries significant impact across many markets. Here’s a breakdown of the economic benefits to the various markets. Google will be:

Adding tens of thousands of new employees
Generating 10,000+ construction jobs
Moving Wisconsin operations to a larger office
Doubling the Virginia workforce
Adding offices in Georgia, Texas, the Boston area, Los Angeles, and Washington state, among others

This comes on top of Google’s previously announced 1.7 MSF Hudson Square office expansion in lower Manhattan.

A Look at Google’s Real Estate Needs

While much of this activity involves moving into newly built or existing space, there also are redevelopment plans in the works, according to Bisnow. The company’s footprint in New York City, for example, is mainly repurposed manufacturing space on Manhattan’s West Side, which included its $2.4 billion purchase of Chelsea Market last year.

And, a big shift involves Google’s expansion in the data center sector, with centers planned in Nevada, Texas, Nebraska and Ohio. Here’s a quick rundown by region:
Read more

Chicago Industrial Market Surges in 2018

Feb. 8, 2018

As Q1 2019 gets into full swing, here’s a look at how 2018 fared and what’s ahead in the industrial, office and retail sectors.

Chicago’s Industrial Market to Expand by 18 MSF

While Chicago’s office and retail sectors declined in 2018 compared with 2017, the industrial sector showed solid growth in leasing and construction, according to Avison Young’s Annual Review and 2019 Forecast. The Chicago industrial market should see 18 million square feet of new space added in the next 12 months, including many speculative buildings. This, combined with continually decreasing vacancy rates, shows investor confidence in Chicago’s industrial markets, especially infill submarkets such as O’Hare and I-88.

Office and Retail Real Estate Moderates

The Avison Young report notes the employment picture was also bright last year, with employers in the Chicago metropolitan area adding more than 35,000 jobs year-over-year, according to this Bisnow story.

“Facebook, Google, Pinterest, Salesforce, Career Builder and Madison Capital have all recently announced major expansions in the CBD, which will increase local workforces as well as real estate footprints,” the report notes.

Q4 2018: Surge in Spec Industrial Construction in Chicago

In Q4 2018, Chicago’s speculative industrial development boom showed 19.5M SF under construction, according to research from Avison Young. That is a 59% year-over-year increase that is pushing development to new areas. This momentum has been seen for many quarters, as noted in this ULI Report.

“Many submarkets that are closer to the city have little to no space available for new buildings, so we’re continuing to see speculative development moving to outlying submarkets such as Southern Wisconsin,” Avison Young principal Chris Lydon tells Bisnow.

Chicago O’Hare Industrial Market Still Reigns

The O’Hare submarket had 4.9 MSF of new construction in Q4, increasing 50% from Q3. There is some concern about a few submarkets becoming overbuilt, however. The I-80 Corridor has the highest vacancy (12%) of any submarket, as it has seen 15.4 MSF of new construction during the past two years, with another 3.3 MSF underway.

Multifamily Skyscrapers Reign in Chicago

In Chicago’s skyscraper race, multifamily is outpacing office, as Millennials and others flock downtown.

Sept. 2018

Chicago’s multifamily market continues to reach new heights, quite literally. The city is now one of just a few cities in the U.S. to boast 100 skyscrapers in its skyline, with the addition of Jupiter Realty Co.’s 444-unit apartment building at 465 North Park. Since 2000, developers have added 38 skyscrapers in Chicago, and 25 of them are multifamily towers, according to a recent Bisnow story. Another seven towers are scheduled to open by 2022, and just one, 110 N. Wacker, is an office building.

Millennials Still Rule

Demand is high on the multifamily front, with an increase in employment and the “live, work, play” trend that is bringing Millennials and others into the Loop and other city neighborhoods. According to a recent report from Real Capital Markets, there is plenty of capital, both domestic and foreign, chasing multifamily investments in Chicago and on a national scale.

Among the new developments to watch is Vista Tower, a 406-unit condo development nearing completion along East Wacker Drive and the Chicago River. When completed in 2020, it will reach 1,198 feet, surpassing the Aon Center as the city’s third-tallest building.

Chicago’s Skyscraper History

Chicago has a rich history of skyscraper development dating back to the 1960s. Its 1000 Lakeshore Plaza, a 55-story, 590-foot multifamily property was the tallest concrete reinforced building in the world when It was completed in 1964, according to RentCafe. Among the notable multifamily skyscrapers in Chicago are Marina City and Lake Point Tower.

But today, American skyscraper development is mainly taking place in New York. Around the world, China is leading the way in skyscraper construction, developing 76 such buildings in 2017. Just 10 were completed in the U.S. in that same year.

Race for Amazon HQ2 Narrows; Questions Arise

Atlanta is seen as a favorite for Amazon HQ2 given its low cost of living and strong talent pool.

Jan. 29, 2018

The race is still on for the Amazon HQ2 project — a potential $5 billion construction bonanza that would bring 50,000 jobs. After 238 cities and regions in 54 locations (US and Toronto) submitted bids, Amazon recently announced the short list of 20 cities still in the running.

Before we get to the finalists, let’s take a look at some contrarian views coming out:

It’s all a sham, as the Washington, D.C. area (which has 3 finalists) has already been chosen, according to a recent Bisnow story. The story points to Amazon founder Jeff Bezos’ new mega-mansion in the area as the critical link to those sites. Executives do like to live near their offices, after all.

Others say it could all be a publicity stunt by Amazon. Look at all the good publicity and the scramble by government officials to appease Amazon.com. See more on that at axios.com.

Time will tell where the Amazon HQ2 goes and what the motivates are. Meantime, the official list of contenders includes Atlanta, Austin, Boston, Chicago, Columbus, Dallas, Denver, Indianapolis, L.A., …and several others. Here are a few snapshots of those that made the cut:

Atlanta

This southern city with $5.8M residents is considered a top contender due to its cost of living, strong talent pool and access to the world’s busiest airport. Traffic was cited as one negative issue, however.

This is how a Chicago Amazon HQ2 might look. Image from Goettsch Partners.

Chicago

Chicago made the cut and here’s what is pushing the city ahead, according to this Bisnow story. The proposal included 10 sites, many with large land areas for development. From Lincoln Yards to the old Michael Reese Hospital site to 700 W. Chicago (pictured here), the city proposal includes many land masses.

The incentives package included about $2B. One frontrunner, according to the story, is the old Chicago Tribune printing plant in River West, as it would connect downtown, River North, the Fulton Market and other neighborhoods.

Dallas

Dallas and Fort Worth are gaining attention for their strong supply of tech talent. And, the cost of living is much lower than other tech hubs, such as New York or San Francisco.

Columbus and Nashville are in, but neither has a major airports, which seems like a liability.

For a detailed look at which cities made the list — and why — see this money.com story.

Office REIT Movement and Other Commercial Real Estate Updates

January 15, 2018

Here’s a quick look at what’s going on in commercial real estate news, along with the retail and industrial sectors.

Office REITs Moving Away From Acquisitions

According to National Real Estate Investor, some office REITs are shying away from acquisitions for 2018. Citing rising interest rates as a factor, the story notes that REITs will now be focusing more on development opportunities. Another factor at play is the shortage of high quality commercial real estate assets in some markets — given the strong investment cycle over the past several years and the desire by institutional investors to hold on for a longer term.

New York Investor Likes Chicago’s Uptown

Chicago’s Uptown neighborhood, with its growing transit-oriented-development corridor, has caught the eye of

Image from Great Global Holdings, which acquired the retail holdings in this Uptown development.

a New York investor, reports Bisnow. Great Global Holdings paid $8.9 M of the retail portion of the Wilson Yards mixed-use development. This is the firm’s fifth Chicago retail acquisition. What’s driving this activity?

Click here for more.

Amazon HQs Update: Residents Look Beyond Economic Stats

The race to lure the Amazon HQ2 continues, with more than 200 locations across North America vying for this prize. According to this Business Insider story, some residents are worrying about the problems associated with adding up to 50K employee into one area. Traffic, souring housing prices…you name it. Check out the story for more on who’s in the running and what this all could mean in terms of economic growth.

Grocery Anchored Centers Losing Luster?

Image courtesy of REJournals.com

Once the darling of the commercial real estate investment world, grocery anchored shopping centers are losing some of their luster, reports rejournals.com. Citing research from Morningstar Credit Ratings, the story details how the food buying landscape is changing. While grocery stores that offered a full line of goods and has at least $2 M in annual sales were once considered “e-commerce resistant,” that appears to be changing.

How will this play out for investors in 2018? Stay tuned!

Amazon HQ2 focus: real estate, tech talent

Real estate and tech talent are key for Amazon in its HQ search.

October 2017

The commercial real estate industry is abuzz as bids were submitted for the hometown of Amazon’s HQ2, a 50,000-employee, $5 billion second headquarters. With more than 50 cities in the U.S. and Canada vying for the company’s attention, competition is fierce, with some cities getting creative to make their case.

According to this Bisnow article, Tucson, Arizona, sent Amazon a 21-foot cactus to remind the company of the city’s growth and resiliency while Stonecrest, Georgia, offered to change its name to Amazon.

Where’s the Best Real Estate and Tech Talent?

While the right commercial real estate is important, Amazon is looking for a city that will attract young talent, a city with good connectivity, and a city that will offer tax incentives. Along with those requirements, the company will potentially bring 50,000 people, along with their spouses and children, to the city, raising the need for housing, schools and retail—and hoping the city can keep up. Here’s a recap of some of the pitches:

Atlanta

Atlanta is pitching several sites including real estate along the Atlanta Beltline, GID’s High Street site in the Central Perimeter, the Gulch in downtown Atlanta, Integral Development’s Assembly Project, the former GM plant in Doraville and the redevelopment of Fort McPherson.

Baltimore feels that its Port Covington, home to UnderArmor’s headquarters on Sagamore Development’s property, is a good choice for Amazon, especially as it may see a transit stop in the near future. And, several Bay Area cities have teamed up to put in a bid for the 5,000-acre Concord Naval Weapons Station, which is within 45 minutes of an airport, has two nearby BART stations and convenient highway access. Also:

Boston has proposed its Seaport neighborhood as the Amazon HQ2 site and has committed to building a $100 million cable-operated gondola system to shuttle Amazon employees to work.
Brooklyn real estate developers are highlighting their neighborhood’s tech talent and proposing Industry City, a massive complex of former industrial buildings, for the project, which will eventually need to be 8 million square feet.

Could Chicago land Amazon?

In the Midwest, Chicago’s Old Main Post Office is currently the largest redevelopment in the U.S. at 2.8 million square feet and offers 250,000 square foot floor plates just steps from the Loop. Here’s more on that Amazon proposal.

And, if the U.S. sites are not the answer, Amazon can always go a little north. Teaming up with its Canadian neighbor, Windsor, Ontario could mean an international headquarters in Detroit.

Which city the internet retail giant will choose will remain a mystery for a while longer, but the promise of such a major real estate development has brought out each city’s competitive side over the past several months.

Commercial Real Estate Trends for 2017

The commercial real estate industry has been on a strong cycle for several years. The big question is: How long will it continue? The latest Emerging Trends Report by PWC (PricewaterhouseCoopers) and the Urban Land Institute, has the long view on the market. Here’s the latest.

The Strong Investment Sectors for 2017?

Supply chain and e-commerce growth continues to drive Industrial real estate leasing and investment.

Industrial — continues to top the charts, due to the growth in e-commerce and the general supply chain. Well located, institutional quality distribution space has been in short supply for several years across the country. While new construction has been strong, it will take time to lease and sell the buildings and, thus, fill all the demand. Bottom line: investors like the stability and long-term growth of this sector and will continue to seek strong assets in primary, secondary and even outlying markets.

Senior Housing/Retirement Homes — these will continue to be in favor, due to the aging population and need for community residences and related services.

Urban Mixed-Use Developments — these vibrant, urban developments that combines residential, retail, offices and more continue to draw Millennials and Baby Boomers alike — and should guide development going into 2017 and beyond.

The Emerging Trends report also predicts:

Global commercial real estate should be stable in 2017

More stability in market cycles — Look for less volatility, as lessons learned from the global financial meltdown will guide decisions moving forward. While construction still lags during this post-recession era, it should continue at a tempered pace.

Multi-Use– or “Optionality” is in — the trend toward developers and investors seeking flexible, multi-use projects. In this commercial real estate market, buildings that can be adjusted to satisfy multiple tenants and changing neighborhoods are ideal. It lets owners maximize rents and seek the highest and best use.

Construction costs to rise due to labor issues — Workers who left during the recession have been slow to return, slowing production and increasing costs. With vacancy rates at record lows in many markets, construction has been a big factor in filling long-term demand. Without an adequate number of workers, costs will rise.

Cap rates could go lower in 2017 — As investors continue to chase deals and limited supply and tempered construction present continued challenges.

What’s Behind Manhattan Land Sales Slowdown?

According to The Real Deal, Manhattan land sales slowed during the first part of 2016. Data and analytics firm Real Capital Analytics (RCA) shows that there were only $90 million worth of development deals in January and zero on record in February.

What’s going on? Looks like three main factors are at play–stringent financing, lackluster luxury condo sales and the termination of the 421a tax abatement program. Another key factor is that buyers are not willing to pay the high prices sellers are touting. This is having a ripply effect on development sites. Click here for more.

(Somewhat) Affordable Housing

March 2016

Nearly every day, we hear news of a new high-end apartment complex being built in a major metropolitan area. But new construction with lots of amenities is not what every renter is looking for, says David Schwartz, CEO and co-chairman of Waterton. His investment firm has spent much of the last few years looking for Class B and Class C value-add apartment properties, and renovating them for middle-income renters seeking affordable housing.

Industry experts see more of this from private investors on the horizon.

One current project for Waterton is the Vida Hollywood, a 25-year-old apartment complex in Hollywood, California. The company is renovating its 345 units, but rents in the building will still remain about $800 less than they would be at a Class-A building in the same area.

Barbara Byrne Denham, an economist with New York City research firm Reis, Inc., urges redevelopers not to interfere with Class B and Class C apartment buildings that are already fully occupied. In areas with high job growth and salaries to match, the existing renters might pay the higher prices to live in the renovated building. But in areas where people are just staying stable in their careers, the tenants looking for affordable housing might move out.

What should they do instead? And, what are investors chasing? Click here for more.

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