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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.

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