Despite steady rent growth, a deep pool of educated renters and one of the smallest construction pipelines in the country, Chicago’s multifamily market is being held back by one thing.

Institutional capital needs to catch up.

Local and private investors are keeping deals moving, but once institutional money fully recognizes the opportunity to buy assets at below replacement cost in a growing market, Chicago multifamily will take off, Lument Managing Director Todd Stofflet told Bisnow.

“The continued strength in Chicago is starting to wake the herd up, and they’re starting to ask the questions, trying to develop investment theses on Chicago and some of the other Midwestern markets,” Stofflet said. “It takes time and it takes transactions.”

Chicago has one of the smallest multifamily construction pipelines in the country, according to a report from real estate investment sales company Lument shared exclusively with Bisnow.

Units in the pipeline make up less than 1% of Chicago’s total multifamily inventory, a rate only met by Houston and San Francisco. 

There are probably about a dozen sites that are shovel-ready in the city that aren’t getting built because developers aren’t finding equity for them, Stofflet said. Equity challenges make it difficult to project exactly how many units will deliver in the city and when. 

Many of the city’s traditional major sponsors, like JPMorgan Chase and Ares, have pulled back from the market, so the difficulty for investors is finding a source of equity excited about developing in the city and comfortable with returns on its investment, Stofflet said. Many of the institutional investors that were on the sidelines are heading back to growth markets like Austin, Charlotte and Nashville, he said.

“I look at Chicago, and I see less than 1% in the pipeline, 7% year-over-year rent growth in downtown,” Stofflet said. “At some point, you just have to focus back on yield and where I’m going to make more money, and that is the Midwest right now.”

Chicago started off the year with strong multifamily sales. The city recorded nearly $1B in multifamily transactions in the first quarter, one of its strongest quarterly performances on record, according to the report. 

But yearly sales won’t come near a record — total year-end multifamily volume in the Chicago area for 2025 will likely be close to the transaction mark in both 2023 and 2024, which was about $3.9B, Stofflet said. 

That’s a far cry from the nearly $5.9B of multifamily sales in the Chicago area in 2022. Of the 12,400 units on the market in the city, 4,000 have closed or are under contract as buyers and sellers feel out pricing, Stofflet said.  

As more product hits the market, it is starting to draw a wider range of investors back to Chicago, Stofflet said. Groups that have wanted to sell for a while are starting to test the waters to see what today’s market will bear.

Downtown Chicago did see some return of institutional and private equity firms — they accounted for more than half of the dollar volume and nearly a third of transactions, according to the report.

“You’re starting to see institutional groups back on your bid lists in Chicagoland, but for the most part, the groups that are winning are private capital just because they have a longer-term perspective,” Stofflet said. 

Seeking lower rent is renters’ top reason for leaving their units, but Stofflet said that shouldn’t be a big concern for landlords. Chicago landlords are comfortable continuing to push rents because there isn’t a significant amount of new inventory coming online, which means landlords don’t have to compete over concessions. 

Some renters are staying in the rental pool longer and coupling together later, and other renters are leaving Chicago entirely because they can’t afford to live in the city, Stofflet said. 

“For every person leaving Chicago, we’re being replaced with one that is five years younger and making $10K more,” he said. 

The percentage of Chicagoans between 25 and 34 years old with a bachelor’s degree or higher is nearly 11% above the national average, and the city’s demographics are shifting. Chicago’s major universities are bringing an influx of educated people to the city, Stofflet said.  

But still, some investors remain skeptical of Chicago’s reputation because they are inundated with “clickbait” that the city is filled with crime, overly progressive and bankrupt, Stofflet said. Until those perceptions shift, institutional capital is likely to stay away, leaving deals to contrarian investors and family offices.

“The more that we can show a stable transaction environment in Chicago, the more that institutional money will feel comfortable investing back in Chicago,” Stofflet said.

CORRECTION, NOV. 11, 3:25 P.M. CT: This story has been updated to correct the misspelling of a company name.

Trammell Crow Company (TCC) and Beacon Capital Partners have topped out at Hyde Park Labs in Chicago. Located at 5207 Harper Court, the building will span more than 300,000 square feet.

Hyde Park Labs will feature nine floors of Class A lab and office space, as well as ground-level retail and lobby. The first tenants are anticipated to move in early 2025, and the University of Chicago has already pre-leased 55,000 square feet of the building for early-stage science research. Hyde Park Labs is the second phase of development at Harper Court, which currently includes a hotel, an office building that houses UChicago administrative offices, and retail space.

Dan Lyne and Brandon Green of CBRE are the exclusive marketing and leasing agents for the project. Additional partners include Elkus Manfredi Architects, Interactive Design Architects, Power Construction, Ujamaa, and Trinal, the development’s diversity and inclusion consulting company.

Connect Industrial Midwest 2024 will take place on March 5, 2024, at Joe’s Live in Rosemont, Illinois. Click here for more information and to register.

It’s little wonder many in Chicago CRE have adopted what Origin Investments CEO Michael Episcope called “a survive until ’25” mentality. Amid cratering transaction volumes, double-digit drops in property values, a burdensome bureaucracy and tax assessments that are rising at one of the most inopportune times in recent commercial real estate history, good news is hard to find.

But where many are hunkering down and waiting it out, others — including the businessmen who enticed Google to purchase the iconic but aging James R. Thompson Center for $105M last summer — say there is still plenty of lift in the Windy City.

Chicago’s prospects depended heavily on who was doing the talking at Bisnow’s Chicago State of the Market event held at LondonHouse Chicago earlier this month. 

“Is the glass half-empty or the glass half-full?” Capri Investment Group founder and Executive Chairman Quintin Primo III asked in what became the question of the day.

Central and North Chicago as seen from Willis Tower

While Primo placed himself in the half-full camp, for the most part, panelists were gloomy about conditions in the city for the short term.

Waterton Chief Investment Officer Rick Hurd pointed to multifamily transaction volume that has fallen from $280B in 2021 and $240B in 2022 to just $20B in Q1 2023 amid value drops of about 20%.

And those conditions cross asset classes, according to Siegel Jennings Managing Partner Molly Phelan.

Phelan has been busy working to offset rising interest rates and lower values for her clients by fighting off poorly timed property tax increases as “one of the few strategies out there to keep a property profitable right now.” On the development side, Focus Senior Vice President of Development Vicky Lee said her firm has opted not to close on any new land for a year or so as it awaits improved fundamentals.

“Where previously we would have taken some entitlement risk, now it’s, ‘No, get everything done, get the permits, get the financing, full cap at full equity and lender, and then close it,’” Lee said. “And for some sellers, that may be you’re sitting out there for a year and a half, but that’s the strategy, to not take the risk … until the capital’s ready.”

Chicago today “is a contrarian play,” Episcope said. He was one of a number of panelists to embrace the survive until 2025 approach given nationwide market conditions and factors unique to Chicago, including slower population growth, an ongoing property tax showdown with Cook County Assessor Fritz Kaegi and what Lee called “layers and layers of meetings — community meetings, aldermen meetings, etc., to just get approved to start your drawings.”

Bisnow

Thompson Coburn’s Jeff Merar, Waterton’s Rick Hurd, Valley National Bank ‘s Jerry Lumpkins, Siegel Jennings’ Molly Phelan, Origin Investments’ Michael Episcope, Focus’ Vicky Lee and Moderne Ventures’ Sam Delisi.

“We’ve decided not to invest here anymore because we have 12 other markets, and we’re just looking for growth because, ultimately, when you’re looking at investment performance over the long term, we are long-term holders,” Episcope said. “You need population growth, you need states that just have friendly business environments.”

Panelists said that while they believe in Chicago’s potential over the long term, markets in the Southeast and Southwest are more attractive for now.

“For every person that looks at our Chicago deals, we have about 20 people that looked at our Florida deals,” Lee said. “So that’s kind of a sign, as if you didn’t know already, of the difference in terms of the politics of Chicago and how open they are to development. For example, I took a deal out to St. Petersburg recently to get entitled. I didn’t have to stand up once to say anything in front of the commissioners, and it got approved within one meeting.”

Hurd said Waterton’s Chicago multifamily portfolio is performing well, logging occupancy increases over the first two quarters on top of rent growth of 9% last year and 4.5% this year. But the company is looking further afield for its next investments to places like Austin, Texas, which has 40,000 apartment units under construction versus 15,000 in Chicago.

Waterton is also eying Nashville, Tennessee, Charlotte, North Carolina, and Phoenix, which Hurd predicts could see an oversupply that will allow the firm to scoop up properties at attractive prices.

“Those are the markets we’re going to transition to start looking to buy where there is going to be real distress from developers,” he said.

“So I think you’ll see us transition from Chicago, LA, New York, where we’ve been active buyers, back into the Southeast and Southwest.”

The Prime Group Chairman and CEO Michael Reschke, on the other hand, said he isn’t turning his attention away from Chicago.

“I have never seen a better time in my life and my 42-year career for opportunity in the city,” he said. “You don’t have to get on a plane. You don’t have to go to Miami or Austin or Nashville. You’ll make more money here with less risk now, with the basis so low, than you will traveling to any other city in the United States.”

Bisnow

Gould + Ratner’s Patrick Johnson, Vermilion Development’s Matt Havey, Wright Heerema Architects’ Roger Heerema, Arch Amenities Group’s Mike Flanagan, Chicago Emerging Minority Developers Initiative’s Graham Grady and SVN Chicago Commercial’s Michael Thanasouras.

Panelists stressed the need to take responsibility for changing Chicago’s image and highlighted their own success turning lemons into lemonade.

“As we talk about … the future of Chicago, we must change the narrative, and it’s just not the mayor’s job. To do this, we as business people have to change the narrative,” Primo said, joking that perhaps he should run for mayor.

“When someone says Guggenheim, they left, you say Google,” Primo said of Guggenheim Partners’ May announcement it would decamp the city for Miami, one in a string of big headquarters losses for the city. “When someone says Tyson Foods or Citadel, you say Salesforce [which is anchoring a new 60-story office tower along the Chicago River].”

Primo is half of the duo that brought Google to Chicago, leveraging a longtime relationship with Google Director of Corporate Real Estate Michael Tabb into a commitment to purchase the 1.2M SF Thompson Center as a second Chicago headquarters.

Reschke is the other half of the duo. The 1.2M SF center is owned and being redeveloped by Prime/Capri Interests, a 50-50 joint venture of Prime and Capri Investment Group ahead of Google’s 2026 acquisition and move-in.

The project has the potential to inject new life into the LaSalle Street corridor in the Central Loop, which has been plagued by sky-high office vacancy. Both men are champions of the area, having won two of three subsidies awarded by the city to convert office buildings there into mixed-income housing as part of former Mayor Lori Lightfoot’s LaSalle Street Reimagined initiative. 

Reschke has invested heavily in LaSalle Street over the years, developing the JW Marriott, Marriott Residence Inn and LaSalle Hotel in addition to acquiring the Thompson Center. Reschke’s Prime Group was singled out for city tax increment finance incentives for a 280-unit project at 208 South LaSalle St. and a 349-unit project at 111 West Monroe St. it would develop alongside Primo’s Capri.

“The headline that I love about the Google transaction, because of the building, is that it’s a little bit like a spaceship,” Reschke said. “So I think the headline to take away today is, ‘Google has landed. One small step for Google, one giant leap for downtown Chicago.’”

The Prime Group is busy stripping the building down to its steel structure and rebuilding it with a new curtain wall to make way for an unknown number of Google employees to move in. Google employs about 2,000 people throughout the city.

The James R. Thompson Center

The Central Loop will be bustling, Reschke said, with Google anchoring the north end of LaSalle Street and two large state agencies, the Office of the Illinois Attorney General and the Office of the Illinois Secretary of State, coming to 15 South LaSalle St., the former headquarters for BMO Harris Bank. Those offices will house nearly 1,800 employees who now work at the Thompson Center and other leased offices. 

Reschke said opportunities to build affordable housing abound, with the population of downtown Chicago growing 300% over the past 12 years, jumping from 40,000 to 120,000. Demand is high, especially for service workers who prefer to live close to their jobs. And more affordable housing will make the downtown area more representative of the city’s population if real estate players “reach out, stretch our arms and embrace a more diverse community downtown,” Primo added.

Primo acknowledged the Chicago CRE landscape has seen better days but said creativity is the key to keeping on top in hard times.

“I’m old and nearly 70, and so I’ve been through numerous cycles,” Primo said. “My God, the world was coming to an end in the early ’90s. And then, you know, the tech wreck and the Great Global Financial Crisis, and every time it was just, ‘Oh, my God.’”

Those worried about lack of financing should look at adding affordable housing to projects and tapping resources from Fannie Mae, Ginnie Mae, the Department of Housing and Urban Development, the Federal Housing Administration and others, he said.

“That’s why they’re there, for markets like this,” Primo said.

“And I think that you don’t have to be too imaginative to imagine that in three or four years, we’ll be in a much different place than we are right now. So I’m very optimistic.”

CORRECTION, AUG. 28, 1:10 P.M. CT: This story has been updated to reflect the nature of the joint venture that owns and is redeveloping the Thompson Center.