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CHICAGO MARKET UPDATE

17 July 2014

With a new Chicago investment launching soon, we take a closer look at how the market stands in one of North America's finance and business powerhouses

We entered the Chicago property market for the first time in the second half of 2013 on the back of strong signs earlier in the year that the city’s economic stabilisation was over and recovery in the wake of the Global Financial Crisis was picking up pace. Our forecasts have been very much born out in the year since; Chicago is a market that’s continuing to benefit from capital growth, strong rental yields and low costs for property investors.

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AT Kearney’s Global Cities Index now ranks Chicago seventh, and with population growth currently strong, recent projections expect the city to grow into a new “megacity” region (a metropolitan area with a population of over ten million) by 2030 – Chicago is the only world city in a developed nation expected to attain that status. The McKinsey Global Institute considers it among the fastest growing metropolitan areas in the developed world.

Business and finance remains a huge strength for Chicago, with 31 Fortune 500 companies headquartered in the city amid more than 500 publicly traded companies that call Chicago home, including engineering behemoth Boeing and United Airlines, the world’s third-largest air carrier by passenger numbers. Chicago is also home to five major financial exchanges, including the Chicago Mercantile Exchange (CME Group) and the Chicago Board Options Exchange (CBOE).

2014 ADDED 79,000 NEW JOBS, THE HIGHEST LEVEL IN 15 YEARS IN CHICAGO.

The technology sector is currently undergoing a rapid expansion in Chicago, which is having a significant effect on employment growth. This is contributing to the highest level of job growth in 15 years across all Chicago employers as 79,900 jobs are created in 2014.

Particularly notable is the expansion of Google’s Chicago operations, which is seeing them begin work on a large new office complex in the West Loop area of the city that will be home to thousands of employees when it opens in 2016.

This will be joined by a USD320 million digital manufacturing design lab that will position Chicago as the world’s leading hub of advanced manufacturing, as well as a committed investment of over USD200 million in the O’Hare Airport Northeast Cargo Centre, which will create over 10,000 new jobs and make O’Hare one of the world’s largest air cargo hubs.

All this growth and investment is positioning Chicago as one of North America’s economic powerhouses for the long term. The city’s economic growth rate of 2.4% has seen its gross metropolitan product grow to USD571 billion, the third-largest in the US. Such strong economic fundamentals contributed to an increase in per capita income of 4.3% in 2013, putting it at USD48,305, while the city’s unemployment rate continues to fall at a steady rate.

A closer look at the Chicago property market shows that there’s a wealth of potential awaiting investors in the city’s residential market. Inventory undersupply is still a significant factor in Chicago, and one that appears to be growing. The city’s construction pipeline is threadbare in the near term, with planned residential constructions having plummeted 80% since 2005, putting them currently 37% below the eight-year average. This long-term problem has resulted in on-the-market inventory falling 42% over the last three years. 

IN MARCH, THE HOUSING PRICE IN CHICAGO REACHED THE HIGHEST IN 25 YEARS.
Chicago Now / 27 May 2015

 

While this is a problem for local residents looking for a place to live, investors will be pleased to note that this has driven a price surge that has taken condominium prices up 20% in the year to April 2014. Those who have yet to enter the market can also be confident that it’s not too late to do so; average prices remain 23% below peak levels, leaving plenty of room for this positive market momentum to drive further rises. This is also an easy market to enter by North American standards, with the city’s average price sitting at an enticingly low USD263,000, although typical prices in Chicago’s prime central areas are significantly higher.

Chicago has several other points in the plus column for property investors, and erhaps chief among these are the excellent rental yields. Perennial investor favourite Manhattan has an average rental yield of 3.1% per annum, whilst Chicago landlords are seeing excellent levels of 7.3%, the highest among the major cities of the US. Such high rates seem sustainable despite the significant residential price growth, as rental rates rose 11% in the year to March 2014.

A further point in Chicago’s favour are the city’s low transaction costs, which constitute significant savings when compared to their equivalents in cities such as New York. The lack of a mortgage recording tax in Chicago (charged at 2.175% in New York) is itself a significant saving on acquisition. This is in addition to a far lower transfer tax rate of just 0.75% compared to New York’s 1.825%. This means that for a USD500,000 purchase, investor entry costs in Chicago would amount to around USD3,750, compared to some USD20,000 in New York. A similar story is found on exit, with Chicago capital gains tax a percent lower than New York and seller transfer tax at just 0.45% (USD2,250 on a USD500,000 sale) compared to 1.825% in New York (USD9,125 on a USD500,000 sale).

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In terms of areas on which to focus investment attention, the Chicago central business district, known as the Loop, remains the most attractive part of the city at present. Unlike markets that rebounded more quickly such as London and New York, or were relatively unaffected by the downturn such as the major cities of Australia, the overall Chicago market is close enough to its market low for the prime central area of the city to still offer consistent investment value. 

Even prices in the prime Loop and South Loop areas remain beneath their peak levels, despite rebounding more strongly over the past year. They’re very much the market safe havens for Chicago though, having held their value much more strongly during the downturn, as you can see in the graph to the right.

The Loop is the fastest growing city centre in the US, with the area’s residential population growing by a huge 80% in the decade to 2010, which has obviously driven a concurrent surge in housing demand. It’s also the second-largest commercial business district in the US, and is home to the city’s financial and theatre districts, the Chicago City Hall, 6 colleges and universities, 23 diplomatic missions, 24 historic landmarks and of course the iconic Willis (formerly Sears) Tower.

With all that on offer along with excellent transport connections and, given the right building, wonderful views across the city and Lake Michigan, the Loop is firmly the first-choice location for the large demographic of professionals currently active on the Chicago sales and lettings market.

Following the popularity of our first Chicago project, we’ve been keen to re-enter the market this year and expect to launch a premium development in a prime Loop location very soon.

IP Global

Written by IP Global

IP Global’s full-service approach is built on extensive market research and analysis combined with a significant financial commitment to every investment we offer. We are able to manage the entire investment process end-to-end, from sourcing, financing, and management to those all important exit strategies, making investment in real estate as straightforward as investing in more traditional asset classes. Our expertise, experience and strong record have produced over USD2.8 billion in international real estate investments in over 30 markets worldwide.

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