A few observations from my recent work and travels. I've been travelling pretty extensively and have spent about a month in London and several weeks in NYC out of the past 5 or 6 months. I've learned quite a bit about the differences in these markets as a result and wanted to share, so excuse the wall of text.
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Originally Posted by SamInTheLoop
Just to concur, there is a definite broadening of institutional and foreign real estate capital from historically a pretty sharp focus on your NYs, Boston, DC, SF, etc to cities - first and foremost among them probably Chicago - where there is a measurably higher yield available......of course it's a trade-off, as Chicago also offers, and will continue to offer, less rent growth and (once this yield adjustment here plays out) capital appreciation potential than those cities.............(think supply constraints here as a first principle)........these foreign guys and others new to the market will learn this lesson - but hopefully not for at least a cycle!  |
I think some of this "refocusing" on our city is resulting from increased travel to Chicago both nationally and internationally. The most puzzling thing about Chicago is that people simply don't travel there. My English partners have told me that Chicago is like number 5 or 6 on most Brit's priority list when the come to the USA. After having spent 3 weeks in Chicago with me over the past few months they have become just as puzzled as me about this.
Their impression of Chicago has been that it is the cleanest and prettiest city they've been too. They have only been to NYC a few times and on this trip they've just been absolutely horrified by the filth and, in particular, the state of the subways. So the appeal of Chicago is there, but for some reason that message doesn't get out. I think the way to fix this is to continue along the path Rahm has been pushing with trying to bring as many visitors to the city as possible. All they need to do is experience the city and the word will spread.
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Originally Posted by SamInTheLoop
Really interesting discussion here as to (one way of reading it) why Chicago couldn't continue its population growth of the '90s into the '00s thru today, while other big cities were able to.............
Tricky one. I honestly think it's a combination of 1) Chicago's population continuing to crater in a number of neighborhoods, primarily on the South and West sides (all those places folks who live downtown, or maybe in Wicker Park and work in River North, etc - for the most part don't even know exist....that I referenced above), while the other major cities don't have a similar phenomenon (is this accurate?), this is another way of saying there's no - or negative demand - for additional housing in huge swaths of the city which could fit much, much, much more under current zoning, and 2) in the minority of the city geographically (several north and to lesser extent northwest side nabes) where there is a lot of demand, supply actually is constrained due to wildly inappropriate downzonings and Chicago's horrific and odd aldermanic prerogative tradition. The only place where a lot of demand and pretty unconstrained supply actually match-up is in the core - but the core is only so big - it's a very small percent of Chicago's 230 odd sq miles and 2.7 mil pop. - you can only mitigate so much of the population loss and stagnation in Chicago's neighborhoods at large with growth in the core........
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The biggest difference is that Chicago is experiencing a post industrial hangover unlike anywhere else on earth. This is not necessarily a result of economics, but, in my opinion, of geography. Because of our unconstrained, perfectly flat, terrain, industry not only flees overseas, but outwards into the endless prairie. At the same time, Chicago's core is simply so much more industrial than any other city on the planet.Chicago was built entirely BECAUSE of industry. This was not an existing city like NYC or London that simply added industry over time. In Chicago the industry came first and people built homes and businesses around it. As a result there are large industrial areas intertwined in all areas of the city. That does not exist in London. That does not exist in NYC (obviously it does to some extent, Brooklyn I'm looking at you, but I'll get to that in a second). Once the industry vacated, Chicago was left with a massive hangover of empty land spread across its core.
When combined with our geography this is particularly toxic. Brooklyn, for example, is just as industrial as any part of Chicago, but because of NYC's extreme space constraints, the industry was significantly more vertical. This also means that the land values were artificially higher. As a result most industrial buildings that vacate are more or less immediately re purposed. In Chicago, we had 3 story warehouses often with huge freight yards and simply knocked those down and build new ones on the outskirts of town over time.
So what it comes down to is that we simply have so much land that we have a "cap" of sorts on land values which constrains our appeal as a center of RE investment. I believe this will change, but it will still take a decade or two. Once Chicago finishes chewing up the vacant land we have in the core, things will change. This change will be dramatic and rapid and will result in a wave of development spreading out into the neighborhoods. That's part of why I'm so excited by this boom over the last. We are seeing smaller projects, but are picking off the vacant land faster. The sooner we can eliminate this land glut, the sooner we can start punching at our weight again in terms of land values and development.
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going to come anywhere remotely close to the supply constraints of your US coastal cities and other global gateway cities.......for some of the reasons you mention, and perhaps a couple others............land prices, rents, capital values, etc will always be significantly lower (although growth rates in the future may indeed be somewhat higher than they have been here in the past) in Chicago than in those peers.....
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