What s Happening in Chicago Real Estate: Where Are the Opportunities for the Coming Cycle? June 21, 2016 NAREC 2016 Annual Financial and Tax Conference Chicago, IL Stephen B. Friedman, FAICP, CRE VISION ECONOMICS STRATEGY FINANCE IMPLEMENTATION
Why Chicago? 6 to 14 Counties Top 10 Global Region High % of College Graduates (Ranked 18 th of Metros) Diversified Economy Low Cost of Living (and Taxes) Compared to Peers Chicago: 116.9 District of Columbia: 140.1 Manhattan: 216.7 Philadelphia: 126.5 Boston: 132.5 Los Angeles: 136.4 San Francisco: 164.0 Thriving Tech/Innovation Community Logistics Hub- Inland Port Alternative Energy Tourism and Conventions Advanced Manufacturing Medical and Pharma Education 50,000+ Students Downtown Headquarters City Finance, Law, Advertising, AEP, Management Consulting, Insurance Services, all Export Industries Major Infrastructure (e.g., O Hare, CREATE, CTA) 2
The Chicago Region Is Projected to Grow Historic & Projected Population in the Region 10,000,000 9,000,000 8,000,000 7,000,000 6,000,000 Longer-term recovery from recent slow down Cook and Chicago stabilize Bulk of growth to collar counties 5,000,000 4,000,000 3,000,000 Entire Region: 2015-2025: Increase of 6.2% 2015-2040: Increase of 14.5% 2,000,000 1,000,000 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 Source: Woods & Poole, SB Friedman Chicago Suburban Cook County Collar Counties Total Core Stabilizing; Collar Counties Projected to Grow 3
Regional Rebalancing is Occurring Housing Starts CITY CAPTURING INCREASED PERCENTAGE OF REGIONAL HOUSING STARTS 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 - Chicago Region Net of Chicago 2010 2011 2012 2013 2014 Chicago 1,877 2,606 1,990 3,025 5,750 Region Net of Chicago 3,838 3,666 5,659 6,632 7,994 Source: US Census, SB Friedman 61,000 New Downtown Residents (2000-2015) 171,600 Total Downtown Population (2015) 13,000+ New Downtown Multi-Family Units Delivered since 2009 4,800+ New Downtown Multi-Family Units under Construction DOWNTOWN RESIDENTIAL IS A BOOMTOWN 4
Regional Rebalancing is Occurring DOWNTOWN RESIDENTIAL IS A BOOMTOWN 5
Housing Prices & Affluence are Increasing in the City $400,000 Average Home Prices in The Region Median Household Income as a Percent of Cook County Median $350,000 $347,845 $300,000 $255,640 $250,000 $250,660 $200,000 Source: MLS, SB Friedman, 2015 1980 2014 $150,000 2010 2011 2012 2013 2014 2015 Chicago Cook County Suburbs 6 County Region Increase in sale prices of existing homes since 2010: City: 18% Remainder of Cook County: 5% Collar Counties: 4% 6
Households Driving Market Are Shifting Older Projected Change in Regional Households by Age & Income (2015-2020) 40,000 30,000 20,000 10,000 - (10,000) (20,000) (30,000) (40,000) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% < 35 35-54 55-74 75+ < $25,000 $25,000 - $49,999 $50,000-$74,999 $75,000-$99,999 $100,000-$149,999 $150,000 + 27% 12% Regional Housing Choices by Age 12% 15% 19% 8% 13% 12% 13% 27% 18% 21% 67% 40% 45% 51% <35 35-54 55-74 >75 Age of Householder Detached one-family house Attached one-family house Condo Rental Larger share of multi-family, but still a preference for single family Net loss of middle-age households Demand growth from Millennials and Boomers Need for Senior Housing grows Suburban product mix is not responding to these shifts City has competitive advantage due to housing mix 7
City Retail Market Is Outperforming the Suburbs 12.00% Retail Vacancy in Chicago and its Suburbs 6,000,000 Retail Absorption in Chicago and its Suburbs 10.00% 5,000,000 8.00% 8.79% 4,000,000 3,000,000 6.00% 2,000,000 4.00% 5.88% 1,000,000 2.00% 0.00% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 0-1,000,000-2,000,000 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 CHICAGO SUBURBS NET OF CHICAGO CHICAGO SUBURBS NET OF CHICAGO Source: CoStar, SB Friedman Source: CoStar, SB Friedman Since 2006, retail vacancy rate in the suburbs has increased by 25% and decreased by 27% in the City 8
City Retail Market Is Outperforming the Suburbs $25.00 $20.00 $15.00 $10.00 $5.00 Retail NNN Rent in Chicago and Suburbs $21.92 $14.37 Since 2006, rents in the suburbs have declined 16%, and increased 7% in the City Chicago has a 53% RENT PREMIUM over suburban retail rents $0.00 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 CHICAGO SUBURBS NET OF CHICAGO Source: CoStar, SB Friedman This is partly catch-up, but also partly reflects the resurgence of large parts of the City and the choices being made by Millennials and Boomers 9
Projected Regional Office Employment Growth 750,000 700,000 Office Employment Projected to 2025 25,000,000 Regional Office Absorption Projected to 2025 650,000 600,000 20,000,000 550,000 500,000 15,000,000 450,000 400,000 10,000,000 350,000 300,000 2001 2005 2010 2015 2020 2025 City Suburbs 5,000,000-1996-2000 2000-2005 2005-2010 2010-2015 2015-2020 2020-2025 Growth slowed from 2000-10 across the region Projected growth in suburbs: 0.99% Chicago growth projection: 1.31% Office absorption projected to continue to increase in the region Suburbs are projected to capture more employment growth through 2025 10
City Office Market is Outperforming the Suburbs 20.00% Total Office Vacancy 6,000,000 Total Office Absorption 15.00% 10.00% 15.17% 10.64% 4,000,000 2,000,000 0 2.5M 1.5M 5.00% -2,000,000-4,000,000 0.00% Source: CoStar, SB Friedman -6,000,000 Source: CoStar, SB Friedman 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 CHICAGO SUBURBS NET OF CHICAGO CHICAGO SUBURBS NET OF CHICAGO $35.00 Gross Office Rent $30.00 $25.00 $20.00 $29.09 $19.49 Since 2000, rents in the suburbs have declined 15% and increased 5% in the City $15.00 $10.00 $5.00 $0.00 Source: CoStar, SB Friedman Chicago has a 50% rent premium over suburban office rents 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 CHICAGO SUBURBS NET OF CHICAGO 11
City Capturing Increased Share of Office Deliveries New Office Deliveries Greater than 100,000 sf Since 2000 Approximately 52% of all newer corporate office development has located in the City, compared to 38% in the previous 10-year period 40,000,000 Office Deliveries by Decade 35,000,000 Square Feet 30,000,000 25,000,000 20,000,000 15,000,000 10,000,000 5,000,000 0 38% 62% 52% 48% 1996-2005 2006-2015 Suburb Deliveries Chicago Source: CoStar, SB Friedman Source: CoStar, SB Friedman 12
HQ Moves Both from Out-of-Region and to DT Nearly 50 major headquarter moves to downtown announced since 2008, the majority of which cite access to talent as a motivation 13
Millennial Preferences Influencing Real Estate In 2015, Millennials surpassed Gen-xers as the Largest Generation in U.S. Labor Force 2015 U.S. Labor Force By Generation as % of Total Millennials have a clear preference for Mixed-Use Walkable Environments MILLENNIAL PREFERENCES 62% of all people prefer to live in the type of mixed-use communities found in urban centers where they can live in close proximity to a mix of shopping, restaurants and offices. 7 2/3 are renters, which better aligns with an urban housing stock. 8 Young people aged 16 to 34 drove 23% fewer miles in 2009 than they did in 2001 a greater decline in driving than any other age group. 9 7 Breaking the Myths, Nielsen 2014 8 Millennials Breaking the Myths, Nielsen 2014 9 A New Direction, US PIRG Education Fund & Frontier Group 2013 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% A 2014 APA survey asked millennials: Where do you live now and where do you want to live someday if you can afford it? 10 41% 8% -33% A suburb where most people drive to places 10 Investing in Place, American Planning Association, 2014 6% 19% Now 25% Someday A suburb with walkable amenities 14
Employers Pay More for Walkable Office Locations A national study in partnership with Smart Growth America indicated that Walkable* office rents achieve a 44% PREMIUM over drivable suburban office rents in the 30 largest metros * Includes walkable suburbs and excludes New York City Rent premiums of this scale reflect PENT-UP DEMAND FOR WALKABLE URBAN OFFICE SPACE 15
But the Suburbs Are Hardly Dead! 2/3 OF TOTAL REGIONAL EMPLOYMENT IS IN THE SUBURBS MAJOR SUBURBAN HEADQUARTER RETENTIONS SUBURBAN AREAS MAINTAIN 50% RENT DISCOUNT TO CITY Source: IDES Where Workers Work, 2015 MANY COMPANIES HAVE CHOSEN TO REMAIN IN SUBURBS, CLOSE TO TRADITIONAL WORKFORCE DESPITE SOME HQ RELOCATIONS, VACANCY HAS DECREASED IN THE SUBURBS ANNUALLY SINCE 2010 TRANSACTION VELOCITY REMAINS HIGH IN THE SUBURBS 40 MILLION SQUARE FEET FROM 2010-15 16
Need for New Sub-Urban Development Paradigms Both Millennials and Boomers prefer mixed-use communities Housing choice includes larger proportion of multi-family Transportation options favor density and mixed use Markets are showing preference in the proportions of housing, office and retail in City Most of the traditional downtowns in the suburbs have been revitalized and redeveloped Suburbs without downtowns and newly developed ones can lead the way to walkable, mixed-use sub-urbanism Source: America 2013, Urban Land Institute 17
Need for New Sub-Urban Development Paradigms Source: America 2013, Urban Land Institute 18
Key Opportunity Areas in the City of Chicago Uptown Residential TOD Red-Purple Line Modernization Finkl Steel Lincoln Park North Branch Industrial Corridor / Goose Island Milwaukee Ave Residential TOD North Branch Industrial Corridor / Goose Island The Loop Fulton Market The Loop University of Illinois Medical District Related Midwest South Loop Fulton Market McCormick Square McCormick Square Former Michael Reese Site University of Illinois Medical District Hyde Park / University of Chicago 19 Hyde Park / University of Chicago
Key Opportunity Areas in the Suburbs North: Lake County Tri-State North Corridor; Libertyville Former Motorola Campus Northwest: O Hare/Rosemont/Des Plaines/Western Corridor Northwest: Schaumburg and the NW Tollway to Hoffman Estates Northwest: Elgin and Beyond West: Oakbrook and the I-88 Corridor West: Naperville-Aurora Southwest: Joliet DT/Inland Port South: Orland and Tinley
Multi-Family Opportunity in the Suburbs Urban and Commuter Rail Suburbs: Evanston, Oak Park, Elmhurst, Wheaton, Naperville and more Rental remains strong Condo likely to return in 2 to 5 years Zoning limits multi-family in suburbs 21
Conclusions Despite a lot of bad press, and fiscal stalemate, the City and region are doing fairly well Region will be competitive even with costs of solving fiscal problems Opportunities by product and place are broad and dispersed The City is hot right now and will continue to benefit from aging attractive to young and old and tradition of moving back But the suburbs have major transaction bulk and volume Age structure should help suburbs in next 10 years Single family Multi-family for diverse ages Redevelopment to new, walkable sub-urbanism a key need and opportunity in select areas 22
Development Advisors to the Public & Private Sectors Real Estate Economics Public-Private Partnerships Developer Solicitation Public-Private Development Financing Area Plans and Implementation Fiscal and Economic Impact SB Friedman Development Advisors 221 North LaSalle Street Suite 820 Chicago, IL 60601 (312) 424-4250 www.sbfriedman.com 23