”In the new downtown, former manufacturing plants and warehouses now house families, law firms, galleries and restaurants instead of machines and stock; and millions of square feet of new or renovated office, retail residential and hotel space come onto the market each year.”
Chicago`s Loop couldn`t have asked for a much better prognosis than that from the real estate check-up delivered recently in the form of an
unprecedented study on the health of downtown development.
The study was conducted by the Center for Urban Affairs and Policy Research at Northwestern University. Part of the production cost of the report was funded by Kenneth Leventhal & Co., a California-based accounting firm with offices in Chicago.
For Leventhal, a company carving out a niche as a real estate specialist, involvement in the study was a natural outgrowth of its development in consulting. Two partners in Leventhal`s Chicago office who aided in the study –Dale Anne Reiss, a managing partner, and Guy Ackermann, tax partner
–offered their initial analysis of the report in an interview.
Reiss, who keeps a copy of the 244-page study handy, saysn the contents have both a broad meaning for city boosters looking to portray Chicago as an attractive environment and specific uses for real estate professionals attempting to guide potential investors.
”From a civic perspective, the study`s findings are fantastic,” she said. ”The image that Chicago is attracting downtown development is great for the city. I live in the city, and I love Chicago, so I love to see all that building.
”From a real estate perspective, the study points out pockets of opportunity for the future, like with hotels. I think you might see a lot more targeted development down the line as people use the study like a rifle to pinpoint what will be successful in a particular location downtown.”
The study lists 160 public and private construction projects completed in the downtown area between 1979 and 1984, 45 buildings ”in progress” as of the end of 1984 and an additional 50 proposed projects. For each building the study lists the use, location, developer, architect, square footage, cost and construction timetable.
The study was written by Professor Louis H. Masotti and researcher Mary K. Ludgin. Masotti, a former member of Mayor Jane Byrne`s transition team, is considered an expert on urban development and the economic impact of real estate activity.
”The intent of the study was to say there is a great deal going on downtown and in unprecedented areas like River West and the South Loop,”
Ludgin said. ”The city administration) wasn`t even aware of what was being done. No one would have expected the Loop to have done so well (when measured against the suburban boom and the changing economy), so that`s where we drew our optimistic conclusion.
”There are good things happening that weren`t being captured in anyone`s statistics. A lot of projects along the lines of $2 million and $3 million rehabs in River North (quantified in the study) have a tremendous impact on the long-term viability of Chicago neighborhoods.”
The authors estimate that the projects completed or started from 1979 to 84 accounted for $4.5 billion in investment in downtown Chicago, ”an explosion of construction activity . . . perhaps Chicago`s greatest building boom, one that is changing the face and function of its downtown.”
The projects announced, but not yet begun, will add another $5.6 billion to the city`s economy, the study said. Several of these, including Cityfront Center west of Navy Pier and the next phases of the South Loop`s Dearborn Park and River City, have enormous potential impact on surrounding real estate.
The study defines the downtown as bounded by North Avenue, Lake Michigan, Roosevelt Road and Halsted Street and divides the area into six subregions.
”Our analysis of downtown development reflects the reorientation of the city center toward service industries and an intensification of residential growth,” Masotti and Ludgin wrote. ”The emergence of the mixed-use project as a development device is highlighted as well as the significant contribution of renovation activites (both rehabilitation and adaptive reuse) to the downtown renaissance.”
However, Reiss and Ackerman tempered the optimism in the report with several cautions:
— Although the unprecedented number and value of new projects downtown signal economic strength in terms of jobs and investment, Ackermann said, the study doesn`t show whether the individual projects themselves are financially successful, information developers guard zealously.
”It would be nice to see whether a project is making money and what might happen if it doesn`t,” Ackermann said. ”There`s always a turnaround point–say at seven years when a building is sold and investors paid off–and for most of these projects it`s too soon to tell if they will be profitable.
”You need both pieces of the puzzle–who did right, who did wrong and why–if you`re to understand what the study means for the future downtown. People don`t invest just for the glamor of it; they`re driven by the pocketbook.”
— While Chicago`s office vacancy-rate remains a low 11 percent, compared with 16 percent nationwide, the ability of the market to absorb the amount of space predicted to come on line in the next few years is in question. The study documents the downtown building boom, but not the concurrent boom in the suburbs, where developers are increasingly catering to Loop-type tenants.
”There is a lot of space out there,” Reiss said. ”Some is being absorbed by the increasing service and financial sectors as they become more important to Chicago, as the study points out. But during the same period what`s not mentioned is that there has been a loss, through acquisitions and mergers, of many company headquarters operations.
”It`s not that these firms move away, but mergers like Esmark and Beatrice or Northwest Industries and Farley mean these firms will not need two corporate facilities, the type of high-profile space you`d find in the Loop. Most of this merger activity is so recent that the impact hasn`t been felt in the leasing market yet.”
— The downtown boom has been fueled by a dramatic surge in the number of renovation projects, which rose from 11 percent of the total 1981 investment to 40 percent in 1984. However, that activity is in turn largely fueled by federal tax credits that are in legislative danger.
”As far as uses for the study go, there is probably none better than to go to (U.S. Rep. Daniel) Rostenkowski and (U.S. Sen. Robert) Dole and the rest of the tax-law writers and tell them to take a look and analyze how these changes in depreciation and interest deductions impact on a major city,”
Ackermann said.
Real estate analysts have argued that were it not for the tax breaks for renovating historic buildings as well as credits for rehabbing other older structures, many of the projects would not have been economically feasible.
”The importance of rehabs and the resultant renovation goes along with the additional quality of lifestyle that people are looking for from the city, the architectural beauty and esthetics of older buildings,” Reiss said.
”It`s a shame to think how much more might have been saved if these tax breaks were in place earlier.
”But the rehabbing also allows a lot of firms to afford rents in areas like River North where new construction might not be so economical. With interest rates up, the cost to develop and carry most new projects is too much for all but the developers with the deepest pockets. Without those tax breaks, developers will be less willing to go into risky areas, as River North was a few years ago, to provide the space that`s needed.”
The space documented in the study included:
— New office construction totaled 17.9 million square feet from 1979 to 1984, with an additional 3.2 million square feet under construction. Another 26.5 million square feet is planned. Renovation and adaptive reuse accounted for 9.9 million square feet of offices from 1979 to 1984, with work underway on 5.7 million more square feet and 300,000 additional square feet announced. — The residential boom saw the addition of 10,595 housing units, of which 7,853 were rental units and the remainder condominium. Renovation accounted for 2,154 of the units. Another 4,075 rental units are under construction and 4,000 more announced, but no condominiums are being built, and only 1,757 have been announced.
The renovation and reuse explosion cited in the study was led by the office sector, where more than one-third of the space completed and nearly two-thirds of the space underway were such projects. Apartment renovation contributed as well during 1979 to 1984, but projects underway or announced strongly favored new construction.
— While 4,196 hotel rooms were added to the downtown between 1979 and 1984, 2,460 are under construction, and another 7,899 are planned, 1,200 more than the total of the last six years.
— Government projects accounted for 1.1 million square feet of space, with another 600,000 planned.
