'We Cannot Get Anything To Work': Chicago Projects Being Dragged Down By Development Hurdles
Some key players in Chicago CRE are struggling to get new projects off the ground, and the high cost of capital isn't solely to blame. The sticking point is what they describe as a high-tax environment in a city with many onerous regulations and an unclear political agenda when it comes to development.
Chicago's high taxes and tough political scene are piling onto an already difficult capital environment to make construction projects not viable, panelists said at Bisnow’s Construction and Development event last week at the Radisson Blu Aqua Hotel Chicago.
Alan Lev, chairman of Belgravia Group, said none of the deals he's been looking at have made financial sense.
“I'm the naysayer on Chicago, unfortunately,” Lev said. “We finished our last project in Chicago a year ago. We cannot get anything to work here right now.”
The city’s CRE players often make their displeasure with the Cook County tax system known — commercial properties pay taxes at more than 2.5 times the rate of residential properties for the same value property, according to a report from Altus Group.
Additionally, Mayor Brandon Johnson didn't win any favor from the CRE industry earlier this year when he put a referendum that would have significantly upped the transfer tax on commercial properties to a citywide vote in March. Voters rejected the measure by a sizable margin, but some distrust lingers among industry figures.
Brian Goldberg, CEO of LG Group, said the city's political environment has always been tough, but it's getting tougher. The city seems to be confused about what kinds of development it wants and how it will make it happen, he added.
Goldberg said that lack of predictability in the tax environment can kill deals.
“If there's fear and uncertainty in a certain market, like Chicago, meaning I'm uncertain where the taxes are going to be [or] I don't know if I can generate value, that's enough for them to say we're not doing investments in Chicago,” Goldberg said.
Many times, Goldberg said, Chicago officials can't clearly define what the taxes on a development might be, making it less attractive to investors than other states where tax liability is more clearcut.
Not every panelist was onboard with the gloomy assessment of investment in the city, and MSCI data indicates the city was the fourth-most popular target for investment last year, up from seventh in 2021 and 2022. That came despite a 44% drop-off in dollars flowing into the city in what was a tough year for transactions nationally.
While there are challenges in the Chicago development community, the market is still reliable, said Jennifer Gee, director of special projects at GI Stone. The city has a strong talent pool and developers are innovative, she said.
Gee said the Johnson administration has gotten the message that the city has thrown up developmental hurdles and is working to fix them.
Johnson's Cut The Tape initiative, announced in December, aims to speed up the pace of development through streamlined approvals, allowing development in more locations and creating more partnerships between the city and other entities.
“I think the city is aware of the red tape and the issues that are happening with the developers trying to get things done,” Gee said. “The administration ... [is] doing their best to try to circumvent those issues so we can remain a top-notch city as far as construction and development is concerned.”
