Chicago luxury towers raise the roof on rentals

The record sale price of a 60-story luxury apartment tower in downtown Chicago is turning the heat up on Windy City real estate. After a rough ride through the recession, with both job and population losses, several of the city's residential projects stalled, but now they are rising again—and selling.

"It talks most to how Chicago is one of the great American cities, and whereas in the past it maybe hasn't been recognized as much by the very high-end purchaser, today the people that drive investment across the country are recognizing the viability of this city," said Curt Bailey, president of Related Midwest, a unit of New York-based Related Cos., the mega-developer behind the sale.

Related acquired the 504-unit building, located at 111 W. Wacker Drive, in 2011. It had originally been slated to be a 90-story hotel and condominium, but work stopped at the early stages due to the recession. Related redesigned and built the project, and last week it sold the new tower for $328 million, or $651,000 per unit, to Chicago-based Heitman, a real estate investment firm. Rents for the units range from $1,700 to $12,000 per month. Representatives at Heitman declined to comment on the sale.

The 60-story luxury tower in Chicago at 111 W. Wacker Drive sold for $328 million last week
Source: The Related Companies
The 60-story luxury tower in Chicago at 111 W. Wacker Drive sold for $328 million last week

"The level of service we have in these buildings exceeds any condo building that you're ever going to find in Chicago," added Bailey, standing on the 12th floor of 500 Lake Shore Drive, another of Related's Chicago apartment towers. The building boasts the newest class of amenities, from full-scale business centers and communal kitchens to movie theaters and professional-class gyms. The building is almost fully leased, with rents comparable to 111 W. Wacker, which competitors in the market are calling a milestone.

"The related sale of 111 W. Wacker represents the confidence that major institutional investors have in these urban markets," said Steve Fifield, president and founder of Chicago-based Fifield Cos.

Fifield, which develops both multifamily apartment and office properties in Chicago, cites the growing number of younger millennials who are moving not just to cities, but to city centers. In fact, the Chicago metro area saw the largest gain in population in its downtown area from 2000 to 2010 than any major city in the nation. This is according to a U.S. Census Bureau survey that measured the number of residents living less than two miles from city hall. The biggest driver of that growth was younger workers.

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"With them we are getting the employers, because the large companies, particularly the high-tech companies, are following the millennials," said Fifield. "In other words, they're bringing their jobs to where the millennials live. Why? Because millennials would rather live, work and play in the same area."

Tech companies like Google, Motorola Mobility and Groupon are moving into downtown Chicago. In 2011, the iconic Wrigley Building was sold to a group of investors that included the founders of Groupon.

Fifield Cos., which stepped away from the office market during the recession, is now, according to its founder, acquiring a 100-year-old office building in downtown Chicago, with the intention of renovating and converting it into, "creative office space to meet this huge demand of tech companies that are moving offices downtown," added Fifield.

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All these new workers need housing, and rental demand continues to be strong. The Chicago metropolitan area saw a bigger jump in rent growth than the rest of the nation at the end of 2014, according to Axiometrics, a real estate analytics company.

"Job growth in the Chicago MSA, which slumped during the early part of 2014, began picking during the second half of the year, which is one reason for the occupancy and rent growth," according to a recent Axiometrics report.

One of the lounges at luxe apartment tower 111 W. Wacker Drive in Chicago
Source: The Related Companies
One of the lounges at luxe apartment tower 111 W. Wacker Drive in Chicago

There has, however, been some concern, not just in Chicago, that the apartment market is overheating. As rents rise and home sales improve, demand is likely to shift, at least in part, from renting to ownership. Since the recession, all of the new households formed have been renter households, according to the Census.

"There is a lot of talk about the overheating in the apartment market. In Chicago, we're not projecting enormous rent growth, but when you talk about a number of units coming on line, they should be easily absorbed by the population growth, and we're focusing on a market today that isn't being served. The luxury market," said Related's Bailey.

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That is why Related is embarking on yet another project, right next door to its apartment tower on Lake Shore Drive. It will build a 67-story hybrid residential tower at 451 E. Grand, that will include 250 apartments and 100 condos. Breaking ground this year, the development will be the first Robert A.M. Stern-designed tower in Chicago. Rents are expected to be even higher for the luxury units in that building, some exceeding $15,000 a month.

The new luxury will likely appeal to a new class of renters. While Chicago has not been the international magnet that other cities like New York and Miami have been, that may be about to change. Another tower, just south of Related's, is set to break ground in 2016.

The 88-story Wanda Vista project is backed by Chinese financier Wang Jianlin and Chicago-based Magellan Development Group. It is expected to house both a luxury hotel and 390 condominium units. It is the largest Chinese investment in the city and will likely attract Chinese buyers to it and to other projects in the city.