Markets

Could debt damage real estate prospects in this top 10 global city?

Change is afoot in Chicago as poor state finances and demographics threaten to impact its reputation as a top global city. But is it enough for the city to slip from the Global Cities index top 10? And what would that mean for real estate investors? Analyst Ben Forster visits real estate companies in the Windy City to find out.

05/07/2017

Ben Forster

Ben Forster

Equity Analyst, Global Real Estate

City: Chicago

Schroders Global Cities index ranking: 4th 

Share of national economy: 3.5%1

Strengths

  • Established infrastructure to enable new high growth industries
  • Critical mass of businesses and talent
  • Cheaper cost of living than other large cities
  • Fortune 500 companies creating jobs in the city core

Weaknesses

  • Rising taxes due to weak public finances could disincentivise investment and population growth 
  • Low barriers to new supply
  • High levels of income inequality and crime

A powerhouse under pressure

Chicago has always been a powerhouse in the Mid-West, with real estate investors keeping pace with the changing local economy.

Whether that’s evolving from print presses to ‘mega-scale’ data centres or moving from ‘open outcry’ trading pits to fully electronic trading platforms – Chicago real estate is something of a chameleon.

But the incentives to keep investing are under threat. Broken public finances, crime and demographic segregation don’t bode well for a global city. Add to that a $130 billion pension bill for the State of Illinois and the alarm bells start to sound. 

 This map shows the different census groups living in Chicago. Explore the interactive version from The New York Times

Illinois is even facing a ratings downgrade by agencies S&P and Moody's. If they can't pass their budget (as they have not been able to do for over 700 days now) the creditworthiness of its bonds will slip to 'junk' status  the lowest ever rating for a US state. 

Policymakers in Chicago are working hard to help get the finances in shape, but this could work against real estate investors. Sweeping taxes have come into effect, imposed on everything from real estate to online gaming and music streaming – a so-called ‘amusement tax’.

And while rising taxes are negative for real estate growth, supply is another big factor to consider. Loose planning restrictions mean developers find it relatively easy to introduce new supply, diluting demand for existing landlords.

Reasons to be optimistic

Despite these potential headwinds, there's still a lot to like about Chicago as a global city. It remains a major economic hub with a large – and productive – population, generating the third highest output of any metropolitan area in the United States.

It’s cheaper to live in Chicago than it is Los Angeles or New York and this could be helping to attract graduates from top universities. The University of Chicago is ranked 10th globally by the QS university ranking. Big name employers like McDonald’s, Motorola and Kraft are now moving back to the city centre to recruit this talent.

Venture capitalists have also been quick to recognise the city’s potential, spending over $1bn on tech deals in 2016. And demand for data centres, which facilitate change, is gathering pace.

The Lakeside Technology building – formerly the Lakeside Press Building – is one of the most connected buildings in the world, playing host to more than 110 carrier networks and around 30% of the Mid-West’s internet traffic. The nearby railway was once used to distribute thousands of Sears catalogues, but that same proximity is now being used to power these giant data centres.

The Lakeside Technology Building hosts around a third of all web traffic in the Mid West (image: Frank McMahon)

What this means for investors in real estate companies

Chicago has managed to gain a number four position in the Schroders Global Cities Index due to its scale and enterprising population. But the state of its finances and the ease of new supply mean it’s firmly on our watch list.

Cash-strapped local and state governments must resist the temptation to discourage new sources of employment by taxing vibrant industries, such as cloud computing and real estate. To successfully invest in this challenging market, we think landlords must continue to find new ways to use city’s history to their advantage.

Explore the full Schroders Global Cities 30 Index

Further facts on living in Chicago 

  • Cost of living in Illinois (via Expatistan in US dollars)
    • One litre of milk will cost you 83 cents
    • Monthly rent for 85 m2 (900 Sqft) furnished accommodation in 'normal' area will cost you $1,474
    • A monthly ticket on public transport will cost you $103

1. Source: Bureau of Economic Analysis, 2015

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