Market Study: Residential Real Estate Chicago’s South Loop Condomania. Megan Kelley Chad Kreindler Dario Napoli Elli

1. Market Study: Residential Real Estate Chicago’s South Loop Condomania.Megan KelleyChad KreindlerDario Napoli Elliot Segal Paul Vranas

2. Chicago’s South Loop Roosevelt (12th) to Cermak (22nd) & River (Or Kennedy) to Lake Michigan

3. Chicago’s South Loop A View Looking South West

4. Chicago’s South Loop

5. Chicago’s South Loop – Residential Real Estate Market Realtor Owned Multiple Listing Service creates liquidity in marketplace Monopolistic Competition- “ Many firms and consumers…concentration measures are close to zero…each firm produces a product that is slightly different from the products produced by others” Substitutes: Other For Sale Homes, Other Neighborhoods, Rental Properties Normal Good Price Elastic Px= Square Footage + Views + Location Desirability + Finishes + Amenities – Cost of Borrowing + Income Developer Supply vs. Individually Owned Supply Cost Issues

6. Chicago’s South Loop – Residential Real Estate Market A Look At Some Numbers

7. Supply and Demand – Causes of Shifts • Interest Rates (Supply and Demand) • Cost of capital for developers to build • Cost of borrowing for homeownership • Expected Price Appreciation (Supply and Demand) • Maximize profits for firms • Ability to re-sell at a profit • Land available for development (Supply) • Personal Income (Demand) • Availability of substitutes (Demand) • Homes for sale in comparable neighborhoods • Rental units vs. Ownership • Abundance of Complements (Demand) • Schools, Supermarkets, Infrastructure

8. Effects of Shifts in Supply and Demand • With interest rates historically low, supply and demand will shift to the right. • Increase from 4,500 condos in South Loop in 1991 to 13,500 in 2006 • Expected to be ~18,500 condos in South Loop by 2009 • Land is more available in the South Loop than other affluent neighborhoods(i.e. Gold Coast, Lincoln Park, Lakeview) • Centrum Properties (Roosevelt Collection) developing 12 acre site with 2.5 acre park • Kargil Development Partners building $250 million project on 2.23 acres on Prairie Ave. between 16th and 18th Streets • Personal income is increasing in the South Loop • Average closing price in 2000 - $225,000 • Average closing price in 2006 - $364,000 • Substitutes are available but at a higher cost • Rental prices have increased dramatically (River North – 7%, Streeterville – 11%) • Average listing price of $510,000 similar to Lincoln Park / Lakeview • Complements have grown at a rapid pace • Target, Whole Foods, Jewel, Linens ‘n Things, DSW • New South Loop Metra facility at 11th St.

9. Barriers to Entry • Available land to purchase • Ability to acquire building permits • Ability to comply with zoning laws • Ability to achieve financing for development (project scope) • Environmental factors (i.e. gas station sites) • Olympics?

10. Impact on Business Strategy • Developers are building retail projects to accommodate the strong demand in residential properties in the South Loop • “Retail Follows Residential” • When difficult to purchase a parcel of land, firms will rehab, convert and renovate existing structures • In 2005, 3,965 units were converted in the South Loop • Developers will look for the next “up and coming” neighborhood to be built • Developers will cease building as the housing market continues to slow down • Housing starts and building permits have decreased

11. Current & Possible Strategies Outlook Monopolistic Competition Pricing Strategies Market Power

12. Outlook • Around half of new residential development in the City of Chicago is taking place in the South Loop. • Development dominated by new construction. • Very few rental buildings up for sale. Downtown rents continued to climb in 2006, with overall occupancy rates averaging more than 95 percent. (Decrease in rental supply) • This brisk pace will continue in 2007. • Future projects will represent a wide variety of price points to maximize sales in what promises to be a highly competitive year.

13. Monopolistic Competition • In downtown, 80,000 units currently and 100,000 by 2010 (not including for-sale-by-owner and those builders who don’t market through agents) • 13,600 private residences in South Loop this year and 18,500 by 2009 • Looking southward, about 2,000-3,000 new or rehabbed housing units are expected to hit the market in the next 7-10 years in the area between McCormick Place and Hyde Park Long-Run Supply Curve • Influx of competition will shift the industry supply curve to the right. Ultimately, this will lower profits for each individual developer. • The long-run supply curve is upward sloping as more developers will be building new properties and rehabbing old buildings, but will flatten on a marginal basis in the long-term

14. Pricing Strategies • Developers of new construction have a huge advantage when pricing the units. They can offer units that offer the same (if not better) features than many other Chicago neighborhoods. Since the area has not completely gentrified yet, these developers can set prices considerably lower than other more popular and developed Chicago neighborhoods like Lincoln Park, Gold Coast, and River North. • Attract first-time buyers • However, this pricing strategy will be short-lived once more retailers move to the South Loop and the and an increase in the price of land will limit flexibility. • In addition, if Chicago wins the bid to host the 2016 Summer Olympics, then this will accelerate economic growth even more quickly than its current pace. • Since market is highly competitive, firms will have to be more creative to differentiate themselves from the competition.

15. Market PowerHow Are Firms Differentiating Themselves from the Competition? • Newest developments are now offering a wider array of amenities and finishes to compete. Resales tend to be inferior to this enhanced product and offer a lower-priced alternative. • “Spadominiums” offer a long list of spa amenities, services and experts (Selling a lifestyle with spa element and social areas for residents • Hardwood floors, stainless steel appliances, spacious balconies, high ceilings, plasma tv, etc. (New standards) • Trend is to build new high-rises with a wide variety units that range in size, price, and features.

16. Market Power (cont.) Example • Roosevelt Collection of properties will draw mostly from other city locations • By 2009, when construction is scheduled to be completed, a surge of 6,500 new condos will have come onto the South Loop market. • Marketing edge with small shops and entertainment within walking distance. • Obstacles include higher interest rates and low Chicago rentals. • Develop a unit for about $185,000 and sell it for perhaps $350,000 • Market mainly for young professionals working downtown and suburbanites who desire a city hideaway.

17. Aspects likely to affect the industry Other factors besides supply and general housing demand will affect price within the South Loop housing market. In turn, Supply and Demand will also be affected by these outside factors.

18. Governmental Influence • The Fair Housing Act • The Affordable Housing Planning and Appeal Act and the IHDA • The State and City offers a number of programs to assist builders and buyers with financial assistance in the production and purchase of a home • Chicago Partnership for Affordable Neighborhoods (CPAN) • The Building Green/Green Roof Initiative • The City Mortgage program • TaxSmart

19. Neighborhood • Safety- • Intelius • Neighborhood watch programs • National Sex Offender Registry • Environmental • Scorecard.com • Chicago Department of Environment • Urban Planning and Parks • Zoning Laws • Community beautification programs • Building Committees • Local businesses • Transportation • Travel to place of employment • Future Olympics in Chicago?

20. Impactof Olympics Mayor Daley announces intention to bring XXXI Olympics to Chicago, Washington Park as primary site, 95,000 seat stadium, (original plan along lakefront, between McCormick Place and Soldier Field) Potential Pros: “Create urban legacy that outlives Games”, similar to impact of World Fair to Jackson Park, 1893 Improved street condition, better lighting, security measures, new pedestrian and bicycle paths (project plans by Skidmore, Owings and Merrill –Freedom Tower at Ground Zero, Sears and Trump Towers) Better access to Washington Park (Lakeshore Dr. and I-90-94, improve dilapidated Green line New jobs, housing and boost to Hyde Park merchants and surrounding neighborhoods

21. Proposed Olympic Site

22. Potential Cons: • Landmark issue: Washington Park. part of historic South Side landscaping plan, by Frederick Law Olmsted (Central Park, NY). Because of Landmark status, federal $ cannot be used • Residents worried about eminent domain for expressway extension (construction of United Center forced many residents out) • Residents would be deprived of use of Park, currently focal point for festivals and community sporting events, what about after Games? • Residents trying to have City sign Community Benefit Agreement, to guarantee that a portion of Games’ profits remain in neighborhood • Aftermath of Games? In Atlanta, grassroots organizations were eliminated, people displaced

23. “Friends of the Parks” urges City to relocate proposed stadium to other underdeveloped parcels that could make for better stadium venues • The USX Site. 580 acres at 79th and Lake Michigan which used to house the U.S. Steel plant. Same travel time to Washington Park., cleared of buildings, cleaned of toxins, ready for development • Illinois International Port District. At 89th and Michigan, adjacent to Calumet Park., the port has little activity currently. • Both parcels would benefit from influx of capital a temporary Olympic stadium would provide and from construction of necessary public transit links, as well as benefits form the lasting legacy of new parks, housing and businesses after the Games

24. Zoning: going green • Baum Development LLC waiting on city zoning approval for 250,000 sf, mixed-use property, The Green Exchange, at 2545 West Diversey (to meet LEED standards), 1st in Chicago • Property to be leased to tenants that make or provide sustainable products only. Ex. Green Maker Supply, distributor of sustainable building materials, Consolidated Printing, eco-friendly printer • Project calls for new type of building designation: “work-live”. If approved by the city, the new code will permit the addition of a small kitchenette and bathroom in portions of the commercial building. Tenants with valid business licenses will then be allowed to live in their workspace, increasing the flexibility and appeal of the building