The rate race: Chicago developers look for a lane in luxury resi projects

Chicago multifamily developers are having their moment atop the nation’s market.

They have their counterparts in the Sun Belt to thank.

After developers rushed into states like Arizona, Texas and Tennessee over the past several years to build frilly new apartments for their growing populations, they overheated. Supply started outpacing demand, and rents began falling. Lease-ups have trailed behind the schedules that builders penciled into their business plans.

The slowdown in the South has delivered a comeback to the Midwest, which has notched top rates in the U.S. for year-over-year rent growth in recent months — Cincinnati and Chicago’s 3.6 percent led the nation in the fourth quarter last year, according to CBRE and Newmark.

And as interest rate hikes over the past two years limit new supply, fresh Chicago housing projects by developers including Lendlease, Marquette Cos., Mavrek and Sulo are benefitting.

With the pace of new construction in Chicago having lagged behind the Sun Belt during the pandemic, Midwest rent and condo prices have risen as tenants and buyers face a market with fewer options than usual, and relatively far less than those in the South.

“We don’t expect financial markets to open until at least mid-2024, pushing the next wave of deliveries well into 2026,” according to Integra Realty Resources’s Chicago multifamily report this year. “Rents are expected to continue to rise at a modest rate over the next 12 months with rent spikes anticipated in 2025.”

Tough times may still be ahead, however, even for Chicago developers touting their best-in-nation market stats. The same interest rate hikes preventing new competition from cropping up and thus fueling local jumps in rent are also cutting into building values.

Chicago’s biggest apartment building sales so far this year have resulted in rough losses for their sellers.

However, development pros like Luxury Living’s Aaron Galvin, Lendlease’s Jon Cordell and Marquette Co’s. Ann Reckelhoff are navigating the choppy waters with optimism.

Here’s what they had to say about the rents they’re pulling in at their newly opened buildings — a crucial metric as they plan to seek fresh financing to replace construction loans amid a far tighter debt market than when they broke ground.

The Saint Grand

Galvin’s high-end rentals brokerage Luxury Living made its first foray into development and ownership with this 21-story, 248-unit project at the corner of East Grand Avenue and North Saint Clair Street in Streeterville.

It welcomed its first residents last month. The development team went with a heavy load of studios and one-bedrooms in the overall unit mix, and it’s been popular with medical professionals who work at nearby campuses such as the Northwestern Memorial Hospital complex. Rents are at about $4.35 per square foot on average, and Galvin predicts as the building leases more units the rates will approach $4.50.

“We’re happy to be the only game in town for the new lease-ups,” Galvin said, noting it’s been years since any Class A apartments have been delivered in the Streeterville neighborhood. “We’re very bullish about rent increases as we look at those next couple of years.”

The development team is a joint venture of Galvin’s firm, Mavrek Development, GW Properties and Double Eagle Development, and it secured a $102 million construction loan from New York-based MSD Partners back in 2022 to break ground. They’ve played up the inclusion of 45,000 square feet of coworking space.

The ownership’s business plan is to reach fully leased by the end of this year, and increase rents as initial tenants go to renew early next year before probing the market to recapitalize the asset and satisfy the construction debt.

The Reed at Southbank and Cirrus

These two projects, both developed by Lendlease, include condos, rentals and some financial tricks already pulled off to move forward.

The 41-story Reed is the newest, with its mix of condos and rentals getting finished last year at 234 West Polk Street as the second residential tower in Lendlease’s 7-acre planned development, following the initial phase called The Cooper, a 452-unit apartment building.

The Reed includes 224 apartments and 216 luxury condos on its upper floors. The rentals are 95 percent leased, and condos start at $390,000, with pre-sold units having gone for as high as nearly $1.4 million, according to public listing data.

“We’re pleased with the [condo] activity. We’d love for it to be more,” Cordell said. “Our pricing has maintained our expectations and the velocity is good, it’s not great but it’s good.”

Lendlease has been offering rate buydown incentives, including so-called 3-2-1 programs that allow buyers to temporarily lower their mortgage interest rate payments by 3 percentage points for the first year, 2 points for the second year and 1 in the final, as a measure to combat the real estate slowdown caused by the Federal Reserve’s interest rate hikes.

The Cirrus — a 47-story, 350-condo project Lendlease co-developed with Magellan at 211 North Harbor Drive in the high-end New Eastside neighborhood — has taken a different route with its business plan, as it’s already been partially refinanced. It pulled in a $130 million condo inventory loan last year from JPMorgan Chase, using 159 unsold units in the tower as collateral, to pay off its construction loan.

“We’re capitalized for the long term to be able to do the right things for the asset and behave as a patient seller, which allows us to hold pricing to really make it a great investment for all of our residents that have chosen to purchase at Cirrus,” Cordell said.

The Thompson

This 210-unit property rising 12 stories at 150 North Ashland Avenue at the western edge of Fulton Market marked Marquette Cos. final stage of overhauling a neighborhood surrounding Union Park with five new rental buildings.

It included the adaptive reuse and integration of an existing five-story brick structure originally built in the 1920s that formerly housed the Mary Thompson Hospital, named after Chicago’s first female doctor. Marquette capped it off and added a new 12-story glass and concrete structure alongside the old building.

The Thompson finished construction in February and it was about 43 percent leased heading into May, Reckelhoff said. It’s the most economical of Marquette’s three standard buildings bordering Union Park — the other two it completed in the area are the Mason at 180 North Ada Street and the 49-unit 1436 West Randolph, which is operated by short-term rental company Sonder.

Rents at The Thompson are averaging $2,808 per market rate unit, which breaks down to about $3.70 per square foot. (There are also affordable housing restrictions on 15 percent of the property’s units as required by city rules.) Its rents trail Marquette’s 242-unit Evo Union Park, completed in 2021, by about $200 per unit on average, and that building trails the 26-story Parq Fulton by about $300 per unit on average.

Marquette’s goal is get the asset as close to fully leased as possible by the end of this year while monitoring the market for a new loan to refinance the property’s $46 million construction loan from Bank OZK.

“We’re hoping we see a break in interest rates a little bit and they go back down,” Reckelhoff said.

The Embry

Sulo Development’s 16-story, 58-unit condo project The Embry opened to residents late last year at 21 North May Street around the corner from the developer’s earlier and smaller West Loop condo building, The Hayden.

Despite a struggling condo market — this the first time in years there aren’t any major condo projects under construction in Chicago — Sulo’s Embry property had 81 percent of its units under contract with buyers as of the end of last year, including the penthouse set to close at a West Loop record price of $7 million when delivered this spring.

Meanwhile, condo sales at other major buildings such as the Tribune Towner, One Chicago and the St. Regis slowed down significantly last year compared to 2022.

“With the Hayden, they were sold out before construction completed,” said Lamar Johnson Collaborative’s Alan Barker, who designed both buildings for Sulo, including when he was Booth Hansen Architects for the Hayden. “Embry is twice as big and twice the number of units and [Sulo] has pushed the pricing much higher than Hayden, although Hayden was at the top of the market at the time.”

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