The Real Deal Chicago

Where does Chicago stand in the foreign investment pecking order?

Despite lack of big-ticket deals, city ranks sixth nationally in overseas investment
By Scott Klocksin | April 16, 2018 12:00PM

The wave of Chinese money pouring into markets like Los Angeles and New York City was going to have one bright, shiny, 98-story beachhead on East Wacker Drive.

But in January, Dalian Wanda Group, one of China’s biggest developers, put its 60 percent stake in the $900 million Vista Tower condo and hotel project up for sale.

If it sells, Dalian Wanda’s Vista Tower stake would be the largest-ever sale of any Chinese interest in Chicago real estate, according to an analysis by The Real Deal of Real Capital Analytics data.

Chinese investment in real estate assets in the Chicago area peaked in 2015, the analysis found. That year, among the top 100 buyers of real estate in the region, Chinese investors bought $795 million in properties. Two years later, they bought just $355 million worth of real estate, a 55 percent drop.

But the dip in Chinese investment doesn’t mean Chicago is not a significant player when it comes to overseas money.

Out of a total of about $18 billion in Chicago metro area investment sales in 2017, about $2.4 billion, or just over 13 percent, was driven by foreign buyers, numbers from RCA show.

Last year, foreign buyers were behind 13 percent of all investment sales in the Chicago metropolitan area, according to a recent report by RCA. That puts Chicago below other gateway markets like Manhattan (32 percent) and Miami (15 percent).

Chicago still placed higher than Los Angeles, where 11 percent of deal volume came from foreign sources last year, the report shows.

That ranks Chicago sixth nationally for foreign investment, but the money has been coming disproportionately from a single country.

Canadian firms made up just over half of all foreign investment in 2017, followed by European buyers, who chipped in 21 percent. Asia contributed 19 percent.

Vancouver-based developer Pacific Reach closed on a 60,000-square-foot development site in the West Loop in November for $28 million, and Onni Group, also based in Vancouver, is in advanced talks to pick up a development site on Goose Island for a residential development.

“Chicago feels good to them,” multifamily brokerage KIG CRE’s Susan Tjarksen said of Canadian investors. “It feels stable, and they recognize what they see here.”

Working in the city’s favor are higher cap rates here than in most big, coastal markets.

According to numbers from JLL, the average cap rate for a Class A office building in Chicago’s central business district was 6.2 percent in the fourth quarter of 2017. That’s compared with 4.5 percent in Manhattan, and 5.25 percent in Los Angeles, per numbers from Transwestern.

“At one point, cap rates were as low as around 1.5 percent in New York and Boston,” Tjarksen said. “So a four-cap here feels like ‘Wow, that’s affordable.’”

But because assets in Chicago trade for numbers that might barely raise an eyebrow in some other markets, some investors might overlook the Chicago market.

“The yield here can be better because the lows aren’t as low,” Tjarksen said. “But the deal’s got to be big enough that they’re not going mouse hunting with an elephant gun.”

Overseas investors might not be as familiar with those dynamics as domestic investors are, making them less comfortable about diving into the Chicago market, Marc Realty Capital’s David Ruttenberg said.

He said that while there have been discussions with Chinese firms in the past, no deals have yet materialized.

“The learning curve was too steep for them. I’d rather work with a [domestic] hedge fund. You’ve got certainty there,” Ruttenberg said.

While popular in other cities, Chicago has yet to be overrun by super-rich international buyers who invest in residential units as a place to dump vast reservers of wealth.

This phenomenon was so pronounced in Vancouver that a 15 percent tax was imposed in 2016 on homebuyers who weren’t Canadian citizens or permanent residents. In February, the tax was expanded to the entire province of British Columbia and raised to 20 percent.

Coldwell Banker Residential’s Jennifer Ames has worked with several foreign buyers in recent years, but they’ve tended to live in the units, she said, rather than using them purely as investments.

“You don’t hear about Russian investors buying a penthouse for their daughter here,” she said.