Just how much has Chicago’s construction market slumped? The city’s top five contractors fell short of $1 billion of work last year – the same amount that just two accomplished during a year-long period ending in 2018.
Leading the 2021 rankings was Lendlease, even as it underperformed its historical local average, according to an analysis by The Real Deal of reported costs on building permits for projects started between Jan. 1 and Dec. 7 last year. The rest of the top five, in order, consists of Power Construction, Executive Construction, Turner Construction and Related’s in-house construction manager LR Contracting.
The down year hasn’t crushed the optimism of Ted Weldon, who runs Lendlease’s development branch in Chicago. He’s still bullish on his home town, brushing aside concern about Illinois’ population loss and pointing instead to downtown residential growth that’s topping any other U.S. city.
“People are flowing out of Illinois, but into the central business district,” Weldon said in an interview. “We expect the next five years of continued growth, and of the tech sector especially into Chicago, bringing more jobs in. We see that as an opportunity for more multifamily.”
Expectations for a recovery are tempered, though signs have emerged it has already begun. Residential projects will keep expanding their market share, as will infrastructure work, while the commercial market share is on pace to slip in 2022 by a little less than 1 percent after dropping 7.8 percent last year, according to research firm Cummings. The overall market is forecast to grow 3 percent this year.
”The market is going to rebound,” said Michael Cwienkala, president of the Chicagoland Associated General Contractors trade group. “Maybe not to pre-pandemic levels, but hopefully near pre-pandemic levels. We continue to be pretty conservative with our market projection.”
Last year’s slow market masked some surprises. While commercial projects’ market share sank by almost 8 percent overall, the sagging market for new office buildings thrust multifamily, usually a small proportion, to the forefront as its share rose by about the same percentage.
Multifamily accounted for the two most expensive building permits issued in the period: the $150 million, 503-unit Cascade apartments across 37 stories at 455 Waterside Drive in Lakeshore East, and the $130 million, 440-unit mixed-use apartment and condo structure Reed at Southbank at 234 West Polk Street along the Chicago River in the South Loop. Lendlease developed both, with Magellan serving as a partner on the Cascade, and oversaw construction on each as general contractor.
Life sciences projects also made up a bigger portion of the total than usual as some developers turned to lab-like facilities, which are difficult or impossible to replicate at home, from traditional office developments. The first such project in Sterling Bay’s Lincoln Yards pulled a $64.7 million permit for Power Construction to build the Ally lab building at 1229 West Concord Place.
“There’s a lot of activity in the life science market,” said Kate VanZeyl at New York-based Turner, ranked No. 4.
Although that permit ranked eighth-priciest in the year, it was the biggest new construction start for anything remotely considered a conventional commercial workplace. That’s a big change from 2020, when the city’s top two construction permits were for the $476 million BMO Harris Bank tower near Union Station and the $360 million Wolf Point South tower.
Contractors needed just eight construction cranes in October, down from 18 in March 2020 and well below 62 in 2017, said McHugh Construction President Mike Meagher, whose company finished No. 9 in the contractor ranking for the year at $99 million. The firm, founded in 1897and propelled to prominence for its high-rise work on the Marina City towers in the 1960s, ranked ninth in 2021, coming in just shy of $99 million with its reported costs on permits.
“For most, 2021 was a very challenging year,” Meagher said. “There was hesitation and uncertainty that played a major factor during 2021 for developers, and investors as well, deciding to put dollars into Chicago or not.”
The market picked up in last year’s second half, Meagher said. His firm resumed work late in the year on the 805-foot, 73-story 1000M apartment building on Michigan Avenue, after pausing early in the pandemic. Developers Time Equities and JK Equities changed plans, switching to build more than 700 apartments instead of the more than 500 condos originally pitched for the site.
Two other developers’ in-house construction teams – Related’s LR Contracting and Onni Development’s builder – also finished in The Real Deal’s ranking. Related’s in-house builder, LR, finished fifth with $123 million. The bulk of its work was on the city’s third-largest contract last year, the 43-story, 300-unit apartment building at 900 West Randolph Street in Fulton Market. Bowa Construction co-managed the project, becoming the first minority-owned construction firm to build a Chicago highrise.
“We have great subcontractors here, we have great general contractors here,” said LR’s Don Biernacki. “It’s exciting to be working on a project like 900. It’s exciting to be in Fulton Market.”
Onni Group’s construction firm ranked No. 7 at $103 million, almost all of it for the 32-story, 373-unit Fulton River District residential building at 354 North Union Avenue, the city’s fourth biggest contract in 2021.
Resi towers lead market
Normally, in-house contracting work makes up 30 percent of Lendlease’s business while the rest are jobs awarded by third-party developers, Weldon said. That mix shifted in 2021 as more than $280 million in reported costs on permits stemmed from the two residential towers, Cascade and the Reed, among a total of $302 million-worth of work performed by Lendlease across all its permits.
Lendlease’s construction arm was still busy working for developers other than those it employs, too. It drew a $3.5 million permit when it was hired by MCZ Development for the first phase of the 21-story, 224-apartment project at 166 North Aberdeen Street, an area where more than 9,000 housing units are in various stages of planning. Lendlease so far has put $5.2 million into that property, and the company landed another residential permit to start the first $3.5 million of work from developer CMK Development for a 30-story, 299-unit building at 1400 South Wabash Avenue that will likely end up costing $100 million. Both are slated to open in 2023.
“The 2021 construction value is markedly lower than Lendlease’s historical averages,” said Kinjal Patel, the company’s general manager of construction in Chicago. “However, we see the future pipeline as optimistic to regain operating rhythm.”
Local players dominated the rest of the field, taking seven of the top 10 spots. While eighth-place Onni is headquartered in Vancouver, and New York-based Turner landed in the top five at $127 million, carried in part by more than $20 million of work for the Obama Presidential Center, and Indiana’s Hunt Construction was eighth at $99 million, Chicago-based firms took the remainder of the top spots.
Power Construction’s $214 million of work led the way among locals. It landed 62 permits, more than all but one other firm in the top 10, Skender Construction, which ranked 10th at $94 million with 63. Power, The Real Deal’s top contractor in Chicago in 2019 by square footage, declined to comment.
Power’s largest contract in 2021 was for $65 million of work on a life science lab at 1229 West Concord Place, the first building in the $6 billion Lincoln Yards megadevelopment by Sterling Bay on the North Side.
“Power is a known commodity in Chicago, just like McHugh, just like Lendlease,” said Troy Imke of Mark Goodman and Associates, a developer planning a life sciences lab at 400 North Elizabeth Street just northwest of Google’s offices in Fulton Market.
Power’s long relationship with Northwestern Medicine has helped get it work on life science projects for the health care system and others, and Chicago wants to lure more development of its lab sector, which could help lift contractors out of last year’s slump.
Labs, renovations ahead of office
Power also pulled permits for $11 million of work for the Fulton Labs property at 1375 West Fulton Street, construction of which cost $16 million with Skender chipping in more than $5 million. That property was an example of how a developer, Trammell Crow, incorporated a lab into its traditional office design before building began.
Even as downtown Chicago offices outside Fulton Market emptied during the pandemic, contractors found big jobs for office renovations last year. More than $2.3 billion went into all types of renovations and alterations last year on more than 6,000 permits, compared with $1.8 billion total of new construction on less than 1,000 permits.
Chicago’s market for office renovations is growing. It’s split between landlords sprucing up older structures with amenities to compete with the newest buildings in the hot Fulton Market district featuring lounges, bars and rooftop decks for workers; and renovations of the huge amount of tenant spaces vacated or put onto the sublease market by tenants.
Gardner Construction, which finished No. 14 in the market by dollar volume, won Chicago’s biggest office renovation project for just under $62 million of work on the eight-story building at 801 South Canal Street. Executive Construction, Chicago’s No. 3 contractor for 2021, landed the second largest office renovation for $55 million on a first-time tenant buildout at 433 West Van Buren Street. Turner handled the third most costly office renovation for almost $50 million across three floors at 131 South Dearborn Street.
“The other piece of our business that has experienced a tremendous amount of growth is our special projects division,” said Turner’s VanZeyl. “That’s a group of individuals in our business unit focused on fast-paced projects. They respond quickly to clients’ needs, with a significant amount of work in the interiors market.”
Office renovations are Executive’s specialty, along with work on projects like data centers and new office construction, and it doesn’t work on residential projects.
“We came into 2021 with a very low backlog,” said Executive’s Dave Hetrick. “Work that had been lined up was canceled or postponed. We have seen a strong rebound in the tenant interior market in Chicago, though, in the past nine to 12 months, and the forecast for the next six to 12 months looks strong in that market.”
‘Tide is turning’
The fate of Loop depends on investment into more renovations.
Old buildings losing out on new business tenants to the latest wave of development probably need renovations and fancier amenities, or conversions into housing for students, seniors and downtown workers. AmTrust Realty has agreed to spend $100 million to improve its Loop portfolio, a move that already yielded a lease from a law firm in one of the properties.
“I do think the tide is turning,” Meagher said. “This year looks exponentially better than 2021. Last year you saw a lot of institutional money that was speculative about the city of Chicago. This year you see them buying into the vision for the city.”