It’s become a common phenomenon: Stymied by the challenges of building in Chicago over the last few years, local developers have branched out of their hometown and set up shop in sunnier locales like Phoenix and Nashville, Tenn.
“What we’ve seen is, Chicago has a lot of really strong, well put-together and sophisticated development groups that used to make a living in Chicago. They can’t make a living in Chicago,” said Craig Pryde, a principal in the Chicago office of national architecture firm KTGY.
More robust population growth and a political environment that they see as friendlier to development makes branching out South and West a better bet, some developers say. On the flip side, those who can build in Chicago stand to benefit from meeting the demand for housing in a supply-constrained market.
Belgravia Group, a residential developer with decades of experience in Chicago, entered the Arizona market in 2022. It’s a move Chairman Alan Lev said was necessary for the company to thrive as construction costs rose at a much faster rate than rents did in Chicago, on top of elevated interest rates making deals even harder to pencil out.
“About three to four years ago, I came to the realization that — or came to the sad conclusion that — we weren’t going to be able to sustain the same level of business in Chicago that we had been doing for the previous 35-plus years,” Lev said. “I wanted us to stay in business, and I was afraid that I wasn’t going to be able to do enough in Chicago.”
Lev said there wasn’t a scientific reason why the firm chose the Phoenix area; he happened to own a house there and knew some people in the area. There were also numbers to back it up: With demand brought on by higher inbound migration — the Phoenix metro area is projected to grow from about 5 million to 7.6 million residents by 2055, according to 2023 U.S. Census Bureau data — home prices have kept pace with pricier construction costs, he said.
“I love Chicago. I’m still, every day, looking for projects to do here and having a very difficult time at the moment,” Lev said. “The economics right now are not working so well around here. A lot of it is nobody’s fault.”
Chicago developer Rob Bond, co-founder and president of Bond Cos., also sees opportunity in Phoenix, where the firm is about to start a 560-unit apartment project and has a few other sites under contract.
“We think the market growth is there, the jobs are being created there, to warrant the size of the project, and the capital is following the growth,” he said.
Bond Cos. is also active in Nashville and Wisconsin. With the firm’s most recent project in Chicago, a 113-unit apartment building in West Town, completed two years ago, the firm is focused on markets with better growth opportunities, Bond said.
“If you compare job growth on an absolute number or percentage number, their growth is stronger than what we currently have in Chicago,” he said. “As a developer you have to look at macroeconomic trends and understand what the economy is telling you when your business is dependent on growth. We manufacture space — that’s what developers do.”
In addition to their own balance sheets, Chicago developers — and the financial institutions they need to back their projects — also have local governments’ financial challenges to worry about. Cook County’s real estate taxes are seen as high and unpredictable among real estate investors and developers, and the city’s projected budget shortfall is also a concern.
“It’s a zero-sum game: The municipalities have budgets — it’s got to come from somewhere. Last I checked, the budgets never go down. The taxes are going to continue to go up,” Lev said.
Developers have also cited regulations in Chicago that can make it harder for projects to pencil out — such as the requirement that developers who seek a zoning change make 20% of the units affordable — that other cities don’t have.
The other side of the picture is that as some developers focus their attention elsewhere, it creates opportunities for those who do pull off projects in Chicago. Though Chicago isn’t getting the population influx that some other markets are, there’s still strong demand for rental housing to be met.
“It does create a void where nothing was happening and others tend to look in and say, ‘What am I missing, or what is the opportunity for us?’ if they don’t have to compete with someone who’s already doing a lot of work here,” Pryde said.
KTGY has worked with development firms based elsewhere in the Midwest, like Indiana, that have had success developing in the Chicago suburbs, where they can capitalize on higher rents compared to their home markets.
In the city, developers that have managed to complete projects in downtown Chicago recently are having no trouble getting their buildings leased up, and they’re likely to see those apartments renting for even more money in the near future. With few projects in the pipeline, just a few hundred apartment units are set to be delivered in 2025, setting the city up for rent spikes over the next two years.
The Chicago metro area’s rent growth is “still pretty rapid” compared to the rest of the country, including Sun Belt markets, said Orphe Divounguy, a senior economist at Zillow who has written on the economy for Crain’s as a guest columnist.
But even though rent growth might be slowing down in the hot markets, they’re not at risk for oversupply quite yet, especially as their wage growth continues to outpace Chicago’s.
“When you look at those markets, you still have a massive housing deficit across the country,” Divounguy said.
To help development to really come back to Chicago, the city needs both a more vibrant labor market and to reduce bureaucratic barriers to adding new housing supply, Divounguy said. That’s something real estate professionals here want to see, and while indications from Mayor Brandon Johnson’s administration that it’s looking for ways to speed up development have made them optimistic, it’ll likely take some time to see more cranes in the sky.
“Chicago has a collection of great architecture and we’ve lost steam, so it’s going to take a while to see the next group of great buildings go up,” Pryde said.
