Chicago Has Vibrant Affordable Housing Market but Some Challenges
By Caitlin Jones & A. J. Johnson
5 min read
Chicago has come a long way since Carl Sandburg’s famous “Chicago” poem of 1916. The “City of the Big Shoulders” and “Hog Butcher for the World” continues to be a major industrial, financial, and cultural center in the U.S.
The Chicago metropolitan area has a population of 9.7 million. The population of the city, the nation’s third largest, has stabilized since 1990 and was 2,873,790 in 2006.
Chicago is a vibrant market for affordable housing, with limited supply and high demand. A slowing economy is likely to increase demand for Chicago’s affordable rental housing inventory, but lenders and city officials are generally optimistic that supply will keep up with demand.
Chicago has a balanced economy thanks to its diversified industrial and service base, and ranks second after New York City as a financial center. Chicago Market Outlook, a commentary, reports the city and environs are home to the nation’s second largest labor pool – about 4.25 million workers.
The city is home to 11 Fortune 500 companies; the surrounding metro area counts another 21. Chicago also has become a major commercial health care center as well, boasting the headquarters of Abbott Laboratories, Baxter International, and GE’s Healthcare Financial Services division.
Chicago’s Current Economy
Columbus, OH-based RED CAPITAL GROUP reports the Chicago economy had sluggish employment growth in the last year, with local employers adding 31,000 jobs in 2007 (0.8% growth), after an increase of 52,800 new jobs in 2006. RED CAPITAL’s May 2008 report says, “We expect metro job trends to approach recession-like conditions by mid-year but rebound in 2009.”
The metro area’s multi- family housing occupancy rate rose by 0.1% in the first quarter of 2008 to 95.3%, according to RED CAPITAL, reflecting solid demand and limited supply. Research firm Reis, Inc. predicts the rate to fall over the next few years, but effective rent growth of 3.6% in 2008, 3.7% in 2009, and 3.5% in 2010.
According to RED CAPITAL, local average effective rents rose by 0.4% in the first quarter of 2008, and 4.7% year-over-year. Meanwhile, asking monthly rents advanced 4.8% in the first quarter, to $1,054, while the size of average concessions rose slightly to 6.5%.
HUD Fair Market Rents for FY 2008 the Chicago area, by unit size, are: studios, $734 per month; one-bedroom, $840, two-bedroom, $944; three-bedroom, $1,154, and four-bedroom, $1,304.
Chicago-based market analyst and appraiser Randal Dawson, of CB Richard Ellis, said: “The demand for multifamily affordable housing in Chicago is high and exceeds supply, and the supply side is having a problem obtaining capital.”
Funding for Projects
Despite the problems of Fannie Mae, Freddie Mac, and a number of other financial institutions nationwide, Chicago moves ahead in financing and producing additional affordable housing. “We have always been successful in bridging other forms of financing into affordable housing deals,” Chicago Housing Commissioner Ellen K. Sahli told the Tax Credit Advisor. “For example, we have used tax-increment financing money and other non-traditional funding sources to help finance affordable housing.”
She added, “We still have a very healthy pool of investors interested in working with us,” referring to corporate investors in low-income housing tax credit (LIHTC) projects.
Joe Hagan, president and CEO of National Equity Fund, Inc., a Chicago-based housing credit syndicator with a $6.6 billion portfolio, echoed Sahli’s optimism. “I cannot see a significant slowdown in the tax credit market in Chicago,” he said. “Sure there may be some projects that might not get funded, but for the most part you’re going to see a steady flow of deals coming out of Chicago.”
Hagan’s optimism centers on Chicago Mayor Richard Daley’s track record of support for housing deals and the city’s long involvement with nonprofit and for-profit developers. Hagan added that the recently signed federal Housing and Economic Recovery Act of 2008, with its provisions modernizing the LIHTC rules and providing states with an extra 10% in housing credits in each of 2008 and 2009, will allow an increase in available state funding.
One major funding source isn’t as optimistic, though. Chicago-based Patrick J. Nash, managing director of JPMorgan Capital Corporation, sees the problems plaguing Fannie Mae and Freddie Mac and prevalent write-downs among financial institutions taking its toll on tax credit investment. “There is a lot of supply but limited demand,” he said, referring to demand by corporate investors for new housing credit investments. “This situation could get worse before it gets better, but I don’t see it getting better soon,” Nash continued. “The expectation is that the economy and earnings of financial institutions available to shelter and invest in this [LIHTC] product are going to diminish. I don’t believe we will see any significant improvement until 2010.”
HOPE VI Deals
In addition to traditional housing credit projects, Chicago has become a “poster child” for public housing revitalization developments utilizing tax credits and funding from HUD’s HOPE VI program. A number of once infamous high-rise public housing projects, such as Robert Taylor Homes and Cabrini-Green, have been razed and replaced by modern, mixed-income residential communities with public housing, affordable, and market-rate housing units.
Most affordable housing in the Chicago area is concentrated within the city. But there is also new activity in adjacent submarkets, such as Maywood, a near western suburb; Ford Heights, a far south suburb; North Chicago, a far north suburb; and satellite cities such as Elgin, Joliet, Kankakee, and Waukegan.
Foreclosure Impact
Those interviewed see the home foreclosure crisis having a major impact on affordable housing in Chicago.
“The subprime lending crisis is putting more pressure on tax credit inventory and has increased demand,” said Dawson. – James T. Berger
