City focus: Chicago

01 / Introduction

Chicago has more than 2.7 million residents and 10 million in the surrounding metro area, and is a leading city in technology, communications and transportation. The metropolitan region is a major business and trading centre and continues to be the country’s rail transportation hub.

In the 2017 Global Financial Centres Index, Chicago was ranked as having the seventh most competitive financial centre in the world (alongside cities such as London, Singapore, Hong Kong, Sydney, Boston, and Toronto in the top 10), and third most competitive in the US. 

The city has an ambitious plan to be the most liveable, competitive, and sustainable city in the 21st century, accommodating a growing tech sector.

Under the guidance of the mayor, Rahm Emanuel, the “windy city” has embarked on a programme of infrastructure overhaul and economic regeneration. Infrastructure investment efforts have been directed at a range of initiatives. These include increasing resilience in its water system, energy efficiency and improving urban mobility with a mass transit upgrade as the city’s residents increasingly shift back downtown. 

Facing substantial fiscal challenges, recent investments have been financed by a mix of user charges and federal funds where available. In promoting his infrastructure policy, the mayor has argued for increased federal funding as well as for measures enhancing the appeal of the infrastructure sector to private investors.

Table 1: City-region indicators

Indicator	Chicago
Arcadis Sustainable Cities Index	60
GDP (2016 – metro area)	$651bn (£502bn) (3rd highest in US)
GDP per head (2016 - metro area)	$69,250 (£53,390)
Year-on-year economic growth (Q3 2016 to Q3 2017)	3%
Unemployment rate (October 2017)	5.5%
Population growth rate (annual) (2010-2016)	0.3%
Population density (people per sq mile, 2016 – city only)	11,841.8
Greenhouse gas emissions (2015)	32.7MtCO2e/year

02 / Economic and political overview

The GDP for the Chicago metropolitan area (Chicago-Naperville-Elgin) – which encompasses north-eastern Illinois and extends into south-eastern Wisconsin and north-western Indiana – totalled $651bn (£502bn) in 2016. Combined, logistics and professional business services industries comprise 36.9% of total metropolitan employment and 24.6% of total output. 

Economic data tracked by World Business Chicago evidences positive developments, with a decrease in the city’s unemployment rate to 5.5% at the end of October – a 0.9% improvement over the previous year. According to the Institute for Supply Management (ISM), Chicago’s business barometer has enjoyed 21 months of solid expansion supported by healthy domestic conditions and a continued low level of interest rates. 

However, behind the growth story, Chicago’s fiscal situation is challenging amid rising structural deficits and growing public pension obligations. Additional revenues from recent tax measures – increases in property tax and sales tax – have been earmarked for pension payments. 

Politics: going it alone

Chicago is divided into 50 wards and is led by a mayor elected to a four-year term. Rahm Emanuel has held the post since 2011. Many powers belong to the aldermen, one elected from each ward, who sit on the city council and must approve most mayoral actions.The aldermen are active in their communities and independently generate specific tax increment financing in their wards for community improvements and updated infrastructure. They are involved with local zoning, planning, and development in their wards. 

Public-private partnership (PPP, or P3s in the US) has caught on more slowly in the US than in other developed countries such as Canada and the UK, and PPPs still make up a tiny fraction of all infrastructure projects. 

Chicago mayor Emanuel, along with Phillip Washington, chief executive of the LA County Metropolitan Transportation Authority, are two well-known promoters of PPP. In 2012, under the guidance of its new mayor, Chicago passed an unprecedented Infrastructure Trust, aiming to leverage private funds for city projects. 

Infrastructure ambitions

Claiming he wanted to “make America great again”, Donald Trump campaigned for the presidency on an ambitious, $1tn (£771m) plan to overhaul the country’s ailing infrastructure. This is yet to be followed by positive action in either budget or tax proposals. Any future federal infrastructure policy is likely to lean heavily on private sector-funded revenue generating infrastructure, such as toll roads, airports and energy assets, which is unlikely to support the renovation of Chicago’s existing assets. The rhetoric is expected to increase ahead of November 2018’s mid-term elections, with some form of infrastructure policy announcement expected in the next six to nine months. 

At present the emphasis is on state and local governments to take action. Several states are moving forward with developing PPP procurement processes and opening solicitations for private-sector developments. About 30 states have enabling legislation in place or pending for specific programs or projects.

Chicago’s tech community is vibrant, thriving and expanding. Chicago was designated as a tech leader by KPMG for 2017. Google has been filling up its local office in the West Loop, while Microsoft, Oracle and CDW all have major offices in Chicago. Smaller tech companies have found a welcome here as well. Investment research firm PitchBook found that Chicago (not Silicon Valley or New York) had the highest percentage of profitable start-ups.

Prioritising technology and digital infrastructure increases opportunities for Chicago’s current – and potential – businesses, residents and visitors. Chordant Smart City Benefits Index places Chicago second against other major cities in the US. Accenture predicts smart city infrastructure investments in technology such as high-speed 5G wireless networks could bring as many as 90,000 jobs and $14bn (£11bn) in economic growth to Chicago. 

Climate change 

Chicago is committed to adopting the Paris Agreement, with goals to reduce greenhouse gas emissions by 26-28% in the city by 2025, powering all municipal buildings entirely by renewable energy. Chicago already cut carbon emissions by 7% between 2010 and 2015 by closing coal-fired plants, weatherising municipal buildings, investing in mass transit and supporting low- and zero-emission vehicles. 

Chicago Transit Authority (CTA), the primary public transit agency serving the city of Chicago, operates more than 250 hybrid electric buses and two all-electric buses. The city has been adding 182 electric vehicles to the city’s vehicle fleet, plus nine DC fast charging stations and 182 level 2 charging stations. Chicago expects to have a passenger fleet that is 25% electric by 2023. 

03 / Infrastructure

According to the American Society of Civil Engineers’ (ASCE) 2014 report card for Illinois, the condition of infrastructure in the state has improved since 2010 on the back of greater investments, in particular in rail and water. However, the report identifies future investment needs, in particular in the following sectors: 

• Rail: $20.5bn (£15.8bn) for rail to ease congestion and delays in both freight and passenger traffic. 
• Transit: The costs of bringing the Chicago region’s transit into a state of good repair and enabling it to cope with the growth in intra-suburban commuting over the next 10 years has risen to $30.9bn (£23.8bn) in 2012 from $26.1bn  (£20.1bn) in 2010.
• Wastewater: The US Environmental Protection Agency (EPA) estimates Illinois must invest $17.5bn (£13.5bn) over the next 20 years to replace existing systems and build new ones to meet rising demand. 

Challenging austerity and disinvestment, the city embarked on a sweeping $20bn (£15bn) plan to transform the city’s ageing infrastructure. The programme aimed to address the many different aspects of infrastructure, from its largest airport to streets, schools, community colleges, parks, the water system and the commuter rail stations.

The Chicago water system is city-owned, with wastewater treatment devolved to a separate regional water-reclamation district (Metropolitan Water Reclamation District of Greater Chicago). As part of its investment programme, Chicago committed to spend about $1.4bn (£1.1bn) to boost resilience against failure and ensure drinking water supplies, as well as to improve wastewater and storm-water management. Planned improvements include replacing about 25% of the century-old water pipes network, repairing sewer lines, and modernising Chicago’s water filtration plants. 

Drainage has been a chronic problem in Chicago, with substantial efforts required to control routine sewer overflows into Lake Michigan and the Chicago river. Discharges have become more frequent as more intense storms and floods arise from climate change. 

In 2012 federal and state authorities agreed to go forward with the completion of the Deep Tunnel, a 40-year-long project that consists primarily of a vast system of large tunnels bored in the bedrock deep beneath the region. The tunnels collect and store storm water until it can be processed at treatment facilities. 

Chicago Infrastructure Trust

The Chicago Infrastructure Trust (CIT) was initially hailed in the US as a novel platform for infrastructure financing solutions. The trust’s initiatives have involved:

• Financing a green retrofitting of city buildings – downsized to $13m (£10m) from the initially planned $200m (£154m) – to reduce energy consumption in city-owned buildings by 25% over three years. This was financed by bank borrowing, with the loan to be paid off over time by leveraging savings from lower utility costs. 
• The upcoming Chicago Smart Lighting Program – to be financed by taxpayers – aims to transform 270,000 lights along public ways from high-pressure sodium to the more energy-efficient, durable and brighter LEDs. 
• The O’Hare Express System Project, to provide a high-speed rail service to O’Hare aiport. Raising private finance for this has proved challenging and the trust is focused on assisting the city in its infrastructure investment decision-making. 

In addition to looking for federal funding, Chicago has been looking at ways of unlocking investment by capturing land value (through property taxes) and user charges. The city’s 2018 budget includes a first-of-its-kind infrastructure investment support measure to fund CTA investment in infrastructure upgrades to its train and bus lines: a phased-in fee of 15 cents in 2018 and an additional five cents in 2019 – expected to generate $16m (£12m) dedicated solely for transit modernisation.

04 / Urban mobility

Chicago has one of the world’s busiest airports and is the nation’s largest rail passenger and freight hub by number of trains. Half of US intermodal freight trains move through the city, and it is the US’s largest inland port. 

Mass transit

Capital needs for transit systems in north-eastern Illinois are estimated at over $2bn (£1.5bn) annually, and transit ridership in the region is 5% higher than in 2010. The Chicago region has suffered as a result of age and lack of funding, with lower than average spends on transit operations and capital investment. The dramatic growth in intra-suburban commuting is a major transit challenge.

The investment plans by Chicago Transport Authority (CTA) – under city jurisdiction – have put reliability ahead of expansion, prioritising improving existing infrastructure, delivering major updates to its ageing rail system as well as improvements to many of the stations on the city’s “L” rapid transit system. Eighty-five percent of passengers said in a recent poll they were satisfied with the service of Chicago’s CTA, suggesting that the strategy is working. 

Four of the seven rail lines are being completely rebuilt. By 2019, there will be 40 stations either reconstructed or built brand new, and half the tracks will have been changed. When the L’s $8.5bn (£6.6bn) modernisation is complete – including the Red and Purple lines and  95th Street and Wilson stations – Chicago will be able to run about 15 more trains every hour on the busiest lines and will cut 10 minutes off a trip to O’Hare International airport.

International airport

Another series of initiatives has focused on upgrading Chicago’s city-owned O’Hare International airport, the sixth-busiest airport in the world. 

In 2015, O’Hare opened a new runway and air traffic control tower as part of a $9bn (£6.9bn) overhaul aimed at increasing capacity at the congested airfield. Plans for the construction of a cargo facility in response to growing cargo volumes were unveiled in 2017.

Projects completed so far have been paid for with a mix of airport revenue bonds, passenger fees and federal grants. Airlines have paid the debt service on the bonds.

A new PPP project has been put to tender for a fast connection service between the airport and the city. The city and CIT will consider potential corridors above or below ground. The request specifies the service will need to be financed by the builder/operator and funded by revenues such as fares and advertising. Project costs have been estimated in the range of $1bn-£3bn (£771m-£2.3bn). Elon Musk’s the Boring Company may be bidding.

Rail transportation

Chicago is the most important freight rail hub in North America, carrying a third of all rail freight traffic in the US, valued at over $1tn (£771bn). Rail freight volume is expected to double by 2025, which will cause congestion and delays unless continued investments

are made. Chicago also has the second-largest commuter rail ridership of any US city, accounting for 11% of total ridership.  

Over the past 15 years, authorities have made efforts to address capacity issues, the most important of which is the as-yet unfinished $4bn (£3bn) investment programme known as Chicago Region Environmental and Transportation Efficiency (CREATE) , encompassing 70 freight and passenger projects. So far, only 29 of these have been completed or are under construction, at a cost of $1.2bn (£925m), while the rest have stalled due to lack of funding.

The mayor has also said that he is “making it a priority” to complete an estimated $1bn (£771m) redevelopment of Union station, hoping to get federal funding to complete the project.

05 / Residential

Chicago’s population has decreased by more than 900,000 people from its peak of 3.6 million in 1950. However, the trend appears to have reversed and the Chicago Metropolitan Agency for Planning (CMAP) projects a 14% increase in the city’s population – an additional 380,000 residents – by 2040. 

Where people live has shifted dramatically. Chicago has become noticeably more dense in the last several years, with density increasing by 1.2% between 2010 and 2016. 

This is a story of two cities, as different neighbourhoods record contrasting population and price developments. Affordability is an issue – particularly in the Loop, the central area defined by Chicago’s elevated metro system.

Downtown has been the strongest engine for growth, powered by an expanding college-student population and continued demand from professionals and empty nesters to live and work in the city centre. Population is stable or growing in the neighbourhoods in the north and in some single-family-home communities on the south-west and north-west of the City. In most of those areas, there is little vacant residential land. 

By contrast, population in traditionally blue-collar neighbourhoods (in the south and west) has decreased markedly, resulting in widespread loss of buildings and large areas of vacant land. 

The city’s housing plan – Bouncing Back – for 2014-18 outlined the city investment of $1.1bn (£848m) toward the construction, refurbishment and preservation of more than 40,000 units of housing and committed to expanding affordability. 

The housing plan identifies two types of approach in responding to diverging trends in housing demand by area: 

• Where demand is strong, increase housing density – for example, by promoting dense housing development near transit stations
• Where demand is weaker, find alternative uses of land, such as urban agriculture, greenways, storm-water retention and other innovative uses.

06 / Commercial

The 2017 economic impact study commissioned by the Building Owners and Managers Association of Chicago (BOMA) and conducted in conjunction with JLL Chicago Research found that Chicago remains a relatively robust hub for office buildings and their tenants:

• Since 2012, average vacancy in Chicago’s central business district has dropped more than 34%, averaging 10.3% in 2016.
• Rents have increased by 23.5%, to reach an average of $38.20/ft²  (£29.45/ft²).
• Chicago continues to be a significant corporate headquarters hub, with Fortune 500 companies expanding twofold.
• Overall, the number of businesses housed in Chicago office buildings has increased by 25% since 2012.

One factor cited in the study is Chicago’s growth as a tech hub. Over the past five years, the tech industry has absorbed more than 9 million ft² of Chicago real estate. The migration of corporate tenants from the suburbs to Chicago has helped fill downtown office space. Between 2012 and 2016, 75 companies have relocated downtown from the suburbs, to the tune of 4.29 million ft² of space.

Shared space operators are expanding in the city too. Since 2011, shared space companies have doubled their footprint annually in the central business district, bringing the total size of this industry to more than 2.38 million ft² in downtown Chicago.

In the last several years, Chicago has been experiencing a development boom that has added thousands of new rental apartments and hotel rooms, and is also transforming neighbourhoods and the city’s skyline. There are numerous projects under way which are valued at $1bn (£771m) or more each. 

Tempering market bullishness are the financial pressures faced by both the city of Chicago and the state of Illinois. Property taxes for commercial buildings – which already pay over 36% of all property taxes collected in Chicago – have risen nearly 35% since 2012.

Table 2: Pipeline of real estate developments greater than $1bn (£771m) 

Project	Developer	Location	Size	Description	Time frame
Wolf Point	Kennedy family, Hines Interests AFL-CIO trust	Downtown	$1bn+ (£771m+)	West Tower – 48 floors, 509 flats;  WP East – 60 floors, 698 flats; WP South – mixed office/retail	West Tower completed; WP East 2019; WP South in design
Vista Tower	Magellan Development, Wanda Group	Lakeshore East	$1bn (£771m)	94 floors, 406 flats, 192-room hotel and car park	Expected completion in 2020
Riverline	CMK Companies, LendLease	River’s South Branch	$1.5bn (£1.2bn)	2,700 homes, 16,500ft2 retail	10-year projected
The 78	Related	Downtown	$5bn (£3.9bn)	10 million ft2 residential / commercial	Construction to start late 2019
8080 Lakeshore	Barcelona Housing Systems, WELink	Lakeshore South	n/a	Pedestrian-friendly 30 blocks city: 12,000 homes, retail and recreational	Still undergoing due diligence
Lakeshore East Parcels O, I, J, K	Magellan,  Lendlease	Lakeshore East	n/a	Parcel O: 650ft-tall tower: 643 flats, two hotels, car park, and 14,000ft2 retail. Three towers planned for Parcels I, J, K, and L	Expected to break ground in 2018
Chicago’s 92-year-old Union Station	Riverside Investment & Development, Convexity Properties	Downtown	$1bn+ (£771m+)	3.1 million ft2 office, residential, hotel, and retail tower to be built over rail tracks	Expected to start mid-2018
Michael Reese hospital	Draper & Kramer, Farpoint Development, Chicago Neighborhood Initiatives, McLaurin,  Bronzeville Community Development Partnership	Bronzeville (near South Side)	n/a	5 million ft2 of tech-oriented commercial spaces, retail, hotel	Under discussion

07 / Conclusion

Chicago is focused on becoming a “smart city” as it looks to distinguish its brand and identity in the face of intense competition from other leading US cities including San Francisco, Boston and Dallas. Quoting the city’s mayor, it is about “building a 21st-century city on a 20th-century foundation”. Prioritising technology and digital infrastructure increases opportunities for Chicago’s current — and potential — businesses, residents and visitors. 

Financing is key. With the mayor a vocal proponent, Chicago infrastructure’s future development will greatly benefit from attracting private investment in a public-private partnership (PPP) model. This raises questions over what mechanisms might be used to attract private capital into the sector, which will also depend on the type of infrastructure policy put in place at the federal level. There is scope for infrastructure policy to rely on:

• Privatisation, especially in the airport sector where the existing PPP regulations have allowed for a handful of private terminals and the Federal Aviation Administration’s pilot privatisation programme. 
• Enhanced private investment in revenue-generating infrastructure. Freight rail, private sector ports, energy assets and water infrastructure are the most likely areas expected to benefit given existing revenue streams associated with usage.