Will Chinese investors still love Chicago tomorrow?

Photo by Chikoo Patel

Photo by Chikoo Patel

A Chicago firm and Chinese partner teamed up to build Vista Tower along the Chicago River.

Chinese investors poured more than $2 billion into Chicago real estate the past two years after flying over the city forever. Yet just as Chicago finally is o the radar in China, two forces may keep more investors from landing here: President Donald Trump's tough talk toward their country and China's own tighter controls on money leaving the nation.

"It would be a huge lost opportunity for Chicago" if Chinese investment were to slow, says David Carlins, president of Chicago-based Magellan Development Group, which has Chinese partners on several projects. "I think Chicago is on the tipping point of being recognized as a large opportunity for Chinese investment."

From 2010 to 2014, Chinese investors spent a paltry $442 million on commercial real estate in metro Chicago, according to Real Capital Analytics. Then in 2015 and 2016, they bankrolled five times that much—$2.2 billion. And that excludes ground-up developments, which are not tracked by the New York-based firm.

One ground-up development, 93-story Vista Tower, which Magellan and Chinese investment partner Wanda Commercial Properties began constructing last year along the Chicago River near Lake Shore Drive, is expected to cost $1 billion alone. The hotel and condominium tower, designed by Jeanne Gang, will be the city's third-tallest building.

For now, while the Trump administration is still formulating trade and investment policies, Chinese investors are continuing to buy in Chicago, with two deals totaling $475 million in the first seven weeks of 2017.

Chicago office sales broker Blake Johnson, an executive vice president at CBRE, visited China shortly after Trump was elected in November to meet with a large number of real estate investment companies. Although politics were a hot topic, "only one firm we met with told us that American investment plans were on hold as a result of the 'orange swan,' " Johnson says, using some foreign investors' term for Trump's election.

"From what I can tell, there's more interest now than there was before Trump," says Michael Smith, managing partner of Baker & McKenzie's Chicago office and one of four members of the firm's global real estate steering committee. "It's sparked more interest, and it may be because they want to get in before the door closes."

But others say that despite their deepening fondness for Chicago, overseas investors may pause as they wait for potential Trump administration changes to the tax code, the EB-5 program—which allows foreigners to become U.S. residents if they invest in real estate and other business ventures—and other policies regarding foreign investments.

"There are various tweets (by Trump), some of them contradictory, but there's no hard policy that's come out yet," says Jim Costello, a senior vice president at Real Capital Analytics. "That's creating an awful lot of uncertainty in the economy, and I think that's already having an impact on the property market. I think some investors are sitting on the sideline for a moment, taking a breather and waiting to see what happens in terms of some of these potential changes."

Chinese investors, meanwhile, are facing tougher internal restrictions on sending money out of China for overseas deals to keep its currency from weakening and reserves from dwindling further.

Investments by Chinese in North American real estate and hospitality totaled $17.4 billion in 2016, an over threefold rise from $5.3 billion in 2015, according to a report by Baker & McKenzie. Even so, deals involving Chinese make up a relatively small percentage of Chicago sales and developments. But Chinese investors are often willing to take on the biggest projects, such as Vista Tower, which are the most difficult to finance. "A lot of Chinese investors want to hit home runs," Costello says.

Wanda is led by China's richest man, Wang Jianlin. Success on Wanda's first Chicago project could capture the attention of deep-pocketed investors in China and elsewhere. "Because so many people follow and respect Wanda, you can see the momentum building," Carlins says.

Already this year, Chinese conglomerate HNA Group, whose vast holdings include Hainan Airlines, has struck a nearly $360 million deal for a 50-story office tower at 181 W. Madison St. And Ping An Insurance has made a $115 million equity commitment to Miami developer Crescent Heights' planned 76-story apartment tower in the South Loop, according to industry newsletter Real Estate Alert.

Previously, China's Cindat Capital Management and Chicago-based Zeller Realty Group paid $302 million for a 65-story office building at 311 S. Wacker Drive in 2014, and a Chicago-based real estate arm of Chinese auto parts manufacturer Wanxiang Group has been involved in several purchases and developments here, including Google's Midwest headquarters, an office development along the Chicago River, a Magellan apartment development in River North and several hotels, including the Waldorf Astoria in the Gold Coast.

Source Crain's Chicago Business