06.12.18
The Real Deal: Two developers tried and failed to build thousands of homes at South Works. Can anyone succeed?
South Side brokers maintain the troubled project could work, for developers willing to take a chance
By John O’Brien, The Real Deal
When U.S. Steel’s South Works plant closed in 1992, it was a pivotal moment for residents — and the economy — of the Southeast Side.
Gone were the thousands of jobs that had helped sustain families and businesses in the area, which has yet to recover.
A quarter-century later, the 440-acre property along Lake Michigan is empty, cleared of the hulking mills, blast furnaces and slag piles.
The massive property is ripe for residential development, but its future remains unclear, and the latest housing plan for the land relegated to the scrap heap.
Emerald Living had envisioned a new neighborhood with as many as 20,000 homes on the site, but walked away last month.https://therealdeal.com/chicago/2018/05/24/emerald-living-drops-plans-for-huge-south-side-mixed-use-project/
The Dublin-based developer had been partnering on the project with Barcelona Housing Systems, a Spanish building of modular housing that intended to construct a factory on-site to produce the development’s new homes.
“We generated lots of goodwill and momentum with our inclusive, community-centric vision for this property,” Emerald Living CEO Barry O’Neill said in a statement. “However, and perhaps not surprisingly, the industrial heritage of this site presented significant challenges which, despite best endeavors by all, made it impossible to conclude the deal with U.S. Steel in its current format.”
The Emerald Living/Barcelona Housing venture was not the first developer to propose an ambitious, transformational endeavor on the South Works site.
Chicago-based McCaffery Interests and U.S. Steel worked for 12 years on a plan to build more than 13,000 homes, 17.5 million square feet of commercial space and a 1,500-slip marina on the site. But the partnership split up in 2016 when U.S. Steel no longer was able to finance the project.
An executive at a prominent Chicago developer said financial considerations aren’t the only obstacle to developing South Works — but they’re a big one.
“There are construction costs, infrastructure costs, remediation costs — there are so many costs,” said the developer, who spoke about South Works with The Real Deal on the condition of anonymity. “It’s hard to imagine you could ever get the revenue to make that deal make sense.”
On construction costs alone, a building on the South Works site would cost as much as one on the lakefront in the Gold Coast, the developer said. But where a Gold Coast condo could sell for $1 million, it would be able to sell for “a fraction” of that at South Works.
On reason for that is it’s distance from Downtown, a full 10 miles from the center of the city.
“There’s a reason there aren’t multimillion-dollar condos up and down the lakefront. You also have to be close to the economic engine” of Downtown, he said.
A month before it pulled out of the project, Emerald Living said it was on hold due to environmental concerns at the site. U.S. Steel, though, said the EPA had issued a ruling saying “no further remediation” was needed at the site.
But the developer who spoke to TRD said “no further remediation” doesn’t mean the site is 100 percent free of contamination.
“It just means the really dangerous stuff has been removed or remediated,” he said. Care would have to be taken long into the future when excavating and moving soil, and if the developer of the property were to discover that a lot of soil would have to be removed “it would get excessively expensive.”
U.S. Steel did not return a call seeking comment for this story. Nor did Cushman & Wakefield, whom the steel company has hired to market the site. McCaffery Interests also did not respond to a request for comment.
Residential broker Maurice Hampton said while it’s reasonable to believe the site would have environmental concerns, its size and location make it too good of a development opportunity to pass up.
Hampton, whose Beverly-based Centered International Realty focuses on South Side listings, said waterfront properties are some “of the most desirable locations on this globe.” The South Works site features unimpeded views of the Downtown skyline and beaches “right outside your door.”
“There is nowhere else along the Lake Michigan shoreline to do it,” Hampton said.
Eventually, the growing population and desire for urban living will spur someone to take on the project.
“By the year 2050, two thirds of the world’s population will live in an urban area, and Chicago will be no different,” Hampton said. “Areas that are blighted won’t be blighted anymore.”
Noah Birk, senior director for the Kiser Group, said transformation of the South Side has already started, even if it’s happening under the radar of those focused on Downtown and the North Side.
Birk specializes in sales of multifamily buildings on the South Side, and said prices have been on the upswing since 2012. Spurred in part by talk about the impending Obama presidential library, investors began buying properties and giving them much-needed upgrades — and cashing in as a result.
Buildings that were selling in the area of $20,000 per unit within a few years were selling for $100,000 per unit, Birk said.
The movement started in East Woodlawn — not far north of the South Works site — but spread to other areas. Now prices are on the rise across the South Side, he said.
That growing value on the South Side works against the argument that a developer won’t be able to set prices high enough to make a profit because of softness in the market surrounding it.
“There’s definitely a need and want for something like this,” Birk said.
He pointed out other areas on the South Side where development jump-started the surrounding market, like the new Whole Foods-anchored development along 63rd Street in Englewood and a retail development anchored by a Mariano’s grocery store in Bronzeville.
The neighborhoods near South Works are lacking restaurants, shops and other retail that would draw residents. Were a developer to start with a retail project on South Works and slowly build around it, people would come, Birk said.
But how many developers can afford to start such a huge project and wait for years to see returns?
The rewards will come for a developer willing to take the chance, Birk maintained.
“How often do you do a development like that in a city and it doesn’t work?” he said.
