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Chicago and the Real Estate Cycle of Creative Destruction

The key to investing in Chicago is figuring out what direction change is occurring in the area you are investing in, and in what time frame that change will be complete. At various times in Chicago’s history, investing in the same plot of land could have been a recipe for riches or disaster. The growth of Chicago has been a process of “creative destruction”, a phrase coined by the Austrian-born economist Josef Schumpeter to describe the process of industrial mutation that continuously revolutionizes the economic structure from within, incessantly destroying the existing economies to create new ones. And creative destruction describes the six waves of growth of one of the most architecturally significant and important cities in the United States.

The First Wave: Displacement of Native Americans

In an area previously inhabited by the Potawatomi Native American tribe, Jean Baptiste Dusable, a Haitian of African descent, established the first trading outpost. Following the victory of the United States in the Northwest Indian War in 1795, and the Treaty of Chicago in 1833 the Potawatomi were forcibly removed from the land and sent west of the Mississippi River during the Indian Removal. The cultural genocide and forcible removal of the Potawatomi tribe was Chicago’s first and most morally egregious act of destruction.

The Second Wave: The Raising of the City

During the 1850s Chicago began its second cycle of creative destruction when in order to accomodate its rapid population growth and demand for better sanitation in 1856 it began a hugely ambitious project to build the United States’ first comprehensive sewerage system. The problem? Chicago was built on a swamp, with a high water table, meaning that the city was unable to run underground sewage pipes, and all the human refuse floated to the surface and contaminated the groundwater. This lead to Chicago becoming a cesspool, a breeding ground for maleria, cholera, yellow fever and a variety of other infectious diseases. There was a reason the marshlands surrounding the mouth of the river into lake Michigan was derived from a perjorative Native American term meaning “Smelly Onion.”

Chicago’s solution? Raise the city! The project raised much of central Chicago to a new grade with the use of hydraulic jackscrews to raise the downtown buildings. By elevating the urban core to as much as 15 feet, new sewage pipes were able to be laid underneath the raised structures that allowed untreated sewage and industrial waste to flow into the Chicago River and subsequently into Lake Michigan. Chicago remains raised to this day, with the famed Michigan Avenue being constructed several stories above lake level.

The Third Wave: The Reversing of the River

The problem was with all the sewage now flowing into Lake Michigan, Chicago was polluting its primary water supply. In 1900 the city responded by both tunneling two miles out into lake Michigan to draw its water away from the shoreline, and then reversing the flow of the Chicago River by constructing a series of canals that diverted the city’s sewage. Instread of flowing into Lake Michigan, the sewage connected with and flowed downstream into the Mississippi River. This was Chicago’s third significant wave of creative destruction, for while it solved the contaminated sewage issues of Chicago, it made the people of St Louis none too happy, who now had to deal with Chicago waste contaminating their water supply.

The Fourth Wave: Recovering from the Fire and the Burnham Plan

Chicago’s fourth wave of creative destruction occurred in 1871, when the Great Chicago fire destroyed a 4 square mile area of the city’s downtown. Chicago used that act of destruction to embark on one of the greatest acts of architectural urban remodelling since that of Paris’s in the late 1800s. Based on a framework constructed by the famed architect and urban planner Daniel Burnham, from the ruins of previous wooden structures arose modern constructions of steel and stone. Chicago built the world’s first skyscraper in 1885, using a steel-skeleton construction that set a precedent for worldwide construction at the time.

The Fifth Wave: The Great Migration and the Rise, and Fall, of Chicago’s South Side

From its inception the heart of the city’s industrial and commercial activities centered on Chicago’s South Side. The city’s wealthy and elite also resided south of the river, in an area now known as the South loop, which contained the mansions of the city’s captains of industry such as Marshal Field. The World’s Columbian Exposition occurred on the south side in 1893, and the University of Chicago moved to its present location in Hyde Park in 1892.

During World War 1 and the 1920s there was a major expansion in industry. The availability of jobs attracted African Americans from the southern United States. Known as The Great Migration, between 1910 and 1930, the African American population of Chicago exploded from 44,103 to 233,903.

The Great Migration had a paradoxical cultural impact. It birthed a Black Renaissance in art, literature and music, and made Chicago the epicenter of African American culture and commerce. But it also precipitated the start of a white and middle class exodus from Chicago’s south side, which eventually led to the creation of segregated housing areas and sections of concentrated poverty. In many ways this became Chicago’s fifth wave of creative destruction, as massive mansions that were built from the South Loop all the way past Hyde Park were abandoned, demolished or turned into tenement housing as the wealth fled north of the river and the area transformed into a poverty stricken ghetto. At one point mid-20th century the area surrounding Hyde park became so rundown that even the University of Chicago considered relocating its main campus to the North suburbs.The Great Depression brought further devastation to Chicago’s south side, and by 1933 over 50% of the industrial jobs in the city were lost.

World War 2 brought a recovery of sorts, as the city of Chicago alone produced more steel during the war years then either the United Kingdom or Nazi Germany. The Great Migration, which had been on pause during the Depression, resumed at an even faster pace,as hundreds of thousands of African Americans from the south arrived in the city to work in the steel mills, railroads and shipping yards.

But by the 1960s, white residents in much of the south side had left the city for the suburbs and white flight accelerated. While home loan discriminatory redlining against blacks continued, confining even middle class blacks to concentrated areas of segregation and poverty, the real estate industry practiced what became known as blockbusting, completely changing the racial composition of whole neighborhoods. Globalization and job outsourcing caused heavy job losses for lower skilled workers, gutting the economic viability of Chicago’s urban core. From a peak of 250,000 steel workers in the 1960s, only 28,000 remained by 2015. The influx of narcotics and cociane in successive epidemics n the 1960s, 1970s and 1980s excacerbated the social decay.

The creation of high rise urban housing projects such as Cabrini Green, The Henry Horner and the Robert Taylor homes in the 1970s, despite a plethora of good intentions, signaled the nadir of urban decline. These housing projects concentrated poverty to such an extant that they drove out the remaining middle class elements from the Chicago’s urban core by the start of the 1980s.

The Sixth Wave: 1980 to present – Renaissance and Rebirth

Starting in the 1980s mayor Richard M. Daley began an aggressive process of urban renewal, demolishing most of the high rise housing projects constructed in the 1960s and demolishing tens of thousands of abandoned homes on the south and west sides. This opened up vast tracts of land for private- and government-lead development.

Daley also embarked on a myriad of urban renewal projects in his efforts to remake Chicago into “The Paris of the Midwest.” This included remodeling the downtown museum campuses, renovating its Navy Pier, creating Millennium Park – a downtown park and concert venue built over the railroad tracks and underground parking lots, and creating boulevards with trees planted in the medians of roadways and parkways.

The public schools were also reorganized to create magnet elementary schools with gifted programs and selective test-in high schools such as Whitney Young, North Side prep and Walter Payton academy that became so competitive and prestigious that they served to draw many whites and middle class people back into the city. City rules were also enforced that mandated that all city workers such a fireman, policeman abd schoolteachers live within the city proper as a condition of employment . That rule kept the city’s its employment base taxable and within the city limits, creating an ongoing need for affordable housing and opening up investor interest in previously vacant land and housing.

The results were dramatic. No downtown area in the United States experienced a greater re-population than Chicago from 1980 to 2020. And few areas experienced greater degrees of gentrification than Chicago’s South and near west sides.

But this resurgence came at a cost. Just as whites and the middle class began moving back into Chicago’s urban core, The Great Black migration reversed itself. From 2000 to 2020 over a quarter of a million African Americans left Chicago for areas of the country that provided more affordable housing, better jobs, and safer neighborhoods.

In an ironic twist of fate, the city that had seen the creation of a Black Renaissance a century before, became the epicenter of rapid gentrification that threatened to render its metro area unaffordable to the descendents of those that birthed it.

As of 2021, median prices of newly constructed single family homes in an area known as Bronzeville exceeded $700,000, and middle and working class residents of the community of Woodlawn, the home of the soon to be constructed Obama Presidential Center, were fighting efforts at gentrification that threatened to force them out .In less than 10 years, Woodlawn had gone from one of the poorest census tracts in the city to an area of rampant real estate development and speculation. A new development of townhomes had recently been constructed with average prices per unit exceeding $600,000, and rents had rapidly exceeded the budgets of most who did not have either government subsidies or family incomes approaching six figures.

Looking Forward: Investing in Chicago and Predicting the Pattern of Change

Chicago has never been a static city. It is always changing. And it’s people, industry, commerce and real estate will continue to change as well. A south side that began as a smelly marsh pupated into a sewage-filled congested slum, before morphing again into a global economic powerhouse. But it is a powerhouse still still rocked by racial segregation, constant in- and out migration, and political conflict. Chicago’s inner city has suffered white flight, then urban abandonment, then renewal, then white in-migration, and now black flight. It remains a fascinating, sometimes frightening, but always exciting construct whose history epitomizes the very ethos of Schumpeter’s Creative Destruction.

Investing in Chicago is not for the faint of heart. But for those with the knowledge and the fortitude, it has the potential to reap stunning rewards.

More on that in future posts…