Table Of ContentFrom Boom to Bubble
From Boom to Bubble
How Finance Built the New Chicago
rachel weber
The University of Chicago Press
Chicago and London
Rachel Weber is associate professor in the Urban Planning and Policy Department
and a faculty fellow in the Great Cities Institute at the University of Illinois at
Chicago.
The University of Chicago Press, Chicago 60637
The University of Chicago Press, Ltd., London
© 2015 by The University of Chicago
All rights reserved. Published 2015.
Printed in the United States of America
24 23 22 21 20 19 18 17 16 15 1 2 3 4 5
isbn- 13: 978- 0- 226- 29448- 3 (cloth)
isbn- 13: 978- 0- 226- 29451- 3 (e- book)
doi: 10.7208/chicago/9780226294513.001.0001
Library of Congress Cataloging-in-Publication Data
Weber, Rachel, author.
From boom to bubble : how fi nance built the new Chicago / Rachel Weber.
pages ; cm
Includes bibliographical references and index.
isbn 978-0-226-29448-3 (cloth : alk. paper) — isbn 978-0-226-29451-3 (ebook)
1. Urban renewal—Illinois—Chicago. 2. Real estate development—Illinois—
Chicago—Finance—History. 3. City planning—Illinois—Chicago.
4. Creative destruction—Illinois—Chicago. I. Title.
ht177.c4w43 2015
307.3′4160977311—dc23
2015004406
This paper meets the requirements of ansi/niso z39.48- 1992 (Permanence of
Paper).
Contents
Introduction: Why We Overbuild 1
part 1 Real Estate Speculations
1 The Rhythm of Urban Redevelopment 15
2 Fast Money Builds the Speculative City 38
3 Out with the Old: How Professional Practices Construct the
Desire for New Construction 63
part 2 Chicago in the 2000s
4 Downtown Chicago’s Millennial Boom 91
5 Who Overbuilt Chicago? 126
6 Making the Market for Chicago’s New Skyscrapers 156
part 3 Building the Future
7 The Slow Build 187
Epilogue: Why We Will Continue to Overbuild 210
Appendix 215
Acknowledgments 217
Notes 221
Index 273
Introduction:
Why We Overbuild
The speed of the cycles of prosperity and desolation is an extraordinary challenge to
historians and prophets.
saul bellow, “Chicago: The City That Was, The City That Is,” 19861
LaSalle Street bisects the Loop, the heart of Chicago’s central business dis-
trict, and has served as the city’s fi nancial services artery since the 1920s, when
it was known as the “Wall Street of Chicago.” A canyon whose steep walls
are carved out of vintage offi ce buildings and ornamented with symbols of
the modern industrial economy, the street terminates on the south in the
imposing Art Deco Board of Trade building (fi g. 0.1). A few blocks north sits
City Hall. Viewed as a whole, the street has come to symbolize the solidity
and durability of the City That Works. Cameos of this classic vista have ap-
peared in movies such as The Dark Knight, The Road to Perdition, and The
Untouchables.
In 2006 the City of Chicago declared the area to be “blighted,” noting
that the buildings on LaSalle Street were “obsolete.”2 Tenants, it argued, were
rejecting their outmoded structures for the new emerald- glass and steel sky-
scrapers springing up just blocks away along the western perimeter of the
Loop. It was true: law fi rms and corporate headquarters had rushed to re-
locate to the millions of square feet of new offi ce space built since 1998. The
buildings they vacated had a diffi cult time staying solvent. Some deteriorated,
others were converted to new uses such as hotels, and a few were demolished.
The wrecking balls and construction machinery signaled yet another round
of what Joseph Schumpeter in 1942 famously termed “creative destruction”—
capitalism’s habit of rendering old products obsolete and destroying them so
that it can invent new ones.3
In this book I explore three aspects of creative destruction in the built
environment that are underappreciated by scholars and practitioners in the
fi elds of real estate and urban planning. First, creative destruction has a histo-
ricity; innovation and annihilation tend to occur together in time, and certain
2 introduction
figure 0.1. Chicago Board of Trade building, 2011. Photograph courtesy of Kevin Dickert.
periods experience a disproportionate amount of both. At these times the de-
velopment industry, fi nancial markets, and public planners all race to erect
new structures and demolish older ones. Spectacular changes are made to
the urban fabric. In the following chapters I take apart these dizzying “build-
ing booms” to determine what sets them off, what sustains them, and what
cuts them off. Looking specifi cally at the case of Chicago during the early
years of the twenty-fi rst century, I argue that developers there acted as they
did not because potential occupants demanded new buildings, but because
fi nancial markets were making more capital available. The new offi ce towers
that pulled tenants from LaSalle Street were fi nanced by investors speculating
on future sale prices, prices infl ated by the use of derivatives and other com-
plex fi nancial instruments. Under the circumstances, it made more sense for
them to build, buy, and “fl ip” buildings than to invest in other kinds of assets.
Second, creative destruction is subject to social and political forces that
infl uence what Schumpeter called its “perennial gale.”4 In addition to their
drive to maximize profi t, capitalists are motivated by professional norms—
such as the pursuit of status and peer imitation. Political incentives and reg-
ulations also structure and harmonize their behavior. Individual capitalists
receive guidance in interpreting their markets from intermediaries, such as
brokers, who play a critical role in propagating ideas about the right times to
invest and the right buildings in which to invest. Tenants abandoned their
why we overbuild 3
older premises on LaSalle Street because, like developers and investors, they
too operated within status hierarchies that placed a premium on the most
modern construction. They too were subsidized, either through concessions
offered by the landlords of these new buildings or through the City of Chi-
cago’s economic development policies. Moreover, they too depended on the
advice of intermediaries whose commission and fee structures rewarded mo-
bility and short-d istance relocations. Such professional advice helps industry
actors make decisions under uncertainty, but can also lead to collectively ir-
rational results. Construction in downtown Chicago, for example, continued
unabated during the 2000s despite the fact that employment growth was fl at.
Third, during a boom, the actors engaged in creative destruction often
misread demand, miscalculating the nature and amount of new products the
market is willing to bear as well as underestimating the strength of attach-
ments to the older products that are destroyed. The pull to abide by domi-
nant professional norms is often so strong that it distracts attention from
actual occupant demand and results in substantial oversupply. Asset bubbles
occur when the market for space comes unhinged from underlying economic
activity and prices bear little resemblance to operating incomes. Once burst,
bubbles leave behind an overhang of unused space. Vacancy rates spike, par-
ticularly in those marginally older buildings whose tenants have fl ocked to
the new stock. On a broader scale, building and lending to excess can bring
down the banking system and capital markets, threatening macroeconomic
stability.
In exploring these three aspects of creative destruction, some central ques-
tions emerge. What caused Chicago and so many other North American cit-
ies to boom during the 2000s? What explains the dramatic and rapid changes
in urban form witnessed during construction booms, when some areas are
built up and out while others are thinned and de-d ensifi ed? Why do develop-
ers seem to get ahead of themselves during these periods, producing more
space than is needed by local businesses and households? And what accounts
for the fact that some of the historic buildings in older submarkets, such as
LaSalle Street, maintain their status and hold their value while others are torn
down to make way for new construction during the boom? Rebuilding is usu-
ally erratic and incomplete, leaving in its wake, as construction booms do, an
assortment of old and new— shiny glass exoskeletons poking out from the
bricks and mortar. How does this happen?
To address these questions and contribute to a richer understanding of
these periodic booms, their bubble phases, and subsequent busts, I care-
fully dismantle the urban development process. This process is a mixture of
continuity and change, building and unbuilding—d ualities more accurately
