Chicago Multifamily Asset Sell Off Strategy
The Midwest market flew under the radar on a recent article in Bisnow that examined the disparity between luxury apartment construction and the working-class American’s need for affordable apartments. Net, net, Midwest cities didn’t make the Ten-X list of top ranking multifamily buyer or seller markets but make up a valuable part of the domestic multifamily market. As we look at the Midwest multifamily market, Chicago’s increasing luxury apartment supply (and total apartment development in Chicago) has begun to outweigh demand as seen in NYC & San Francisco on a more tempered basis.
In recent years we have witnessed a significant influx of capital from foreign and domestic coastal real estate investors that has propped up Chicago apartment development, particularly in the luxury apartment space. Subsequently, cap rates on these luxury buildings continue to drop requiring the new owners to achieve higher and higher rental levels. Just recently we have noticed the record scratch. In June of 2017, and for the first time in over five years, Chicago rents have decreased mainly due to a surplus of supply (Journal of Appraisal Research).
While we at 33 don’t expect to see a significant fall off in Chicago real estate investment in the short term, we do expect cap rates to start to creep back up as additional supply continues to hit the market. Combined with a potential increasing interest rate environment, we feel this could result in a pullback in value for these luxury apartment buildings. During this period of disproportionate supply and demand, we will likely witness ongoing pressure on luxury rents that require concessions and price drops. Owners/operators will have to assemble proactive and aggressive marketing plans to maintain pricing levels and minimize vacancy, something we pride ourselves on here at 33.