A Harvest in the Heartland

A Harvest in the Heartland
Published: October 01, 2007

Fifield Cos. is building 353 N. Des Plaines a K Station, the second of six apartment towers in a new mixed-use, master-planned project in downtown Chicago.

Despite the unrest in the financial markets over the last three months, real estate investors are still bullish on quality multi-housing projects with good fundamentals. While coastal metropolitan areas such as New York and San Francisco continue to be investor favorites, Midwest cities like Chicago and Minneapolis are experiencing multi-housing revitalizations. Smaller municipalities like Ann Arbor, Mich. and Indianapolis are also attracting more than their fair share of multi-housing work, with occupancy rates approaching 95 percent.

"Cities like Indianapolis are becoming safe havens for long-term investors," observes Jack Hahn of iCap Realty Advisors, The Woodlands, Texas. "The Midwest didn't experience the unjustified increases in property values that occurred in other regions, and its fundamentals have remained very strong."

Hahn is director of iCap's new Ohio office, in a region underserved by large national brokers. In fact, iCap is the only national brokerage firm with an operating office in Ohio right now.

"A lot of the market fundamentals found in Indianapolis also apply in Cincinnati, Columbus and suburban Cleveland," says Hahn. "The occupancy rates in Greater Indy are at 91 percent, and they're going to go higher."

Indianapolis is one of the least expensive cities in the U.S. to relocate to and do business in. As such, it has avoided the economic hardships that have plagued manufacturing-oriented metros and remains attractive to multi-housing renters.

"The reasons are as practical as the people who live there," says Hahn. "The market is stable and more affordable, and as far as apartments, there's isn't a lot of existing glut or new development coming on line."

Like almost everywhere else these days, transients who have relocated will remain leery about buying in Indy until the housing market bottoms out. For the multi-housing industry, particularly the rental segment, the single-family slowdown is a good thing.

"All these factors are working together to stabilize and increase occupancy rates in rental properties," concludes Hahn. "We'll continue to see increased demand for multifamily units until everyone is comfortable that the single-family market has hit rock bottom and is ready to rise."

Walking to Work

In Chicago, multifamily developments are springing up along train lines that were once primarily homes to single-family dwellings. This trend to "transit-oriented development" is bringing new life to suburban neighborhoods—and attractive opportunities to the multi-housing industry.

"Downtown workers need to commute to Chicago's Loop every day, but they'd also like a quiet place to come home to at night," says developer Ray Franczak of R. Franczak and Associates. His company is offering condominium homes near Chicago-area Metra train stations in the suburbs of Des Plaines and Palatine.

According to the 2007 edition of "Emerging Trends in Real Estate," published by the Urban Land Institute and PricewaterhouseCoopers LLC, "Infill locations, especially near mass transit stops, remain attractive to investors and developers." These communities reduce residents' dependence on automobiles and the accompanying high fuel prices while offering greater convenience for commuters.

"Suburban nodes will increasingly look more urban, with mid- and high-rise apartments clustering around shopping centers and office cores," the report notes.

Successful in Chicago

Transit-oriented developments (TODs) are not just another fad. A number of recent Chicago-area TODs have one thing in common—buyers can live in the suburbs in an apartment or condo and not need a car because they are close to convenient transportation in communities like R. Franczak & Associates' The Preserve of Palatine, The Stratford of Palatine, The Heritage of Palatine and The Waterford Condominiums.

The Preserve of Palatine condominium is nestled just a few blocks from the Metra Union Pacific Northwest Line in the heart of downtown Palatine, Ill. The downtown commute is under an hour. Katie O'Brien, sales manager for Franczak, said the village of Palatine has put time and effort into a downtown revitalization project that has attracted stores, restaurants and other amenities to the area. To date, sales have been brisk at this development, with 75 percent occupancy. Prices range from $309,900 to $374,900.

The Waterford Condominiums is a new three-building enclave by Franczak in downtown Des Plaines, three blocks from the Metra Northwest Line station and near O'Hare International Airport and Interstates 90, 94 and 294. Express trains take riders to the Loop in 28 minutes. Building II at The Waterford is nearly 75 percent sold. Remaining units cost from $312,400 to $384,400.

Sales recently got off to a fast start at Mainstreet Station, a luxury 71-unit new-construction condominium development by Bernard Katz & Associates Inc., based in Highland Park, Ill., at the corner of Main Street and Chicago Avenue in the heart of historic Evanston, Ill. Pre-construction base prices range from $296,900 to $553,900.

Georgetown by the River, from Kipling Homes, Shorewood, Ill., features 48 newly built condominiums in west suburban Glen Ellyn, just opened for pre-construction sales. "There is easy access via Metra, bike (Prairie Path) or car," says Meg Studer, marketing manager for the development. Located in the heart of the northwest suburbs, about 17 miles from Chicago's Loop, prices at Georgetown on the River range from $219,900 to $233,900.

"We can look at historical trends and try to predict where the market will be but currently, there are too many variables at work to make an accurate prediction of what will happen," says Hahn. "One thing I know for certain is that you must stay on top of trends like [TOD] in order to be successful."

The 'Greening' of the Midwest

Developer Village Green has also experienced dramatic growth in Chicago, St. Louis and Detroit. The company's headquarters is in Farmington Mills, Mich., and it manages 135 apartment complexes (35,000 units) throughout the Midwest.

"The 'for sale' and condominium markets have slowed down, but that is providing unique opportunities, especially as consumers look to wait out the market," says Village Green Cos. Chairman & CEO Jonathan Holtzman. "We see tremendous opportunities for additional expansion in the Midwest from internal and external means. However, the public is demanding more customized, personal service with all their interactions."

The company bases much of its success on continually monitoring resident satisfaction through surveys and emphasizing its "We Care" creed with clients, owners, partners, suppliers, vendors and others.

"Inexpensive money is harder to find, but the quality development will continue to find financing—and marginal properties will not," says Holtzman. "Cities and towns that have positive population growths will continue to reward the developer. Chicago and Minneapolis continue to show positive trends in regards to occupancy and rental resilience. These two cities are leading the Midwest right now."

One of the company's most recent development coups is the 158-unit Lake Calhoun City Apartments in Minneapolis' popular Chain of Lakes district. This development includes soft-loft style units, penthouses and townhomes.

"Jon (Holtzman) saw opportunities in the Minneapolis area that other developers did not," says a company insider. "The ideal apartment community offers the renter everything he or she could need or ask for as soon as he walks out the door, including recreation, entertainment and quality of life. It's expensive to build in these areas, but the customer will pay more and the occupancies will be higher."

Other recent Village Green developments include another new apartment community in Minneapolis (Eitel Building City Apartments); one historic renovation in downtown Chicago (Randolph Tower City Apartments); and another renovation (Village Park of Hoffman Estates) in suburban Chicago. The firm is also working on additional developments in Ann Arbor, Mich. and St. Louis.

"The multi-housing business builds based on demand," says Holtzman. "We can't predict the business cycles, but there are locations that are more insulated from the larger economy. Chicago and Ann Arbor are two of them. There is demand there with universities, hospitals and older apartments that need to be torn down or upgraded with the amenities the renter or owner demands these days. It also helps if your apartment community is better than what's currently available in the market."

Despite the recent unrest in the capital markets, Holtzman refuses to be a hand-wringer. "We are in a normal, five-year business cycle, and I've seen five or six such cycles in my career," Holtzman insists. "It's not about what's 'hot' today—garden, mid rise or high rise—it's about the potential performance of the property."

Nevertheless, the garden apartment market is a strong portion of Village Green's portfolio. The company carries four branded products and builds accordingly, based on the demands of the specific clientele.

"A widower will have different needs and expectations than a college student," observes Holtzman. "But everyone likes a beautifully landscaped property."

These days, the term "green" has taken on more significance. Village Green has evolved to not only identify with the historic meaning of a settlement's common area that is the center for community events, but also with the growing interest in environmentally friendly development.

"It was insightful of my father to include 'green' in our name 40 years ago," says Holtzman. "The word is as meaningful and relevant today as it was in 1966."

In 2004, Village Green's MDA City Apartments in Chicago set a precedent. It was the first market-rate apartment community in the Windy City to pursue the U.S. Green Building Council's Leadership in Energy and Environmental Design (LEED) certification. Since then, the company has continued to integrate various green elements into its existing, renovated and new construction apartment communities in the Midwest. And a number of other Chicago buildings are now designed to meet LEED criteria.

"Beyond that, the multi-housing industry needs to improve customer satisfaction at a faster rate," says Holtzman. "The most successful multi-housing providers are taking their cues from the top hotels, automobile makers and airlines. These companies are at the top because they improved customer satisfaction."

Village Green's "REACT" survey measures customer satisfaction, and the results of its latest (2006) poll show that the company is making significant progress toward its goals. "Flexibility of lease terms, choice of finishes within the apartment and a little more respect is what the renter is looking for these days," says Holtzman. "Not everyone wants a one-year lease and white walls, and I don't think that's particular to the Midwest."