Over the past year, Chicago’s multifamily market has been tested by shifting demographic trends and changing lifestyle preferences, with the pandemic pushing people to trade the once-vibrant city center for the slow-paced suburbs.
Since founding Peak Properties in 1998, Mike Zucker has been through several market downturns, learning how to rapidly adapt to any phase of the real estate cycle. In the interview below, he dives into how the pandemic-driven changes are impacting Chicago’s rental market and also reveals his predictions.
How much has the Chicago multifamily market changed over the past year?
Zucker: The resiliency and strength of the Chicago market were both equally tested. When COVID-19 hit, along with the civil unrest surrounding the Black Lives Matter protests, Chicago was greatly challenged, especially its urban core.
Recent tax changes are also creating some hesitancy in the market. Some investors and developers are choosing more tax-friendly markets, such as Phoenix, Denver or Indianapolis, to name a few.
Neighborhoods outside the Loop held up fairly well, while downtown and River North were impacted greatly. Small studios fell out of favor while big units became in vogue.
Before the pandemic, there was great urbanization going on. People were moving back to the city, whereas now, people are fleeing the city and are going back to the suburbs or are taking the opportunity to move to warmer climates, such as Arizona, Texas, Florida and so on.
Which aspects of Chicago’s multifamily market have been impacted the most by the pandemic?
Zucker: The pandemic has greatly impacted where people want to live. Small units or studio apartments in the urban core did not hold up well during the health crisis. As people were technically not allowed to leave their apartments, these small units became confined spaces. When you’re not able to go for a walk outside, when you don’t have a balcony, or when you’re stuck in a 200-square-foot apartment, that is almost a feeling of being trapped. Therefore, small, studio-type units were impacted greatly.
Also, small studios are usually people’s first apartments, it’s for people who are still in school or just graduated college. But because of COVID-19, no one was looking for this type of space. Students who would usually move downtown stayed at home.
Before COVID-19, people used their studio apartments really just for sleep, but the lobbies of the buildings were made into social areas with coffee shops. Think of these buildings as hotels, with lobbies turned into great social spaces with workstations and collaboration areas. The health crisis took away these options.
What can you tell us about the spring rental season in Chicago? How is it unfolding?
Zucker: The closer you were to the central business district, the greater the impact you would feel if you owned a building. I know people that own 250-unit studio buildings close to downtown and they were only 77 percent occupied. I have a friend who has a family-owned business and focuses only on this type of building, near the urban core, and he told to me that this is the worst his family has seen in three generations and it will take years to recover.
However, firsthand, I can tell that I am seeing people who are moving back into these units because people do have the desire to get back to the city. Especially younger people between 21 and 35. So, I can say that our occupancy numbers have gone up. Just this weekend, for this unit type we have received more than 40 applications. As the summer season is approaching, leasing momentum is picking up more and more.
How has the pandemic impacted Peak Properties’ multifamily portfolio?
Zucker: Overall, we have done very well. There are definitely some parts of the portfolio that were impacted more than others. The biggest impact we felt was for small-unit studios in the central business district. As you head further south or north, to neighborhoods such as Lincoln Park, Roscoe Village, Lakeview, Bucktown, etc., the statistics become much better.
In a 40-unit building, we’d never have more than two or three empty apartments, because these were all one-, two- or three-bedroom units. So the impact was significantly less in the suburbs.
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What can you tell us about rent collection across your portfolio since April 2020?
Zucker: We manage 8,000 units in the Chicagoland area. Our portfolio includes high-rise, midrise and scattered-site communities. Our collections have been very strong throughout the pandemic across all our asset types, reaching mid-to-upper 90 percent throughout the entire pandemic.
Overall, around 5 percent or less than 400 of our residents needed rent assistance. We worked very hard with our residents to come up with some sort of solution, whether that was letting them out of the lease, or helping them get rent assistance through the state or the government.
How do you see the future of the rental market in Chicago?
Zucker: For the immediate future, neighborhood buildings, midrises and high-rises should do pretty well. I would be a tad more concerned about high-rises based on expected rents, as residents in this world can now have a job that allows them to work from anywhere.
Supply will be shrinking due to the political climate, except in the West Loop/Fulton Market neighborhoods, yet those buildings need to get financed and built. I am concerned about taxes, politics and social justice issues that are rampant in the city.
Despite all this, Chicago is still a vibrant place, with great culture and infrastructure. Therefore, while I believe that there’s a lot to work on, the city offers tremendous opportunities for the future.