Investors Look to Chicago as a Safe Haven

An expert from Marcus & Millichap reveals why small-balance multifamily owners should look to the Windy City, including the area's cap rates, price per unit and gross rent multipliers.
Image by Dave Mark/Creative Commons

Image by Dave Mark/Creative Commons

Commercial real estate is a bit sluggish amid uncertainties regarding tax reform and economic stimuli; however, many national investors are looking to Chicago as a good bet. When you consider the strength of the demographics and dynamic employment pool, it’s no wonder savvy, national and international investors continue to invest billions of dollars of capital into the market. Cap rates, price per unit and gross rent multipliers remain attractive in the Windy City with upside potential when you compare rents and cost of living with comparable cities.

In 2016, Chicago’s population estimate was more than 5 million, with a median household income of $55,250. It also has an educated workforce where 85 percent of those over 25 have a high school diploma and 35 percent have a bachelor’s degree or higher. There are 32 diversified Fortune 500 companies headquartered in and around Chicagoland. Major tech employers include Amazon, Groupon and the Google tech hub, which is the gift that keeps on giving because of its never-ending ability to attract tech companies and startups.

In addition to those national household names, the financial institutions that ring their bell in Chicago include the seventh district of the Federal Reserve, the Chicago Board of Trade and the Mercantile Exchange. It’s vast ensemble of top-tier educational institutions keep the pipeline of high-caliber employees readily available for its workforce. Its central location has made it the longstanding Midwest Stallworth in trade and transportation.

Inside the business district

Chicago’s central business district has a nice velocity of trophy assets trading. Just two years ago, Blackstone picked up Willis Tower for $1.3 billion. Our team recently traded a deal in the South Loop South called the Fairfax, a 30-unit apartment building at a sub six cap for $320,000 per unit. North of the loop, six caps aren’t difficult to find with very high collection rates and modest rent growth year over year. In the blue-collar suburbs surrounding the city mid- to high-seven cap rate deals are plentiful, often with a clear pathway to get to mid- to high-eights within a reasonable amount of time.

In the middle of it all is Chicago’s South Side market, one of the most undervalued markets in North America. It has received bad national press since the days of Al Capone while historically being a strong rental market since the mid to late 1920s when most of its apartment stock was constructed. Solid fundamentals when it comes to multifamily investments, however, with the recent announcements of the Obama Presidential Library, Tiger Woods PGA-style golf course and City’s recent announcements of the selection of a developer for largest swath of undeveloped lakefront land in the United States, it’s poised for massive growth in the not-to-distant future.

This is especially advantageous for small and midsized investors for a couple reasons. Lenders are understandably more comfortable lending on smaller deals that spread their risk out over several properties versus one large transaction. This is especially the case when they see large and institutional capital investments in that submarket. Also, yield is inversely related to deal size. Generally, as the dollar amount and deal size decreases the respective yield tends to increase. For instance, where one investor recently closed on a 100+ unit property on the south side of Chicago at 8.50 cap, our team recently listed four 30 unit buildings at a 9.25 cap in that same submarket. In today’s current lending environment, that 9.25 percent cap rate will yield a leveraged return in the mid to high teens for the small to mid-sized investor.

Chicago’s South Side marketplace is a high-velocity market where local, regional and national investors flock and where mid to high teen cash-on-cash returns abound. My team recently listed a high-profile South Side apartment building and received more than two dozen offers from national and local investors within 30 days of marketing. After all, it’s home to “the busiest square mile in the world,” better known as Midway International Airport, Museum of Science and Industry, University of Chicago and McCormick Place. Chicago will remain a global convention, entertainment and capital migration destination.

Tony Headshot lean forwardAnthony Hardy is a senior associate at Marcus & Millichap with 20 years of experience helping clients create and preserve wealth through the timely acquisition and disposition of multifamily properties.

Sources: Marcus & Millichap Research Services; BLS; CoStar Group, Inc.; Federal Reserve; Freddie Mac; Forbes; IMF; MBAA; Moodys Analytics; MPF Research; NAR; Real Capital Analytics; The Conference Board; and U.S. Census Bureau; World Bank.