Chicago Multifamily Investment in Focus

Pioneer Acquisitions' James Peterson Jr. names the city’s most attractive submarkets and sheds light on trends for Chicago investors to watch.
James Peterson Jr., Founder & Principal, Pioneer Acquisitions

With healthy demand almost balancing out supply, Chicago’s multifamily market seems to have left the fear of overbuilding behind, at least for now. The city has been adding jobs at a more accelerated pace—particularly in the construction, manufacturing and education and health services sectors— and has been strengthening its tech hub status, which fueled demand for housing across the metro. 

According to a recent Yardi Matrix multifamily report, at the end of last year, rent growth reached the highest value since 2016—2.5 percent, which, although still below the national rate, represents an achievement for the market. Growth was mainly led by suburban submarkets such as Grayslake and Chicago-Heights North, but several neighborhoods near Downtown, including Hyde Park, Bronzeville and South Shore, also recorded rent increases. 

Pioneer Acquisitions is a multifamily investor with a portfolio of roughly 2,000 units in Chicago. James Peterson Jr., founder & principal, told Multi-Housing News that “the fundamentals in Hyde Park are very strong” and the neighborhood has been attracting a lot of interest from investors and residents priced out of Chicago’s core areas. Peterson reveals what other submarkets are strong for investment, the evolution of rent growth in 2019 as well as the company’s strategy for the year ahead. 

What are the strengths and weaknesses of Chicago’s multifamily market?

Peterson: Strong demand remains one of the main strengths of Chicago’s multifamily market, particularly in Hyde Park and the far north side neighborhoods. We continue to see tenants being priced out of near north side neighborhoods and moving north, along the “L” lines, to find units that fit their budgets.

One of the main weaknesses, particularly downtown, is the continuing introduction of new supply with elevated amenities and leasing incentives, which encourages tenants to trade up to newer buildings. Soaring real estate taxes and water/sewer prices are a major concern for landlords, as are the burgeoning discussions about the introduction of rent control.

Rents have continued to peak throughout 2018. What are your predictions for this year?

Peterson: We expect rent growth to moderate with rental increases of 2 percent to 3 percent across our portfolio.

Tell us a bit about investment opportunities in the suburbs versus the urban core.

Peterson: Typically, Pioneer, doesn’t invest in the suburbs. What we have seen is strong cap rates in the suburbs, particularly for larger properties. Suburban cap rates are higher than core downtown locations, but lower than some of the outer neighborhoods where Pioneer invests.

Can you point out a few current investment trends in Chicago’s multifamily sector?

Peterson: Landlords continue to invest in vintage buildings with the objective of updating/renovating and then capitalizing on them. However, these opportunities are fewer and farther between. At the same time, micro or smaller units continue to be in vogue. Amenities remain a major focus of new developments in the downtown core, which, we believe, appeals to the aspirational mentality of Millennials. For example, Fyre Festival.

Your company focuses on acquiring vintage buildings. Tell us about a recent acquisition/project and how it is indicative of market trends.

Peterson: Opportunities to invest in vintage buildings at favorable purchasing prices are dwindling. However, Pioneer has purchased a handful of buildings over the last year on an off-market basis. Typically, we’ll invest $15,000 to $20,000 per unit for new kitchens, baths and flooring. Depending on the location, we’ve been able to increase rents by 50 percent or greater.

1369 E. Hyde Park Blvd.

What role does sustainability play in your projects?

Peterson: Sustainability is important if for no other reason than that resource costs are increasing. We generally replace older, sloan-valve toilets with high-efficiency toilets. We do the same with faucets and shower heads. Light bulbs are replaced throughout with high-efficiency LED bulbs. We also upgrade boilers and take advantage of energy credits provided by Peoples Gas.

What can you tell us about the process of financing your investments? How has it changed in recent years and what do you expect going forward?

Peterson: We typically finance our acquisitions with floating rate acquisition or construction loans. Once renovations are complete and the building has been retenanted, we refinance, typically through the agencies. We are in the process of closing five Freddie Mac loans with favorable rates, proceeds and terms.

What markets and/or submarkets is Pioneer Acquisitions focusing on and why? 

Peterson: Pioneer has a significant presence in Hyde Park where we are the second largest landlord. We feel the fundamentals in Hyde Park are very strong given the presence of the university and medical community. It is also a neighborhood where a tremendous amount of growth and investment is taking place.

We also invest in north side neighborhoods from Lincoln Square to Rogers Park.  These neighborhoods are on the “L” lines and still affordable relative to Lakeview, Lincoln Park, Downtown and some of the trendier neighborhoods.

What is your company’s strategy for 2019?

Peterson: We will continue to acquire properties on a selective basis in Chicago. We also plan on expanding into other markets in 2019 and 2020.

Images courtesy of Pioneer Acquisitions