Chicago Multifamily Suffers While Home Sales Market Rebounds, But For How Long?
The ability of renters to keep making their monthly payments buoyed the multifamily market over the past seven months. The dire predictions of early spring, when many observers predicted calamity, have not come true.
But that doesn’t mean the housing market is healthy.
Cracks in the multifamily foundation have appeared as the coronavirus pandemic continued to sour the economy and some residents of large urban properties began to exit.
Kiser said the real challenge for the multifamily industry is that the properties most responsible for the sector’s recent success are precisely the ones most likely to suffer in a pandemic. Class-A luxury buildings with a lot of amenities, located near dining and entertainment options and public transportation, just don’t have the same cachet.
“No one is checking off these boxes anymore,” Kiser said. “People aren’t taking public transportation, so if your property is near it, it doesn’t matter. When you add to that the episodes of civil unrest, which are occurring in those same zones, it’s not a surprise that the segment within multifamily that is being hit harder than anywhere else are these prime rental locations.”
The struggles within the multifamily sector coincide with a burst of activity in the single-family home market. After several years of depressed sales and slow price increases, eager buyers have appeared throughout much of the city and in many suburbs. Some observers tie that increase in some cases to the outbreak of the coronavirus and say buyers are seeking shelter in less dense environments, but other experts disagree.
Other factors could be unleashing the flood of new buyers, she added. Historically low interest rates make purchasing very attractive right now, and the recent escalation in prices could be related to a historically low inventory of homes for sale. McGriff said she will wait for months of more data that could show how all of these factors are influencing one another before making a determination of what is driving the shift.
The struggles of top downtown properties are not exactly news, Kiser said, but vacancies are rising, and renewals are scarce in other prime locations for the same reasons, including Lincoln Park, Lakeview and Bucktown.
“It is pretty scary right now,” Kiser said.
But the multifamily market hasn’t soured everywhere. Outside the glittering Class-A properties that rose throughout much of the downtown and surrounding neighborhoods, conditions are as strong as ever, Kiser said. Workforce housing and suburban properties have held onto their residents, as did some Chicago neighborhoods farther out from the urban core, including Uptown, Edgewater, Old Irving Park and South Shore.
“Occupancy in these areas is either good or even excellent,” Kiser said.
Investors now perk up a bit when looking at these properties, he added.
“We’re also seeing some of our clients for the first time consider affordable housing properties with subsidized units because there is guaranteed rent there.”
That heightened level of interest hasn’t yet caused a big boost in multifamily property sales. Many owners are holding off on putting assets on the market because they fear the overall economic conditions will depress the properties’ values, according to Kiser. And other difficulties make buying and selling a challenge.
“The biggest problem right now is with lenders, and I don’t mean that they’re doing something wrong, but many are subjecting properties to more scrutiny,” Kiser said.
That extra caution exists often even if a building or complex has steady rent collection, so expectations going into any potential deal these days are very different from one year ago.
“It is a property-by-property process and a bank-by-bank process. That’s the nature of the beast right now.”
Kiser Group has a 24-unit apartment property under contract, Kiser added, and it has three vacancies, a historic high. But the 21 tenants have each paid 100% of their rent.
“Fortunately, the bank we’re dealing with, it’s the actual rent collection that they care about,” he said.
Sales of single-family homes did take off recently. The city of Chicago saw 2,570 sales, including condos, in September, a 28.1% boost compared to the previous September, according to a report from Illinois Realtors that analyzed sales data from Midwest Real Estate Data LLC. Prices are also headed up. The median price of a Chicago home in September was about $322K, up 10.4% from September 2019.
And similar jumps were seen across the region. In the nine-county metro area, September home sales totaled 12,451, up 38.7% from last year, and the median price was $275K, an increase of 14.6%.
Although McGriff has seen buyers out in the market looking for more space, she remains focused on low interest rates and low inventory as explanations for these increases.
After sales went into a steep dive in the immediate aftermath of the statewide shutdown orders in March, home sales rebounded by 12% in July after interest rates sank, she pointed out. The average rate for a 30-year, fixed-rate mortgage was 3.02% that month, according to data from the Federal Home Loan Mortgage Corp., down from 3.77% the previous July. In September, the rate declined to 2.89%, the lowest rate since the early 1970s.
“We’ve also had an inventory shortage for at least two years,” McGriff added.
That shortage of homes for sale got even worse when potential sellers were spooked by the pandemic and decided to hold onto their properties. In September, the inventory across the Chicago region for detached single-family homes declined 38.6% from the same month in 2019, according to MRED, and in October it was down about 25%. There is now a less than four-month supply of single-family homes for sale, and McGriff said sellers are not typically fielding multiple offers.
“That helps keep pushing prices upward,” McGriff said. “If you’re thinking about selling, now is the time.”
There has been a flood of condos recently hitting the market, many in the downtown area, she said, and that could be a sign that many downtown dwellers plan permanent exits. In August and September, more than 1,000 condos in Chicago were hitting the market each week, with only a few hundred selling each week.
But whether the spurt in home sales is driven by an exodus from downtown multifamily properties and condos, buyers simply taking advantage of low interest rates or a combination of these factors, McGriff would prefer another six months of data to see whether it’s a long-term trend.
“I think that will tell a more focused story, rather than us speculating on what is happening,” she said.
And with so much of both the economy and daily life in turmoil, making predictions is not easy.
Geoffrey J.D. Hewings, emeritus director of the Regional Economics Applications Laboratory at the University of Illinois, said even with all the positive signs in the region’s housing market, low inventory continues to be a problem, along with an increase in the number of serious delinquencies.
“While the former issue is having a significant impact on upward price movements, the delinquency problem in combination with increases in the number of long-term unemployed may dampen demand in 2021,” he said.
“There is a whole lot of anxiety right now over the election, and even though I don’t know if that has a direct impact on commercial real estate, it’s happening on top of COVID-19 and the potential for more civil unrest,” Kiser said. “It all kind of adds up after a while on the collective psyche of everyone.”