South Shore Drawing Investors, And Thus Far Leaving Gentrification Behind
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The downtown Chicago multifamily market began taking off just after the recession, bringing in buyers from all over the world, but investment activity on the city’s South Side was mostly confined to trades between local neighborhood players.
Many out-of-state investors have been priced out of Chicago’s downtown, and now increasingly set their sights on apartment buildings in neighborhoods like South Shore, which stretches from 67th Street just south of Jackson Park, down to 79th Street. Today, that neighborhood buzzes with investment activity.
“There used to be a stigma of everything south of McCormick Place, but that has changed,” said Boston-based Capital Investors co-founder and Managing Partner Shuvam Bhaumik, who has been buying up properties in South Shore, and a few surrounding neighborhoods, for about five years.
“South Shore is definitely in the spotlight,” Apartment Investment Advisers Managing Broker Jack Cassin said, more so than at any time in the 17 years he has brokered deals in the neighborhood.
Unlike other neighborhoods also targeted by investors, such as Pilsen, Logan Square and Uptown, gentrification and displacement of existing South Shore residents does not seem like much of a threat, at least in the short term. Today’s multifamily buyers in South Shore seem satisfied with what they find: well-kept, remodeled vintage properties with high cap rates and steady cash flows, even though the area is far from wealthy and can’t support steep rental increases.
“The investors I’m working with on a daily basis are interested in enhancing the housing stock,” Interra Realty Director Lucas Fryman said.
Interra just brokered the sale of the 16-story, 178-unit Shorewind Towers at 7000 South Shore Drive, and the 60-unit Shorewind Court at 6951 South Oglesby Ave. San Francisco-based Belveron Partners paid $16.8M to Chicago-based TLC Management Co., or about $80K per unit, for the 1920s-era portfolio.
“Shorewind suits our mission of investing in low- and middle-income rental housing, ensuring that current residents of neighborhoods like South Shore are not displaced by future development,” President and founding partner Paul Odland said.
Unlike many of the properties Interra has sold in the past 18 months or so, which typically offer several dozen units, the Shorewind portfolio offered an investor immediate scale, and Fryman said that helped bring up to 30 potential buyers to the property, along with nine written offers from a diverse group, including locals, coastal investors like Belveron and one from Israel.
Fryman expects a sale of this size, the largest by dollar amount and unit count in the submarket since 2009, according to CoStar, may help bring similar portfolios to market, as owners previously content to hold their properties can now see how much they gain from selling.
“It certainly opened some eyes,” he said.
Cassin is seeing the same thing. Apartment Investment Advisers this summer offered a portfolio of four buildings clustered along Jeffrey Avenue and 71st Place. The portfolio consists of 7144 South Jeffrey Ave., 7130 South Jeffrey Ave., 7147 South Jeffrey Ave., 1962 East 71st Place and a 34-space parking lot. The asking price is $16.2M for 208 units, or about $77K per unit.
Like Interra’s experience with the Shorewind portfolio, a large group of buyers from across the nation and overseas, along with many local landlords, contacted AIA about taking a look at the properties.
“We’re close to inking a deal right now,” Cassin said.
Although South Shore has not seen a large influx of high-income renters, Cassin said that does not mean its population has been static. Rising rents in Hyde Park to the north gradually sent many of its residents south, and in South Shore, they found a number of apartment buildings that mostly local owners had picked up for bargain prices in the aftermath of the recession and foreclosure crisis.
Those low prices, sometimes just $20K or $30K per unit, allowed new owners to spend liberally on renovations, and it is now standard to include top-line finishes such as granite countertops and stainless steel appliances in portions of South Shore, especially between 67th Street and 71st Street, or what Cassin calls the first tier.
“Once the dust settled, and a new group of owners came in, the product was improved drastically, and rents naturally followed,” he said.
The neighborhood still has a wide range of property types, Cassin said. Buyers in the second tier, stretching roughly from 71st Street to 75th Street, and in the third tier, which extends to 79th Street, can still find value-add opportunities for $30K per unit, but brokers now regularly close deals for stabilized properties in that first tier for $75K per unit.
Renovated units may start selling for even higher prices.
Brokerage firm Kiser Group this spring listed a 208-unit South Shore portfolio for $20M. The properties, located at 7500 South Shore Drive, 6916 South Clyde Ave. and 7038 South Chappel Ave., have all been renovated, and rents range from $585 for studios up to $1,515 for a three-bedroom unit.
“It’s a traditional, turnkey investment where almost everything has already been done,” Kiser’s Aaron Sklar said.
There has been a flurry of interest from investors, and he expects it will sell for close to the listing price, or more than $90K per unit, and the eventual buyer won't have to worry for years about making major improvements.
“That makes this portfolio a microcosm of what’s happening in South Shore right now,” Kiser partner Noah Birk said.
However, sets of renovated buildings are not enough for most multifamily investors, who also need to make sure their neighborhoods provide residents with needed services, and portions of the South Side can sometimes lack the basics. The closure of the Dominick’s grocery chain in late 2013, including the outlet at 2101 East 71st St., right next to the Jeffery portfolio, left many South Shore residents stranded in a food desert, and showed how challenging it can be to invest in an area that is not affluent.
“That’s been dark for five years, and it’s been terrible for the neighborhood,” Cassin said.
But Cezary and Eva Jakubowski, the married couple that owns the Shop & Save grocery chain, recently bought the site and plan to open one of their stores later this year, Cassin said. He believes that will return the neighborhood to normalcy, and reassure anyone considering significant multifamily investments.
Still, out-of-town investors, many of whom have only seen Chicago’s downtown, may need some extra hand-holding and education as they consider buying properties that far south.
The decision to locate the Obama Presidential Center in Jackson Park, as well as the plans to link two existing golf courses in Jackson Park and South Shore Cultural Center Park into one $30M course designed by Tiger Woods, brought more cachet to the neighborhood, but as Cassin found out with one investor from overseas, sometimes you need to help potential buyers truly visualize the neighborhood.
“I didn’t exactly give him a walking tour, but we went up on the roof of one of the Jeffery buildings, and I was able to point and say, ‘this is where the Obama Center will go, that’s where Tiger Woods’ golf course will be and that’s the location of our new Shop & Save grocery,’” he said.
Bhaumik said coastal investors are not after big payouts when they buy in South Shore. Instead, the relatively low prices of its apartments can ensure stable, high rates of return for years to come.
“To a California or East Coast investor, a 7 or 8 cap rate is very attractive, and in South Shore you can find 9 caps, and for someone based in Boston, that’s like hitting the lottery.”
His firm now owns about 2,400 units in the neighborhood, including buildings it owns in partnership with other investors, and continues to eyeball deals that cost between $65K and $75K per unit.
The intensifying competition, and subsequent boost in prices, is making it tougher to find such offers, Bhaumik added, so the company expanded its search area to the blocks down near 75th Street.
“We’re also starting to look a little bit further west than we typically did, including in neighborhoods like Englewood.”
Even though the recent price increases may push his firm to shift its focus elsewhere, he doesn’t believe gentrification is in South Shore’s future, at least in the short term.
“Eventually, the look and feel of the neighborhood is going to change, that’s inevitable,” he said.
But the $70K to $80K per unit now typical in South Shore sales, at least for renovated buildings within a few blocks of Jackson Park, is still a far cry from the rapid price escalations seen in areas like Pilsen, Edgewater and Uptown where gentrification fears have roiled local politics.
The price per unit for buildings in Edgewater and Uptown with over 10 units more than doubled from $83K in 2013 to $183K last year, according to data from CoStar.
It would take a big shift in the South Shore neighborhood to change its trajectory that drastically. The Obama Presidential Center could provide that spark, according to DePaul University’s Institute for Housing Studies.
The institute released a study on affordability pressures across the city late last year, and even though the most-affected areas were on the North and West Sides, the researchers did tag the Woodlawn neighborhood, just south of the University of Chicago and west of the Obama site, as vulnerable, with already-moderate costs and rising prices.
But the portion of South Shore that stretches from 67th Street to 71st Street and between Stony Island Boulevard and Paxton Avenue about 1 mile to the east has stable prices, according to the institute, and about 60% of the units have gross rents under $900. And in the areas of South Shore closer to the lake, including the location of the Shorewind portfolio and the neighborhood with the Jeffery portfolio, even though prices are rising, the vast majority of units also still have rents under $900.
Bhaumik thinks it will take something more far-reaching to kick off steep price increases or displacement in South Shore, and he doesn't see much on the horizon.
The long-discussed redevelopment of the abandoned South Works site, southeast from South Shore at 85th Street and the lake, could be that catalyst, he said. The rapper Common recently joined with a development team that includes Los Angeles-based Sam Nazarian and Chicago’s DL3 Realty to propose building a $71M mixed-use complex on the 415-acre site, including a film production studio. But too many plans for South Works have fallen through in the past several decades to count on this happening.
“If you start seeing a development like that come in, then that could be driver of more demand, but I don’t know if it will happen in the next five years,” he said.