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Will Changes to the Affordability Ordinance Slow Multifamily Development?

Want to get a jump-start on upcoming deals? Meet the major Chicago players at one of our upcoming events!

Changes to Chicago's ARO mean developers might have to set aside 25% for affordable housing in a buildingor pay up. Not good, especially when downtown land pricing is rising. We'll take a deeper look at what this means and more at Bisnow's 6th Annual Multifamily Summit on April 2 at the JW Mariott, starting at 7am.

ARO changes and the uncertainty of what will ultimately be adopted are not ideal for developers, who are trying to be cautiously optimistic given that multifamily is doing well in the Windy City, says Essex Realty Group principal Jim Darrow, who'll be a panelist. (He's pictured here in plaid shorts and orange cap, on a trip to Anguilla with some commercial real estate buds.) “It puts a bigger burden on developers, especially downtown, where land prices have skyrocketed over the past 12 to 24 months.”

He says Millennials are on the move, which brings them to different neighborhoods and areas. “From a brokerage standpoint, it’s part of an important trend. Lincoln Park and Lakeview were the go-to post-college neighborhoods; now, it’s Logan Square, River North, the West Loop and Pilsen." (Pictured, The Halstead, in Lakeview.)

Also a panelist, Kiser Institutional Group managing partner Todd Stofflet (here, chilling out in Paris) cites Edgewater and Andersonville as two examples of neighborhoods that have opportunities and deals that would provide more yield than in downtown. In particular, the value-add assets there are getting institutional interest. “People are interested in transit-oriented neighborhoods,” he says. What's more, the hot population du jour, Millennials, doesn’t need the glitzy amenities of downtown—they want the hipper places. Plus rents are just getting too high downtown at $3.50/SF versus areas outside, where they're $2.30/SF to $2.40/SF, he notes.

Renovation of existing product is a hot trend away from downtown, says Waterton Associates CEO David Schwartz, pictured after a hike up Kilimanjaro. Rents can stay low on renovated product as it doesn’t have to enter the ring with the fancy new construction downtown where there’s some “heated” competition among landlords as they push fancy roofdecks and other enticing amenities to try to lease up: young people are still coming to Chicago for jobs and its relative affordability. 

And the newest big issue of all: ARO changes. Among our panelists, The Habitat Co president Matt Fiascone (here suspended on glass with his family above the Windy City) explains, “we’re going to see the impact of this on development and capitalizing and in financing in ways that are unexpected, one of which could be the acceleration of current interest of development in the neighborhoods and product renovation.” In the new ordinance there’s a disparate fee structure in place regarding affordable units for the higher income neighborhoods as opposed to the lower. However, he adds this shift away from the core downtown markets is a pretty darn good thing, as it's extending Chicago’s overall development cycle and keeping the jobs rolling.

Despite ARO, the market's still upward-trending, which is great for investors, says CohnReznick partner Jason Burian (snapped here with his girlfriend at a Jimmy Buffett concert), who'll be a moderator. “It’s a very viable market, and nationally, firms are creating dedicated acquisition teams to look at Chicago. There’s great value-add opportunity here.” He also notes units here are getting smaller. "There's a flood of new condo development coming into play," he says, "and we continue to see a long list of new developments with expected delivery later this year and into 2016."

Also moderating, Walker & Dunlop managing partner Allan Edelson says if you need financing for that new project, the time to get it is now. Although interest rates haven't increased over the past five years, he says people are looking to lock up financing sooner and refi as soon as possible. Given the Fed's pronouncements, most owners believe they have a 90- to 120-day window before rates begin to rise, he says. To learn more, please join us for Bisnow's 6th Annual Multifamily Summit on April 2 at the JW Mariott starting at 7am. Register here.