Can The Bull Multifamily Market Continue? Our Experts Discuss
With strong investor demand and nearly 9,000 apartments set for delivery over the next two years, the sky seems to be the limit for Chicago area multifamily. We asked some of the featured speakers at Bisnow’s 7th Annual Multifamily event, 7am May 26 at the JW Marriott to share what they see as the strengths and future weaknesses of this cycle.
Golub & Co is delivering nearly 2,000 units this year with five high-profile multifamily projects, and CEO Michael Newman (center, with Cyclone Energy's Will Mak and CMK director Prasan Kale) says they’re in the perfect locations. Two are in Streeterville, one's in the Loop, one's in the South Loop and one's in downtown Oak Park. Apartment supply will be higher than the historic average over the next two years, but Michael believes demand should remain strong in proven locations as downtown solidifies itself into a 24/7 destination. Michael says the downtown residential market is being fed from demands in the office sector, as well as a growing cultural trend to live and work downtown. He expects that trend to continue and adds that analysts will understand any softening in the market is expected, given all the new supply.
Michael hasn't seen a shortage of capital for developments—Chicago is well-priced and attractive to outside investors—but there is a growing conversation of where we are in the cycle. “If we had a new project, we’d be confident we could raise the capital for it.”
KIG managing partner Todd Stofflet agrees there is no shortage of investors for Chicagoland apartments. KIG is seeing a serious appetite for larger neighborhood deals offering up strong value-add opportunities and higher yields. Two noteworthy KIG brokered deals include a $21.6M sale of a 223-unit building at 5200 N Sheridan Rd and new construction at 1819 W Division. The New York institutional investor that acquired the deal in Edgewater plans a complete renovation and reposition of the asset. The Chicago-based investor that purchased the building in Wicker Park was able to buy the building vacant and execute its own lease-up strategy.
Todd says most institutional investors are still seeking value-add opportunities, and they are willing to look at up-and-coming neighborhoods for investment. KIG is keeping tabs on other neighborhoods, such as the Illinois Medical District, where KIG is finishing up a JV partnership arrangement on 410 units, and Hyde Park.
John Buck CIO Kevin Hites says he continues to see outstanding depth in the equity participant pool, but the market may be in the beginning stages of deal fatigue. Some players have withdrawn from the marketplace after a turbulent Q1 in the global markets, which Kevin believes will result in fewer institutional players later in the year. The biggest areas of interest for active investors: new development and JV equity deals. The story on the debt side is similar to what’s happening in the equity market. There’s a wider pool to choose from but tighter regulations have resulted in banks being more selective in what they’re sponsoring. Some lenders are sticking with established borrowers and aren’t financing new relationships.
Hunt Mortgage Group managing director Greg Cazel says there’s more money in the equity markets than developers know what to do with, but returns are constricting with deliveries. He agrees with Kevin’s view that lenders are sponsoring more experienced borrowers, especially if the project is a value-add or bridge play. On the latter, Greg is looking for deals that can be rolled into Fannie Mae/Freddie Mac programs or CMBS execution. Cap rates are also at an all-time low and will continue as Millennials continue to resist entering homeownership. He adds that cap rates are contingent on interest rates and eventually, they’ll have to rise. But it won’t happen immediately, and Illinois, with its budget struggles, is in a unique position in that renters can refuse to buy and still see their taxes increase.
M&R Development president Tony Rossi Sr. says he’s starting to see an uptick in suburban new construction. M&R is JV’ing with Hamilton Partners on a 297-unit project in Itasca, at Hamilton Partners’ Hamilton Lakes office campus. The northern suburbs are starting to show modest rent growths as villages are embracing new developments. Tony says suburban TOD is becoming a higher priority with institutional lenders, and the closer a development is to a train station, the easier it will be to secure equity. M&R is building 75 apartments in Wilmette across from the Metra station, which Tony says he’s JV’ing 50-50 with a friend.