Chicago's Multifamily Market Scoring Some Deals, But The Suburbs And The Sun Belt Are Still The Places To Be

A well-publicized rise in violent crime during the coronavirus pandemic has taken the reputation of Chicago’s multifamily market down a notch, prompting some investors to shift their gazes to sunnier climates offering higher growth rates and no nagging worries that property taxes will suddenly jump.

“Chicago should be one of the premier markets in the country, but it’s our toughest market; we’ve essentially redlined it,” AMLI Residential CEO Gregory Mutz said Tuesday during Bisnow's Multifamily Annual Conference Midwest.

The company has poked around a bit in Chicago. It considered a potential deal in Fulton Market, Mutz said of the area long considered the city’s hottest office market.

That business magnet inevitably draws in multifamily operators seeking to provide homes to office workers. A set of developers have proposed this year a number of new projects in the neighborhood, especially north of Lake Street, which was recently opened up to new development. But for Mutz, a number of concerns close the door on potential Chicago deals, even in Fulton Market. Those include the lack of office workers actually coming into work and Cook County Assessor Fritz Kaegi’s revamp of the county’s assessment system, which has led to a big jump in some assessed values.

“If there was any place we were going to go, it would be Fulton Market, but it just didn’t pencil,” he said.

The picture for Chicago is not all doom and gloom, according to panelists. The city is on its way back as rents and occupancy return to pre-pandemic levels. And many suburbs are doing even better, with performances that can rival Sun Belt cities. But as long as the urban submarkets keep suffering from the uncertainty caused by violent crime, taxes and other difficulties, they still won’t compete with places such as Nashville, Tennessee, Austin, Texas, and many others, where investors and developers can secure far better returns.

“I would spin [Chicago] a little more positively,” Waterton CEO David Schwartz said. “Chicago in ’21 was a recovery year.”

Waterton managers have seen rents return to pre-pandemic levels, he added, and there are other signs of strength. Fulton Market has started growing again, and office activity has at least begun ticking up.

The company, which owns the West Loop’s massive Presidential Towers complex and downtown’s 55-story North Harbor Tower, does have enough confidence to pursue at least one more big deal. Schwartz confirmed a Crain’s Chicago Business story from September that the company was closing in on the purchase of two towers in the Lakeshore East community with a total of about 1,200 units. Crain’s estimated the deal for the Tides at 360 East South Water St. and the Shoreham at 400 East South Water St. could be worth close to $400M.

Mutz added that AMLI’s occupancy numbers in Chicago did improve substantially in the past year, increasing from 84% to 95%, although its suburban properties did even better.

ZOM Living CEO Greg West said Chicago still has a number of attributes that will sustain its markets over the long term. Office users are more than ever seeking out markets with amenities that will give employees a high quality of life, a profound change from the recent past, when companies simply headquartered wherever the CEO wanted to live.

“That’s really not the case anymore,” West said. “Your business has to be located where people want to live.”

Chicago’s superb universities, parks system and impressive array of retail and restaurants does set it apart from many other cities, he added.

But even as rents rise, renters return and some investors start checking out downtown, the violent crime problem will likely act as a drag on the multifamily market, according to Schwartz.

“It’s about all we talk about lately when we talk about Chicago,” he said.

West said his firm certainly wouldn’t abandon Chicago, but new investments were unlikely.

“It would be hard to dig in any deeper right now,” he said.

Furthermore, the number of workers actually returning to the office in Chicago, while improved since the summer, is still below the national big-city average. According to data from Kastle Systems, a security company that tracks access-card swipes around the U.S., just after Thanksgiving Chicago hit 35.2% average occupancy, compared to 37% recorded for New York City and 36.3% in Los Angeles, all below the national average of 40.6%. Austin led all large U.S. cities with more than 59%.

“Our office is in the West Loop, and it’s still a ghost town,” Schwartz said. “That has to have an effect on urban properties. The swipe counts need to come up.”  

Another reason Chicago may receive less attention from investors is that there are so many other places to park your money. Mutz said his firm’s revenue growth in the suburbs has far outpaced that from the city over the past four years. Schwartz added that the suburban recovery made it one of the best places for investors.

“The suburbs are almost behaving like the Sun Belt,” he said.

And down south, the growth and level of recovery has far outpaced Chicago. Although rents and occupancy in Chicago are improving, in areas such as Miami, Dallas and others, every metric seems to be pointed in the right direction, including values, revenue, net operating income and other factors.  

The improvements have been strong enough that the sharp distinction between cities and their suburban markets isn’t seen in the Sun Belt or in some high-growth markets in the West, according to Schwartz. In places like the Denver metro, urban properties do just as well their counterparts in the suburbs.

“That’s why we’re still big believers in urban markets,” Schwartz said.