Middle-Market Multifamily Floating Above Economic Troubles, And Investors Want In

Six months into the coronavirus pandemic, real estate buyers still face a narrow set of options in a painful economy. But middle-market and affordable multifamily buildings are still attracting dollars, and investors say this sector will stay lively in 2021, whichever direction the overall economy takes.

A year ago, Class-A multifamily was the high-flying sector, with developers constantly breaking ground on new projects. Both tenants and investors were willing to pay high prices for these developments, particularly ones near dense urban cores and with splendid amenities. Those environments don’t seem as appealing these days. Rents for top properties are falling in many metro areas, and tenants now avoid using amenities due to fears of catching the coronavirus.

“Economically, those buildings are just not as viable, and a lot of new developments have stalled,” CI Holdings Group Managing Partner Shuvam Bhaumik said.  

But in an economy where millions of jobs evaporated and big layoffs continue, many renters look for less expensive housing, Bhaumik said. That’s sustaining the rental rates of Class-B and Class-C properties in neighborhoods outside of downtowns, leading investors to ramp up the competition for such units.   

“The more affordable housing market is going to be the blue-chip investment in the real estate market in general,” he said. “It’s like in the past when people wanted to buy IBM because we were always going to need computers; that’s what affordable housing is today.”

Bhaumik, who is based in Boston, said that although middle-market multifamily is strengthening throughout much of the U.S., including Boston and New York, yields are especially high in Midwest markets like Chicago. His firm directly owns hundreds of units in Chicago’s South Side neighborhoods such as South Shore, Hyde Park and Bronzeville, and has ownership stakes in hundreds more.

“There has been a huge influx of coastal investors coming into the Midwest searching for higher yields,” he added.

Brokers working in the middle-market multifamily sector across Chicago’s South and North Side neighborhoods, as well as the nearby suburbs, say investments there garner significant premiums.   

“The economic backbone of Chicago is still strong, and I think people recognize that,” Interra Realty founder and Managing Principal Jon Morgan said.

In the Los Angeles area, middle-market properties have cap rates in the 5% to 6% range, but in South Side Chicago neighborhoods such as Woodlawn, investors can buy similar buildings for between 7% and 8%, he added.

“You’re getting a pretty substantial spread, so people are more willing to take a risk.”

Whatever worries investors have about the economy, those higher yields helped keep the market for neighborhood apartment buildings on track, Morgan said.

Rent collection has remained relatively solid. According to data from the National Multifamily Housing Council, which surveys more than 11 million apartments each month, 92.2% of nationwide renters paid all or part of their rent by Sept. 27, just 1.5 percentage points below the same period last year.

Chicago-based Interra, founded in 2010, brokers neighborhood multifamily deals, many valued between $1M to $5M. This summer, it closed the $2M sale of 3821-23 West Wrightwood Ave., a 13-unit multifamily building in Chicago’s Logan Square neighborhood. Originally scheduled to close in April, the sale was canceled in March due to the pandemic, but after the property kept performing well, the buyer came back to the table.  

“Our transaction volume hasn’t seen any slippage,” Morgan said. “2020 is not done, and we’re still 20% ahead of where we were at this time in 2019.”

That sustained activity over the summer was a bit of a surprise, according to Essex Realty Group Managing Director Steve Livaditis.

“The big fear, nightmare really, of a big collapse didn’t happen,” he said. 

Instead of a collapse in values, followed by a fire sale of assets, the market was solid, with prices, investment activity and cap rates all relatively stable. When the pandemic first hit, lenders did pause, he added, but as healthy rent collections continued month after month, they again started approving acquisition loans.

“Two or three months ago, they eased up, and today it’s a complete 180 from where we were six months ago,” Livaditis said. “We thought all this was going to be much more challenging.”  

Essex brokers a lot of deals in North Side neighborhoods such as Edgewater, Lincoln Park, Lakeview and Logan Square, typically for between $1M and $25M. The company closed 27 transactions in the last three to four months, with an average cap rate of 5.5%, almost identical to what it was 12 months ago, Livaditis said. It also has 35 deals under contract that will close this year.

Investors are also scrambling for value-add properties, a sign of confidence in the market’s long-term health, he added.

In August, Essex brokered the sale of Bartlett Lakes Apartments, a 192-unit multifamily complex at 561-564 Deere Park Circle in northwest suburban Bartlett, to Monument Capital Management, a Coral Gables, Florida-based firm. The previous owner had been accused by the Securities and Exchange Commission of being involved in a Ponzi scheme, which included Bartlett Lakes Apartments, and the kitchens and bathrooms were in their original 1971 condition. Monument paid $17.8M, but only after beating out a lot of competition.

“There were 25-plus tours, maybe as many as 30, with over 15 offers on the asset,” Livaditis said.       

CI Holdings also looks on its South Side properties as steady, long-term investments, Bhaumik said. It has 7200 South Vincennes Ave. in the Greater Grand Crossing neighborhood under contract, and already owns the two apartment buildings next door and across the street, a portfolio of 60 units it plans to improve and lease up.

“We’re not trying to displace anybody, and controlling and renovating a pocket like this is a great way to improve a neighborhood,” he said.

The properties are in an opportunity zone, where investors can secure tax breaks if they improve properties and hold them for at least 10 years. Bhaumik said he doesn’t expect the program will lead to an overnight turnaround, but it should draw in other apartment buyers. And Mayor Lori Lightfoot’s INVEST South/West initiative, which the city claims will bring in $750M of new investment to historically disadvantaged neighborhoods, as well as the nonprofit Obama Foundation’s plan to establish the $500M Obama Presidential Center in the South Side’s Jackson Park, will all help sustain these areas over the long haul.

“I think there will be a big increase in value over time,” Bhaumik said.