Monday, February 20, 2012

The Chicago Multi-Family Perception vs. Reality for Non-distressed Properties

My good friend Kevin Rocio of @Properties spoke last week on the state of the Chicago Apartment Market and shared some eye-opening facts that I thought I would pass along…

Apartment buildings are once again expected to be the best-performing commercial sector. For the second year in a row, the absorption of 170,000 existing units is far outpacing the completion of 38,000 new units. In 2010 the spread was even wider. As a result, vacancies have continued to drop with Chicago being the 8th market with the largest drop while rental rates continue to rise.

The Co-Star forecast is for Chicago multifamily vacancies to drop to 4.6% in 2012 from 5.3% in 2011. The rental rate, at a median of $1,066 per unit, is expected to increase 3.5% this year and 3.8% in 2013.

Foreclosures are not the major cause for the drop in vacancies as many suspect. Instead, it is the increase in the formations of new households which are expected to total 7 million over the next four years.

With regards to pricing, it’s important to understand that cap rates are expected to 4% by year end for non-distressed assets in the Chicago A-markets (Streeterville to the Central Business District to River North to LakeView). The 3-month trailing cap rate in these markets at the end of Jan, 2012 was 5.5%. Just 12-months ago, the average hovered around 10.25%. That’s the biggest drop in in the last 40 years. (see attached graph)

What this is going to do, is force investor to look at the suburban markets because this is where the value play is expected to remain, at least for the near-term.

(sources: Co-Star & Real Estate Investment Journal)
Post a Comment