Suburban Chicago Multifamily – Buy, Hold or Sell?
The multifamily real estate market has been HOT! There appears to be no end in sight. Properties are receiving numerous offers from qualified buyers. Proven locations with historically strong occupancy and demand are driving prices up and CAP rates down. Some Class A properties across the country have seen CAP rates dive into the 4% range. This has not yet warded off interest, and competing offers are commonplace for well-priced, proven locations offered for sale. These low CAP rates dissuade the mid-range investors to find a feasible investment avenue. In effect, properties are selling at prices too high to obtain a proper return on investment.
While the most-qualified buyers can continue making deals in this environment, the majority are showing resistance due to the escalating prices, and are second guessing the anticipation of evermore expansion. As a result, Class C suburban properties have gained attention where higher yields can be achieved. Properties in this category have recently traded in the high 6 to low 7 CAP ranges.
Eric Spiess & Paul Montes, Vice Presidents with Inland Real Estate Brokerage & Consulting, Inc., have been at the forefront of this trend. Focusing primarily on the Chicago suburbs, Spiess & Montes recently sold over 1,000 units – 600 of which involved fractured condominium deals.
"We’ve seen purchasers get creative on our last few deals in order to find ways to make the returns work and still add value to the property. With these fractured condo sales, the purchasers know they are in it for the long haul with the end game being a de-conversion - essentially buying back all of the units. Additionally, as they see fit, (typically when units turn) they are upgrading interiors and amenities in hopes of attracting a more luxury indulgent clientele while increasing rents."
This strategy allows for the potential to earn significant gains, however there are some risks associated with this method. The long-term play means more time for real estate and economic factors to rear their head, eventually driving CAP rates up. On the economic side it’s likely we will see one or two more interest rate hikes in 2017, making the cost of capital more expensive. On the real estate development side we’re seeing a large boom in the number of luxury apartments, either existing or under development, further increasing supply. Today, most apartment complexes do not have to offer significant incentives or concessions to keep occupancy levels in the upper 90% range. These factors coupled with the nearly 378,000 new apartments slated to hit the marketplace in 2017 ~ roughly 35% more than the 20 year average, means we may start to see incentives become the norm, rather than the exception in the marketplace.
So what does this all mean?
Spiess and Montes say this may be the time to sell. "With CAP rates as low as they are and ample, active buyers in the marketplace, we would seek a buyer now if we were holding a multi-family asset."
Eric Spiess and Paul Montes, Inland Real Estate Brokerage & Consulting, Inc.