CRE Midwest

State of the market: Chicago apartment ‘bubble’ unlikely

When faced with the question of whether the Chicago market is facing a “multifamily bubble,” speakers on the State of the Market panel at last Thursday’s Metro-Chicago Apartment Summit agreed that does not appear to be the case.

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When faced with the question of whether the Chicago market is facing a “multifamily bubble,” speakers on the State of the Market panel at last Thursday’s Metro-Chicago Apartment Summit agreed that does not appear to be the case.

The panel featured moderator Patrick Tuohy, Marquette Bank; Ryan Engle, Marcus & Millichap; Kevin Maloney, Maloney Appraisal; Lee Kiser, Kiser Group; Matthew Welke, Essex Realty Group; and David Fetter, Chase Commercial Term Lending.

Kiser said he does not believe that the market will face a bubble similar to what happened during the last crash. But he does think Chicago has some serious issues when it comes to values in certain locations.

He said Chicago consists of two different markets, the downtown, institutional-grade core market and everything else.

“It’s really a tale of two cities here,” he said. “In the luxury end of the market, in the true core, I do think we have some real problems coming.”

Welke said that while an average of 3,000 units per year is projected to come online downtown from 2013 to 2015, he does not believe it will lead to a multifamily bubble.

“I personally am not overly concerned. I don’t think we’re in a bubble and I don’t think that supply is going to have a tremendous downward pressure on the market,” he said. “If you look at the peak pricing that we’re seeing today, it’s very different from the peak pricing that we saw in 2006 and 2007. The fundamentals are extremely different.”

Chicago’s neighborhoods are not facing the threat of a bubble because there hasn’t been any significant new construction of rental units taking place, according to Kiser.

“I think that you’ll see values sustained and possibly even additional cap rate compression there,” he said.

Kiser added that the market will continue seeing strong rent growth in Chicago’s neighborhoods.

In the suburbs, Engle said he thinks there is plenty of room for growth.

“As people get sick of the 5 percent returns in the city, I think we’re going to see more investments in the suburbs,” he said.

Engle added that the deals that are being purchased in the Class A suburban locations are very well funded.

“I’m not that concerned that there is a bubble in the immediate term,” he said. “I think cap rates will continue to compress a little bit as the cost of debt goes up.”

Kiser said he sees values continuing to rise in the suburban markets, adding that more people who are traditionally “city owners” will begin to focus on the suburbs.

“When you look at cap rates and yields in suburbs, they actually become very attractive to guys who have usually been in the city,” he said.

In terms of lending, Fetter said he believes it has been a very disciplined market from a lenders standpoint in the last couple years.

“I think there has been some stability within the lender community,” he said.

Maloney said there are too many buyers chasing too few deals, but the bids that are coming in on deals are extremely disciplined.

“It’s not unusual for a property in a quality Logan Square or Wrigleyville location to elicit 20 bids,” he said. “You’ve got a very disciplined and well-capitalized buyer group.”

In north side core neighborhoods, Kiser said there is a great deal of cap rate compression.

“Chicago has become very attractive to institutional-backed buyers, private fund buyers and out-of-country buyers with a completely different yield function,” he said. “That is what’s really driving the core neighborhoods even lower on cap rates.”

Kiser said he is seeing values return in some west and south side communities as well.

“There are fundamentals in these markets that if underwritten property, there is money to be made,” he said. “I’m now seeing the market begin to come back to fundamental investments that make sense. I think you have to make sure you’re underwriting it to the submarket.”