CRE Midwest

2015 to continue positive trends for multifamily market

Todd Stofflet

According to Todd Stofflet, managing partner at Kiser Institutional Group, in 2014 the multifamily market had one of the best years he’s seen since the recession. Stofflet attributed the successful year to plenty of rent growth, significant transaction volume increases, as well as cap rates compressing from 13 percent.

According to Todd Stofflet, managing partner at Kiser Institutional Group, in 2014 the multifamily market had one of the best years he’s seen since the recession. Stofflet attributed the successful year to plenty of rent growth, significant transaction volume increases, as well as cap rates compressing from 1 to 3 percent depending on the market.

“2015 will still be a very strong year for multifamily,” Stofflet said. “We seem to have a really good handle on absorption for the new development product. So I think we’ll continue to see a lot of new product leasing up well. I don’t expect any significant changes in treasuries, so I believe that people will be bullish on acquisitions.”

Despite Stofflet’s optimism for the multifamily market in 2015, he is keeping his eyes open for any challenges that may arise.

“We definitely need to keep our eye on development,” he said. “We have a lot of properties coming online, and a lot of properties that are still in construction—not only in the Chicago MSA, but in some of the major markets in the Midwest like Columbus, Indianapolis, and Louisville.”

“I think a lot of the owners, and investors, will be looking at the lease ups and seeing how people are renting,” Stofflet continued. “As well as how occupancies are going to make sure that we’re in line and not having to start to offer concessions or any rent specials.”

As far as multifamily developments go, Stofflet noted that there are a few that are just starting to lease up. “The Jones, a high rise in River North, has just started leasing their asset and opened their doors in December. The ownership of that asset has another building going up on Division. That will probably also start pre-leasing in 2015.”

“New City, which is on Clybourn, has 199 units that will be coming online this year as well,” Stofflet added. “There are well over 1,000 units, probably closer to 2,000 that are leasing up right now, or will be shortly.”

It’s an exciting time to be in multifamily, according to Stofflet, who said that the market has become the darling of the investment community post-recession.

“A lot of people that are chasing yield are finding safety in multifamily,” Stofflet noted. “We’ve had some really good growth rates as it relates to rental increases over the past couple of years. So it seems to be the safe bet as it relates to investing in real estate.”

So what are the reasons for the continued interest among developers and investors in multifamily? Stofflet said that depends on who you ask.

“I think if you ask a lot of institutional investors, they are really chasing yield and they are able to acquire multifamily product knowing that they will have an annual rent growth, and are able to project yields that are attractive to their investor pool that they’re not finding in other arenas. So that is the interest that the institutional investor has—finding the yield.”

According to Stofflet, the reason as to why the Midwest has had so much focus on it, is due to the compression of cap rates on the coasts and Texas.

“It’s very difficult to buy real estate with any sizeable yield,” he said. “So most investors have looked at the Midwest as a yield play for them to see more returns for their investors, and mainly it is just a difference in cap rates in the Midwest versus the coasts.”

“Chicago is still relatively affordable as it relates to rents versus a New York or a Boston,” Stofflet noted. “And yet we are still seeing really nice growth rates, not only in renters from a population standpoint, but also in our growth rates in rents. We’re starting to push three and a quarter, three and a half, on some of the high-end luxury high rises located downtown. That doesn’t really compare yet to some of the New York pricing, but they’re very healthy rents given it being a Midwest market.”

In 2014, Chicago gave their landlords over $14 billion in rent, according to numbers from Zillow, which represents a 7.4 percent increase over last year. So why are so many people—young ones especially—choosing to rent instead of buying a home? Stofflet said there a couple of dynamics that come into a play.

“The younger generation, the millennials, tend to be more mobile,” he said. “They have had experiences from a family standpoint in which their family—whether it be parents or siblings—have gone through chaos as it relates to home ownership. That could be problems through the recession, foreclosure, or a host of other things.”

Due to all of that chaos, according to Stofflet, the millennials have experience and understanding that owning real estate is not necessarily what it used to be.

“They also tend to not to need as much space and be a lot more urban. So when you put all of those dynamics into play, you have a younger employed person that likes to be close to work and entertainment, would rather live in an urban center, not have a car, and have use of public transportation if they need it.”

“So they end up spending more money on rent because they have more of their disposable income to use due to not buying cars, or furnishing big houses,” Stofflet added. “This is a new dynamic for us. I’m 40-years old and it was always the dream to own a house, and you just don’t see that being the case with millennials. They would rather rent, but they like to be in the right location and they like nice product.”

Another dynamic Stofflet has seen is that there has been a huge increase into the amount of money that developers are spending on amenities.

“The millennial seems to be very amenity driven,” he said. “Because the units tend to be smaller, they like to have space in which they can congregate with friends, or get out of the unit and use facilities—whether it be pools, fitness centers or community rooms. So we’ve seen a huge push as it relates to making the apartments be very amenity heavy.”

With millennials not buying homes and having such a significant impact on the way developers build product, curious minds want to know what that holds for the future of the multifamily market. According to Stofflet, it’s a generational shift that is here to stay.

“That’s not to say that as people get older they’re not going to want to look at home purchases,” Stofflet said. “And I think that is okay, but what we’re seeing from a demographic standpoint is that people are waiting longer to get married, and waiting to have kids. They tend to be a little bit more focused on career advancement early, and so those people tend to be more mobile.”