Kiser Group partners Noah Birk and Aaron Sklar, who brokered the most multifamily deals in Chicago last year, are anticipating continued strong demand in 2022, especially on the city’s south and west sides, where out-of-state buyers are looking to invest.
“We’ve sold two buildings here in the first 19 days,” said Sklar. “We have about 38 buildings under contract scheduled to close already.”
The two closed $146 million in sales in 73 transactions in the South and West Side last year, a record number of multifamily properties sold in downtown Chicago in a single year, according to CoStar.
Located in an inexpensive, developing area in downtown, Chicago’s South and West Side’s affordable multifamily rentals that yield higher cap rates are an appealing investment option especially for investors in New York, Birk said.
Cap rates, a measure of return on assets, for multifamily properties across the nation were an average 5 percent in 2021, while Chicago’s South Side apartments were in the mid-8 percent range, according to Marcus & Millichaps’ latest report.
Rents started trickling up as vacant buildings were renovated, but there was “a healthy correction where numbers are slowly trickling up while still being affordable,” Sklar said.
“There’s been stable, affordable, nice units coming to the market that didn’t really exist before.”
Read on for Birk and Sklar’s take on opportunities in multifamily properties in Chicago’s South and West Side and implications for the housing market.
This interview has been condensed and edited for clarity.
How hot has the multifamily market been this year?
Aaron Sklar: We’ve sold two buildings here in the first 19 days, and by the time January is over, I think we’ll have about six deals sold this month alone. That said, we have about 38 buildings under contract scheduled to close already.
Who are the buyers and why are they investing in the South and West Sides?
Noah Birk: The buildings that we sell in the South and West Side are lower price points and it’s in a high velocity area. We’ve seen a huge push from people around the country kind of flocking to Chicago because of the high cap rates that you see here versus New York. New York buyers have probably been the heaviest buyers in the Chicago market lately. The price points here in Chicago are just so much lower than the coastal cities. So a lot of these people have been priced out of their local markets in New York, Los Angeles, San Francisco and Miami. Because of that they’re venturing outside of the cities that they’ve been playing in for a while. The areas where we specialize in the South and West Side of Chicago tend to have the highest cap rates at a lower price.
Aaron Sklar: Unlike a lot of the other markets, Chicago does not have any rent control, which has been another catalyst that is pushing people out of California, New York and into one of the largest cities in the country.
Single family homes receiving multiple bids were common as the housing market flourished. Is this the case for multifamily properties?
Aaron Sklar: We have a number of bids and offers on all of our listings. But when you’re selling an investment property, there’s more variables and factors to consider than just the price. What makes one buyer’s terms better than the other, sometimes it’s about track record. What has that developer done for the neighborhood? It’s us working with the sellers and buyers to find out who the best buyer ultimately is going to be.
What are the implications for the housing market?
Aaron Sklar: Rents are slowly trickling up. The South and West Side of Chicago are still very affordable places to live. Given the tight supply of housing, rents are certainly not aggressively being pushed up to the point where people cannot afford it. I wouldn’t say there’s any displacement going on unnecessarily where people are and higher renters are coming in. But I think it’s a healthy correction where numbers are slowly trickling up while still being affordable.
Noah Birk: Rents are somewhat of a lagging indicator to the housing market. Everybody’s seeing the housing market just exploding and prices on single family homes going through the roof. A lot of people have been priced out, not being able to buy a house. Because of that, the supply of renters has continued to go up. Demand for rental units is definitely going up. Chicago hasn’t had quite that kind of explosive rent growth. But it has been a healthy rent growth.
How much more multifamily properties do you expect to come on the market from the South and West Side of Chicago?
Noah Birk: These are neighborhoods that had a lot of run-down, vacant buildings that had been just completely neglected for years. Developers have been coming through and taking these completely disheveled buildings, and just bringing them back online over the past 10 years. But even the buildings that were online and were available, weren’t really quality ones with nice finishes in these units. So we’ve seen a lot of investors coming through and just making these other buildings nice, clean, affordable, places for people to stay recently. As opposed to gentrification, what we’ve seen more on the South and West Side, is that there’s been stable, affordable, nice units coming to the market that didn’t really exist before.
Your team has done a record number of transactions in Chicago last year, do you expect to top that in 2022?
Noah Birk: Absolutely, I mean, that’s what we’ve seen for the last two years. It is 100% a seller’s market, there’s, there’s, you know, extreme demand for these products and low supply of them. So because of that, sellers have been able to ask pretty crazy prices and they’ve been getting it just because there are so many people that are seeking multifamily housing.