The red brick building at 1704 North Mohawk Street was a dream for developers on the hunt for the few remaining properties in Lincoln Park that are financially feasible for condo redevelopment.
The property had flexible zoning and was free from architectural or historical protections, Cross Street Senior Broker Charlie Cohen said. Costs associated with rezoning or demolition delays are risks that multifamily developers in Lincoln Park often can’t afford to take anymore.
The building sold in an off-market deal last month for just over $1 million to buyers who plan to use it as a single-family home. The deal showed just how high demand is among multifamily developers, said Cohen, who represented the buyers.
“We closed a couple weeks ago, and it’s like clockwork,” Cohen said. “There’s people in my inbox offering me $500,000 over what they paid.”
Off-market deals and above-list offers have become more common in Lincoln Park as multifamily developers and investors show demand, despite thinner margins, increasingly scarce and expensive land and a low rate of return for investors.
It can be difficult to make these condo projects pencil out, as the cost of construction materials and land in Lincoln Park increases, and taxes and interest rates remain high. With demand for condos and smaller multifamily buildings outpacing supply in Lincoln Park, builders who find budgetable properties to develop are jumping at the opportunity.
Besides that, wealthy individuals are investing in these smaller scale multifamily buildings despite low capitalization rates, viewing them not as cash cows but as opportunities to live in Lincoln Park — or give their kids a place to live there — while also having a place to “park their money” and benefit from the tax write-offs that come with claiming depreciation on the property, Cohen said.
“The problem is you can’t really make a ton of money,” said Matt Laricy, one of Chicago’s top residential brokers.
Lincoln Park will always be a “golden statue” in the Chicago real estate market, said Laricy, founder of the Laricy Team at Americorp Real Estate. But he predicted that demand for downtown high rises will come back around and, when it does, it will pull from the resale values of Lincoln Park condos. That could spell trouble for investors who aren’t in it for the long haul.
Developers look off market as margins thin
Demand has been shifting away from downtown and toward other areas for the past few years, and Lincoln Park’s flexible zoning made it attractive for developers who wanted to tear down properties to build mansions or, increasingly, luxury condo buildings as a less expensive alternative for high-end homebuyers.
“The tricky thing is finding land that makes sense, but (developers) are definitely willing to take the opportunity to do it,” Laricy said.
In another off-market transaction last month, Chicago developer Urban Edge Group shelled out $5.7 million for three Lincoln Park homes just up the road, at 1933, 1935 and 1937 North Mohawk Street. Urban Edge’s Khaled Gad said the group plans to tear down the homes to build an eight-unit luxury condo building.
Urban Edge is a family-run construction company started in 2018, and it has been wanting to break into the Lincoln Park market for some time now but has only recently found a good opportunity to do so, Gad said.
“One of the biggest factors is the cost to build — it’s high,” Gad said. “At the end of the day, it boils down to the land.”
Urban Edge’s first project is a 5-unit condo building at 1646 North Orchard Street, estimated to cost $500,000 per unit to build, according to previous reporting. The firm is still building out the fourth floor but has already received some inquiries from potential buyers, Gad said.
Thinner margins make it even more important to design units for who it knows its clientele to be: well-off buyers, or renters looking for their first home purchase, who want to stay in Lincoln Park for the location or the schools but don’t want to pay for a multi-million dollar single-family home, Gad said.
“People feel more safe living in condos, having neighbors in non-crammed condos with decent square footage,” Gad said. It’s new construction, a good amount of space, without the maintenance of owning a single-family home.
Investing in Lincoln Park
The pressure on multifamily investors in Lincoln Park can be seen in the recent sale of a three-unit building at 746 West Belden Avenue, which sold last month for $2.7 million — $900,000 per unit and $500,000 over the list price.
“We’ve seen just unbelievable levels of competition when properties in good locations make it to market … especially ones that are in more of a turnkey condition,” Cross Street Senior Broker Alex Morsch said.
Some buyers are also looking to off-market transactions for better deals.
A three-unit condo building at 2020 North Fremont Street traded hands last month in an off-market sale for $1.75 million. Morsch, who represented the buyer along with Cohen, estimated the property would have gone for closer to $2 million if it had been listed publicly.
The buyer is “a younger fellow who’s looking at it as a long-term investment and an alternative to buying a nice condo,” Morsch said. “Why not own the whole building, offset some of those costs, and have that sort of long-term asset?”
But with high property taxes and mortgage interest rates, the rate of return on investments in smaller multi-family buildings in Lincoln Park is low, Cohen said.
A decade or so ago, investors would look for opportunities with a capitalization rate of 6 to 8 percent, Cohen said. But it’s nowhere near that now in Lincoln Park.
“It’s really unusual, and it seems like there’s been either a shifting perspective on how to value these properties over time, or it’s just the replacement cost is so high that prices are going to exceed these old metrics that we used to use all the time,” he said.
Some may be looking for 1031 exchanges or to put a portion of their wealth into real estate to get tax write-offs, Cohen said.
Others are buying buildings for themselves or their kids to live in, and seeing it as an opportunity to secure a hard asset, below replacement cost, in a neighborhood they want to be in for a while, Cohen said. Maybe they’ll even convert it into a single-family home one day.
“There’s a lot of flexibility in terms of what you can do in the future,” he said.
Laricy said he believes in the longevity of neighborhoods like Lincoln Park, but he had words of caution for anyone investing in multifamily there in the hopes of flipping or selling their property in the next few years.
“I believe the downtown market is so bad that at some point it’ll come back, and when that comes back, it’ll draw some of the demand that’s going to Lincoln Park,” Laricy said.
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