Multi-Faceted Predictions on Multifamily Housing Boom

Multi-Faceted Predictions on Multifamily Housing Boom

Joy of Real Estate: Buoyed by a strong economy, panels and attendees were mostly in good spirits re the market.

• Post-recession apartment development has far outpaced condominium construction;
• Keynote says city must grow more "taxable assets" for housing market to keep thriving;
• New, more affordable housing formats are emerging to meet the needs of Millennials.

by JOHN GREGERSON, Senior Editor | April 15, 2016

Here's one measure of how vastly Chicago's multifamily landscape has shifted from the pre- to post-recessionary market. Call it a reversal of fortunes.

“We anticipate the city will bring 4,000 apartments on line next year and 500 condominiums,” said panelist Alan Lev, CEO of developer Belgravia Group. Speaking April 6 to some 400 investors, developers, and owners at the Marcus & Millichap/IPA Multifamily Forum: Chicago atop the 83-story AON Center, he added, “Prior to the recession, those numbers were inverted.”

Among the reasons, Chicago has ranked among the slowest markets to recover from the national housing bust that accompanied the 2008 recession. Additionally, many Millennials witnessed how that bust affected their parents, as well as the families of friends, and they resolved not to allow the same fate to befall them. As a result, they now much prefer to rent. And more parents-turned-empty-nesters are also returning to the city to rent, escaping the encumbrances of ownership.

Multifamily fortunes are rising and drawing real crowds.

Meanwhile, Chicago is seeing sizable employment gains due to corporate relocations. “The fact that Google, Kraft, and others are moving into Chicago is spurring more jobs and development of more apartments,” said Kevin Hites, chief investment officer The John Buck Co.

While apartment renters desire an array of on-site amenities in exchange for smaller units, condominium buyers place a premium on spaciousness and desire few on-site amenities in order to minimize monthly assessment payments. These were among the conclusions drawn at the event, which was presented by national commercial real estate brokers Marcus & Millichap and its International Property Advisors unit. Founded in 1971, the firm today boasts more than 1,600 investment sales and financing professionals across the U.S. and Canada.

Wolf Point West (center) opened to tenants in January. Below, a rendering from bKL Architecture. It is just part of a $1B project.

Most presenters and panelists agreed that it's a very good time to be in the multifamily business in Chicago, a sentiment stressed by keynote speaker Christopher Kennedy, president of Joseph P. Kennedy Enterprises. He brought attendees up to date on the $1-billion Wolf Point towers complex rising along the Chicago River. This included details of the ongoing construction of the first phase, a 48-story tower luxury apartment tower his firm is co-developing with Hines.

No stranger to politics, Kennedy also addressed the fly in the ointment that eventually could derail Chicago's multifamily boom: the state and city's fiscal crises, the latter having recently triggered real estate tax hikes. To enhance its fiscal prospects, “The city needs to grow taxable assets by leveraging R&D and lab work under way at its universities, just as Boston, Pittsburgh and other cities have,” he said. “Those undertakings form the basis for new business enterprises.”

Already multifamily growth is broadening the city's tax base “by encouraging development of adjacent retail and restaurants,” Kennedy said. “It makes for a more vibrant city that people want to be a part of.  [Then] the whole phenomenon just snowballs.”

constant change

One point that most presenters and panelists made clear is that the multifamily market is continually evolving in response to emerging consumer trends and desires. In particular, Millennials who want to work, live and recreate in the city are driving formats now that vary greatly in approach. Marc Realty Residential, an enterprise that specializes in converting old buildings to apartments, recently developed a downtown apartment complex with units measuring only 350 sq ft, according to firm principal and director David Ruttenberg.

The so-called micro-apartments, part of a national trend for cities with high rents, allow Millenials who can't afford the $1,500 to $1,800 to rent a studio downtown the opportunity “to walk to work and enjoy the city's amenities,” explained Ruttenberg. He added that the concept was modeled on pre-World War II units, which likewise were small, but afforded city dwellers easier access to museums, the lakefront, and other attractions.

Micro-apartments arrived in Chicago last summer, first emerging in the ever-trendy West Loop area.

Other emerging models include cooperative living arrangements — or co-living — according to Ruttenberg, who noted the concept essentially borrows from college student housing, allowing occupants to “rent a bed in a three- or four-bedroom unit at a relatively low price.” Renters may or may not have dedicated private areas, such as bathrooms, he noted.

“There's definitely a market for the concept, but there are limits,” said Aaron Galvin, owner of broker Luxury Living Chicago Realty. “It won't come to the luxury or ultra-luxury markets.”

How long Chicago can sustain its apartment building boom was a matter of speculation at the Forum. “We'll be delivering a three-year supply in the coming two years, but I believe new construction will fall off a cliff — with deliverables dropping 50% or more, due to the real estate tax increase approved last year by City Hall,” predicted Steven Fifield, Chairman & CEO of Fifield Realty. He claimed that Chicago multifamily developers also are being “fee'd to death.”

One ordinance, enacted last year, would compel developers to pay hefty fees if they fail to set aside units for low-income Chicagoans. Among other objectives, the law is designed to promote multifamily development in less affluent areas and leverage the desire to develop in affluent areas as a means of funding affordable housing city-wide.

Whether development or absorption rates slow remains an open question. At present, Chicago's multifamily apartment vacancy rate is 3.6%, outperforming the rest of the nation, said John Chang, vice president for research with Marcus & Millchap.

1000 S. Michigan aims to attract Gold Coast-level pricing southward with a soaring, Helmut Jahn design.

Meantime, developers  JK Equities and Time Equities plan to test the capacity and elasticity of Chicago condominium market with the planned 73-story 1000 S. Michigan, a slender tower in the historic Michigan Boulevard District that will contain 136 apartments on 20 floors and 370 condominiums on 50 floors. JK Equities founder Jerry Karlik and Time Equities chair and CEO Francis Greenburger jointly delivered a closing keynote that addressed project specifics.

As demonstrated by both 1000 S. Michigan and a separate proposed 93-story condominium tower under development by Magellan Group, “We know the demand is out there and are hoping to lock in Gold Coast-level pricing,” said Karlik, in reference to one of the city's priciest areas.

Although quite a distance south of the Gold Coast, Karlik believes that 1000 S. Michigan, designed by renowned architect Helmut Jahn, has all the ingredients for success. “We're near Grant Park, Lake Michigan, museums and Shedd Aquarium,” he said. “And we have a Michigan Ave. address.”

It remains to be seen, of course, whether those projects can be completed and occupied before the multifamily high-rise market goes over that proverbial cliff also predicted.

Multifamily moved from third to first on CBRE’s Americas Investor Intentions Survey 2016. Conducted between Jan. 11 and Feb. 3, the research polled 491 CBRE clients around the world.