by Dan Rafter
Chicago’s multi-family market has been hot for so long that it’s easy to take for granted just how strong this sector is. But Susan Tjarksen, principal and managing broker for Chicago’s Kiser Institutional Group — better known as KIG –isn’t doing this. She understands just how rare a market like this is. Institutional investors are sinking big dollars in multi-family buildings not just in Chicago’s center, but also in the neighborhoods surrounding the heart of Chicago’s Central Business District, the so-called “out-of-core” areas. Midwest Real Estate News recently spoke with Tjarksen about what’s behind the strength of the city’s apartment market.
Midwest Real Estate News: Why are institutional investors increasingly turning to multi-family buildings outside the core neighborhoods of downtown Chicago? Why is this trend taking place now?
Susan Tjarksen: When you are raising a million dollars a day, like many of these investors are, you are going to look at products in different places than you normally would have looked. In core markets today the cap rates are becoming so compressed because people are raising a million dollars a day. Investors are looking for yield rates that are higher, so they’re willing to look at neighborhoods that maybe in the past they would not have considered.
MREN: What areas are investors targeting outside of the core downtown neighborhoods of the city?
Tjarksen: We are seeing investors from both coasts looking at neighborhoods such as Edgewater, South Shore and Logan Square. The yields there are better.
MREN: What type of multi-family building are investors seeking out in these non-core neighborhoods?
Tjarksen: The thing for an institutional developer is that they don’t want to go mouse hunting with an elephant gun. The project has to be big enough to make it worth an investors’ time. There has to be enough critical mass to make it worth their while. The assets have to be big enough so that once it is part of their portfolio they can manage it effectively.
MREN: Are there any multi-family projects right now in non-core neighborhoods that are attracting the attention of institutional investors, even out-of-state ones?
Tjarksen: We are seeing national attention at 7000 S. South Shore Drive in the South Shore neighborhood. That’s the Shorewind Towers apartment development. Investors are flying in from all of the coasts to look at it. We are also seeing a lot of interest in developments in the Uptown and Logan Square neighborhoods.
MREN: Outside of the sheer size of a development, what else do these investors look for when considering investing in a multi-family building outside the core downtown neighborhoods?
Tjarksen: Value-added is the darling of today’s investment world. Chicago’s non-core neighborhoods have a lot of older building stock. There is an inherent value to investors in adding value to these older buildings. When you refurbish or add amenities to these older buildings, you increase the value of them and the interest from possible tenants. The second important consideration is the neighborhood itself. Simply put, the neighborhood must have a high Walk Score. It has to be a place where renters want to live that is still an urban environment. It should be close, within walking distance, to something like a Whole Foods. It should be close to a cluster of good restaurants and retail shopping. Of course, none of this matters if the building doesn’t have enough units in it to make it worth the while of investors. It can’t be a 20-unit or 30-unit building unless the investor is buying part of a portfolio of 1,000 units in a three- or four-block radius. Then you have some economies of scale. Again, it’s an element of not going mouse hunting with an elephant gun.
MREN: How long can Chicago’s multi-family market remain as strong as it is today?
Tjarksen: The multi-family sector has been the darling of the investment community for a long time now. But all sectors go through cycles. We are now seeing the retail and industrial sectors heating up, too. It will be interesting to see where the institutional money continues to concentrate its efforts. We believe like most of the pundits that renting is a lifestyle choice today, not an economic necessity. We don’t see that demographic shifting any time quickly. Can rental stay this hot forever? No. It has to cool down eventually. But “cooling down” is a relative term. Multi-family will always be a strong sector. It will always have yields that are attractive to institutional investors. It will be interesting as other sectors start to heat up to see where the institutional money goes.