IllinoisMultifamily Assessing the multifamily sector, from deconversions to affordable housing Matt Baker March 5, 2019 Share on Facebook Share on Twitter Share on LinkedIn Share via email The multifamily sector is one of Chicago’s most active asset classes right now. But there are still so many unknowns and evolving trends—from deconversion to affordable housing, co-living to Class A amenities—that it can be hard to get a handle on this lively real estate segment. That’s why these issues and more will be addressed at the 10th Annual Chicagoland Multifamily & Affordable Housing real estate summit on March 12. The program will have a stacked roster of industry experts talking about every aspect of multifamily. We spoke with three of those speakers—Christine Kolb, associate vice president, Focus; John Meyer, managing director, 33 Realty and Joe Pecoraro, project executive and partner, Skender—to preview some of their comments ahead of the summit. The condo is dead, long live the condo One trend that is top of mind for those who work on multifamily transactions is the rate of condo deconversions. An oversupply of owned units was exposed by the Great Recession; deconversion has reversed the flow in recent years. “Everything is perceived as cyclical in real estate. That of course applies to deconversion which is a trend similar to the conversion trend,” said Meyer. “There are a ton in the works that I’m familiar with in the suburbs, but I haven’t heard of too many closings.” There have been a handful of deconversions announced in the Chicago city limits so far this year, including Interra Realty’s $2.125 million Rogers Park deal. The suburbs have been represented, however. Rockwell Partners completed a 356-unit condo deconversion in Naperville and 33 Realty handled a $15-million, 79-unit transaction in Oak Park. None of this is to suggest that new condominiums are not being developed. There is still a market for new, Class A product in choice locations, both in the downtown core and in some suburban locales. But as Meyer sees it, the transformation of vintage, multi-unit apartment buildings into condos may never occur again in our lifetimes. Affordability by way of technology Like other large markets, Chicago has struggled with providing adequate affordable housing options. The city addressed this via legislation in 2007 by passing the Affordable Requirements Ordinance (ARO). An amendment in 2015 now requires certain market rate projects to deliver affordable units as well. There is widespread recognition of the need for more integration across the city and for more affordable housing options. However, the ARO has seen some pushback from the CRE industry—not just because it can suppress rents, but also as it has the potential to quash new development. “The city has been tightening their expectation of requirements at the same point that the market has been reaching its apex and is now kind of leveling out,” said Kolb. “So they’re getting more restrictive at the same time that deals are harder to underwrite.” Therefore, the most effective solution may have to come about from the private, not public, sector. With market pressures typically misaligned with the slim margins of affordable housing, it may take some sort of technological disruption for meaningful change. “We anticipate that the modular solution will solve a common problem for market-rate developers—how to satisfy Chicago’s ARO policy,” Pecoraro said. Skender is developing a smart apartment module that will be manufactured in a controlled environment where the design, building and technology processes are all standardized. The idea is to make the construction of buildings safer, faster, cheaper and more technologically and environmentally friendly. “Rising construction material costs and a high demand on the labor market have created a scenario where many affordable housing projects no longer make financial sense to developers,” said Pecoraro. “Skender’s vertically integrated modular solution will help lower construction costs and schedules, enabling developers to bring more of these projects to market.” Market disruptions have practically defined other segments of the economy since the end of the recession. According to Kolb, however, the same tech-driven schisms have mostly left portions of the CRE industry untouched. “Given how technology has unfolded in the other sectors of our economy, it hasn’t impacted construction, development or property management as much,” Kolb said. “It’s going to be imperative that people look to technology to add value or make a deal feasible because we are in a climate of very tough margins right now.” Opportunities outside of Class A Though affordable housing remains an ever-prevalent issue, there is another segment of the user base that is underserved by new development. The vast majority of new multifamily projects that have gone up in the past six to seven years have targeted high-earning renters with well-amenitized Class A spaces. “There is no such thing as new construction middle class housing, which is a core issue in a big market like Chicago,” said Meyer. “The middle income renter—not city middle income, but suburban middle income, a guy making $40,000 or $50,000—he’s making too much for affordable help, and he’s making way too little to be spending $2,000 a month.” Meyer specializes in Class B and Class C product in the suburbs, generally buildings erected in the 1970s that have seen minimal upkeep. According to him, these older, suburban properties may be the healthiest multifamily assets right now. “They have the highest likelihood of low rents where there’s a big return to be made if you go in there and start raising rents a little,” Meyer said. “It’s the only place left, in my opinion, where you can still renovate and have tons of room to raise rents. If it’s priced anywhere near correctly there’s a frenzy for this sort of thing.” There is still availability at the March Chicagoland Multifamily & Affordable Housing real estate summit. Click here for more information or to register.