With all the activity going on in multifamily these days, many question what the next frontier of this asset class looks like. Yesterday morning, over 225 people had their questions answered at the 10th Annual Chicagoland Multifamily & Affordable Housing Real Estate Summit, hosted by REjournals.
Amenities, rents, demand
The first panel of the day, “The State of the Market,” was moderated by Ron DeVries, MAI, FRICS senior managing director, Integra Realty Resources – Chicago. Joining him were Aaron Galvin, CEO and founder, Luxury Living Chicago Realty; Christine Kolb, associate vice president, Focus; John Meyer, managing director, 33 Realty; Jim Pape, CRE market manager IL & WI, TCF Bank and Craig Pryde, AIA, LEED AP, principal, KTGY Architecture + Planning.
“For every 100 people who move downtown, that amounts to 15 new renters,” DeVries said. “I think what that means is that the apartments being absorbed aren’t just a function of new jobs.”
DeVries also pointed out there is a large spread between Class A and B product. Instead of developing new Class B buildings, developments are focused on high-end properties, with 46 percent of all existing Class A space coming online since 2015. Chicago absorption hit record levels last year, DeVries said, at about 4,000 units—and he expects similar results in 2019.
When asked to predict when this construction cycle will end, Meyer spoke for the group. “We keep thinking it will end but the data proves us wrong,” he said. Pape added that he believes demand is going to be stronger than the supply for the near future, and that the record-setting market may yet continue for a few more year.
Young professionals continue to show an appetite for rental units in the downtown core. But according to Galvin, the city’s numerous megaprojects may be a better indicator of the city’s strong multifamily market. “For the first time in long time, we’re seeing great developments like Lincoln Yards … and The 78. Those are 10- to 15-year deals that will move Chicago forward in a meaningful way.”
The panelists identified a number of other trends, including the importance of empty nesters in the suburbs, who have different needs and desires from renters in the CBD. In the suburbs, properties skew older and bigger, with the prime amenities being proximity to train lines and/or suburban downtown areas.
“We have a lot of projects outside of Chicago,” Pryde said. “They haven’t seen the glut of amenities that you see downtown. Instead, we are seeing a focus on how you use space, with more programming and interaction with residents.”
Also, as average unit sizes have steadily shrunk over the years, developers may have to put a renewed focus on high-end finishes to attract tenants to smaller spaces. One way to make the most out of every square foot is flexible or even “robotic” furniture that can easily turn, for example, a sitting area into a bedroom.
Investing, financing, management
Ralph DePasquale, managing director at Berkadia, moderated the second panel, “Investing, Financing, Management Trends.” The panel was made up by Eugene Jones, chief executive officer, Chicago Housing Authority; Steve Livaditis, principal, Essex Realty Group; Chris Tritsis, senior managing director, Baker Tilly; Patrick Tuohy, vice president, Marquette Bank and Igor Zhizhin, principal and founder, American Street Capital.
Right out of the gate, Jones took a slightly truculent tone, upset by the dearth of affordable housing so far during the conference. “On the first panel, no one talked about the South Shore or West Side,” Jones said. “When it comes to affordable housing, there’s a need. How do we make that change faster?”
Jones also took exception to the stance by some in the CRE industry against expanding the scope of the city’s Affordable Requirements Ordinance. “Lincoln Yards has 600 affordable units in a $6 million development,” Jones said. “For advocates, that’s not enough.”
Seeking ways to address affordable housing, the discussion soon turned to Opportunity Zones, the relatively new investment vehicle that allows investors to save on capital gains taxes when funds are directed at impoverished areas. But the Treasury has been slow to put forth full guidance and requirements for the program and many are still unsure how best to take advantage.
“We’re still trying to figure out how that math works in the low income world because investors are looking for a return on investment,” Tritsis said. “A lot of the projects getting done are the low-hanging fruit.”
“When we talk about Opportunity Zones, you have to start and end the conversation with access to debt,” said Zhizhin. “Debt has to be available for up to 70 percent or investors won’t follow.”
Echoing a sentiment from the first panel about the relationship between unit size and finishes, Tuohy said that owners of older properties have to improve apartments’ look and feel if they want to attract and retain residents.
“There’s been a trend in the last few years for vintage buildings where the tenant is demanding condo-quality finishes,” said Tuohy. “The landlords and investors who want those quality tenants have to provide those.”
With a new governor in office and a new mayor imminent, DePasquale asked the speakers what the “state of the state” is right now. The panelists mostly agreed that owner-operators are being more cautious and giving themselves room for change in uncertain times.
Livaditis touched upon another new political installation in Illinois: Cook County Assessor Fritz Kaegi, who has been promoting a bill sponsored by House Assistant Majority Leader Will Davis and Senate Revenue Chair Toi Hutchinson. The bill, H.B. 2217, would allow Illinois counties to require certain property owners to divulge income information such as rent.
“Uncertainty brings caution. And that’s okay,” Livaditis said. “But the Assessor wants to gather data to create a better algorithm, one that would bring clarity to the assessment process. Owners don’t want to give that information to the Assessor because they don’t know how it could be distributed.”
Development, construction, design
Tritsis stayed on the dais to moderate the day’s final discussion, “Development, Construction, & Design Trends.” Joining him were Michael Hayford, director of Midwest business development, Kastle Systems; Connor Jansen, PE, LEED AP BD+C, senior project manager, ComEd Energy Efficiency; Prasan Kale, co-founder, Rise Buildings; Joe Pecoraro, project executive, Skender and Susan Tjarksen, managing director, Cushman & Wakefield.
Technology featured prominently in this discussion, including the idea that it shouldn’t be an afterthought in the development process. Design teams fret over countertop finishes, flooring options and paint colors, but tech should be a part of early conversations as well.
“From a design perspective, the earlier you can get involved, the cleaner your end product,” said Hayford. “One thing we run into, whether it’s market rate, affordable or high-end, the tail wags the dog.”
Kale agreed, adding that by not involving technology providers early, “You might end up undoing some of the stuff you did during construction.”
And technology shouldn’t be an afterthought, as it is one of the main drivers—if not the main driver—for many young tenants. Tjarksen argued that a building’s technology metrics are just as important as cap rates and NOI.
“As a business and as an industry, CRE is looking at technology wrong. It’s not a snap-on feature,” Tjarksen said. “In three years, we won’t be talking about technology in buildings, we will just be talking about the buildings.”
The conversation also turned to sustainability, a building trait that can attract certain tenants, but more importantly, can save owners and managers on operating costs. One approach to sustainability is Skender’s modular construction plan that will see fully finished building modules manufactured in a Chicago factory and delivered to the job site.
“Modular is the ultimate sustainable system, not because the steel is different, but because we are using less of it,” said Pecoraro. “When you throw away 20 percent of materials, who pays for that? The owners do.”