After years of being overlooked, Chicago is attracting the attention of a new crop of real estate hopefuls. No longer seen as a flyover city, foreign investors have their eye on untapped opportunities in the market, abandoning investment plays that have been largely exhausted in other markets.
Attracted to tax depreciation opportunities, and with a desire to move money out of unstable countries, aggressive investors are seeking opportunities in new markets, eager to cash in on a higher yield than what’s available in the largely tapped-out coastal cities.
Unless there is a major swing in cap rates, from our vantage point, Chicago is on the map as the next new horizon for outside investors. Even if the other markets relax, there is still a value play in the Chicago market—and it would be foolish to expect it to slow down any time soon.
With a particular emphasis on the multifamily spectrum from small 12-unit walkups, all the way to 300 unit complexes, the common denominator from Russian, Japanese and Chinese investors is to move money into US-based brick and mortar, converting liquid assets into more stable assets.
These same foreign investors who drastically changed the buyer profile in cities like New York, San Francisco and Los Angeles, see Chicago as a value add investment, finding opportunities that even local investors may not be conditioned to view as low-hanging fruit.
The difference is local investors are looking for more aggressive returns than the three to four percent ROI that can be intriguing to foreign investors, who may be making larger portfolio opportunities. But local investors may be leaving money on the table, by ignoring solid options investment opportunities with 5% cap rate on a good building with cash flow right out of the gates.
Still, anyone looking to make a play in the Midwest, should know that there is more at stake here than just low cap rates and a competitive cost per square foot, especially if the primary goal is to offset the coastal wait period with new cash flow opportunities.
The Windy City is a complex market with block-by-block intricacies. Not only are the fundamentals of the market regionally unique, local laws require specific underwriting tactics in the areas of vacancy and collections. Especially when higher yields are on the table, investors coming to Chicago can’t expect a sure thing without the help of an insider’s perspective.
Faced with increased competition, the real winners in Chicago real estate will be the ones who know the story behind the buys. This leaves plenty of room for local investors to remain in the game, particularly when it comes to off-market transactions.
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