“South Side, I love you,” say coastal investors

More and more, East and West Coast investors are coming into Midwest markets in search of cheaper assets than what they can find locally. For those targeting the reliable multifamily sector, Chicago’s South Side offers value in spades.

“A lot of coastal real estate has become outrageously expensive, and there’s a lot of money out there trying to produce returns for their investors,” said Lucas Fryman, Managing Partner at Interra Realty. “As spreads get tighter, that causes non-traditional parties to enter markets in search of different opportunities that can get them the returns that they’re promising.”

Fryman—along with colleagues David Goss, Jon Morgan and Joe Smazal—recently represented TLC Management Company’s $16.8 million sale of Shorewind Towers, a two-building, 238-unit property in Chicago’s South Shore neighborhood. According to CoStar data, the transaction was the largest by dollar amount and unit count for that neighborhood in ten years.

What was particularly interesting about this deal was the buyer, San Francisco-based Belveron Partners LLC. The well-heeled fund owns large assets all over the country, with a focus on preserving affordable and workforce housing.

“Five or 10 years ago, you probably would not expect a firm like this to participate in submarkets that have been overlooked by people outside of Chicago,” said Fryman. “I think they’re a prime example of the high-caliber sophisticated buyers coming into a market that has recently gained a lot of attention.”

Shorewind Towers has a lot going for it, lake views, beach access and close proximity to mass transit and a golf course. Additionally, the property is just south of historic Jackson Park, which is about to get an upgrade with the addition of The Obama Presidential Center.

Those types of nearby community assets can significantly elevate the potential rent ceiling on a multifamily property, which is why it’s understandable why Shorewind traded at the price-per-unit that it did. For Chicago’s South Side, many communities operate differently block by block and require an extra level of due diligence.

“Serious investors are willing to spend time to educate themselves and to actually come out and get a feel for the neighborhoods, to understand what matches their criteria,” said Fryman. “If you can really spend the time and are motivated enough, you will find an opportunity that’s correct or attractive.”

Chicago’s South Side neighborhoods are filled with quality, vintage structures that can achieve steady rent growth, especially in communities like South Shore, Kenwood and Woodlawn. Last fall, Golub & Company and Farpoint Development acquired a 1,675-unit portfolio, Prairie Shores, situated on 20 acres along Martin Luther King Drive in Bronzeville.

As young professionals continue to stave off homeownership, there is an increasing need for rental units in the marketplace. And of course, there always has been and likely always will be a need for safe and affordable workforce housing, something that is in good supply on the city’s South Side.

While Chicago and Illinois face population loss, pension troubles and tax worries, there are a number of factors pointing to an upward trajectory among multifamily investments. The interest rate environment, for example, is still very attractive and the capital markets sector remains willing and eager to lend on what are viewed as relatively safe investments.

With a stock market that’s at an all-time high, real estate is viewed as a more sustainable, long-term alternative investment. Fryman doesn’t anticipate any catastrophic events that would impact the multifamily sector.

“The underlying dynamics of the neighborhood apartment building business are as strong as they’ve ever been, at least from what I’m seeing on the South Side,” Fryman said. “There are people doing a good job of providing nice, updated, affordable, clean, well-managed housing. So I think the investors who really understand what they’re doing and are educated enough are going to make it work for them.”