For Chicago area multifamily property owners and operators, the pandemic has only been a part of the challenge that these last two years have represented. The stay at home orders, mass layoffs, eviction moratoriums and more, coincidentally come around the same time that rules have changed between the landlord and tenant relationship.
But despite it all, those who have been able to ride through the continuous waves of adversity may have found themselves in a very good situation.
“The silver linings, or at least the things that have re-energized me are these,” says Sal Becovic, President of Becovic, a family-run property group which owns and manages 2,000 units in Chicago’s far north side. “First and foremost, what we do as housing providers is so important. And number two: multifamily is the place to be right now compared to other real estate asset classes.”
Becovic acknowledges the hardships from the last couple of years, but believes that the pandemic only reaffirmed how vital and somewhat insulated the apartment market can be during economic downturns or other challenges.
“Multifamily performed. And even though it got challenging for us, we performed, and that’s where I think multifamily is going to be ready to really take the next step as we move forward,” he says. “And that’s the reason why we’re getting all this capital and why a lot of guys that were invested in offices, or invested in hotels, or in retail, are coming in here investing in multifamily.”
Indeed, multifamily assets in the neighborhoods are trading at a fast clip and at big prices. And the capital being pumped into neighborhood apartment buildings is perhaps reflective of the larger economic recovery, or at least a testament that the “death of the major city” narrative at the height of the pandemic uncertainty last summer was overblown.
Even still, the multifamily sector has its challenges. Despite the news about a fully recovered Class A downtown apartment market from earlier this year, there are varying messages coming from neighborhood owners and operators. And while the asset class performed during the downturn, there is still an ongoing recovery.
“Some properties were more insulated, but overall, it was challenging. And now we’re digging out. We’re stabilizing. We’re not downtown and back at record highs; no, we’re not there yet. But we’re trending up,” Becovic says about the current situation.
However, news about a fully recovered downtown is still meaningful to neighborhood owners and operators, he adds.
“I take what’s happening downtown as a great signal as to what’s going to happen in the neighborhoods,” Becovic explains. “Downtown is always the first to the party, and then leaves the party early.”
A November report from Neighborhood Building Owners Alliance offers a more detailed look into what independent landlords are experiencing outside of downtown. One note that is particularly positive is strong collections.
Over half of the members surveyed indicate that they have received 95% or higher collections for the month of September, suggesting improved stability of the housing market. Back in March, only 46% of respondents had >95% collections and then in June, that number only bumped up slightly to 49% of those surveyed.
But even with stronger collections, property owners are making fewer improvements or having to cut back on costs in other ways. Nearly 40% of respondents to the November report plan to reduce their maintenance and repairs budget. Roughly 20% are making personnel cuts, while 6% say that they’re not likely to pay their property tax bills on time, or in full. Only 3% of NBOA property owners surveyed said that they’re unable to pay their mortgage on time.
In terms of methodology, the report indicates that the NBOA members surveyed own 30,000, units collectively. Nearly half of the cohort own five or fewer properties in Chicago, suggesting that the makeup of the membership is largely small-time, independent landlords.
The market conditions have been ripe for private equity to step in and scoop up vast numbers of units from struggling landlords. In other cities, particularly in Texas markets like Dallas, there isn’t as robust of an independent, mom-and-pop landlord community. However, Chicago could be — and arguably already is — heading down the path of more corporate ownership of apartment properties.
Having a robust and thriving independent landlord community is not just about variety or the opportunity for small-time investors to build equity and a path to financial stability. Independent landlords are likely more willing to understand and address tenant needs, says Mike Glasser, owner of Magellen Properties and president of the Neighborhood Building Owners Alliance.
“We favor situations where there’s local ownership of local property. There’s plenty of outside money that will come in and sweep up the property; this is a nationwide trend,” he says about the theme. “Outside money doesn’t have that connection to the property and with the individual tenants and instead just really looks at it as a numbers game.”
And in many cases, a change in ownership from an independent, neighborhood landlord to a larger, outside corporate interest, can have ramifications for existing tenants.
“When [a private equity group] is buying an apartment building, they view it as a revenue stream, and not the 20 different individuals or so who happen to be dependent on that apartment,” Glasser says. “That long-term elderly tenant who’s been on a fixed income might find themselves priced out and dealing with a ruthless outside owner who isn’t in a position to show any compassion.”
Two- and three-flat ownership in Chicago is a tradition worth preserving, Glasser adds, giving families a means to build equity while also providing others with much-needed housing.
“It’s a beautiful thing for an immigrant or hard-working postal worker, or anybody who’s dedicated their life to building up a family asset, to be able to pass that asset on to their next generation,” he says. “It’s been happening for years and [multifamily home ownership] should be available to everybody who wants to put in the work and sweat equity.”
This article also appears in the December 2021 issue of Illinois Real Estate Journal.