Lee & Associates’ Brian Pohl: Chicago Apartment Demand Reaches All-Time High

By Paul Bubny

For the Chicago region’s multifamily sector, the current environment marks both a high watermark for development and investment sales, and a tipping point in terms of emerging challenges. These range from obtaining joint venture equity to higher assessment valuations. Connect Media asked Lee & Associates principal Brian Pohl, who specializes in the acquisition, disposition, and placement of real estate investments in greater Chicago and throughout the Midwest, to map out the market’s terrain.

Q: Across the greater Chicago market, is there any one area of multifamily investment that appears to be growing faster as far as investors’ interests are concerned (e.g., value add)? Or are there several, depending on the submarket?

Brian Pohl: There will always be a high concentration of investors looking for value-add deals in the Chicago market. However, these deals have become more difficult to come by, with pricing often getting bid up and more tricky to navigate.

Condominium deconversions have been a very active segment for Chicago-area investors. Demand for urban apartments is at an all-time high; despite nearly 9,000 new units of Class A apartments being delivered to the market over the next 36 months, well-located condominiums are being converted to rental apartments to meet this demand. The value of these units as rental apartments has exceeded the market value as a condominium in the market today.

Q: You work with a broad range of institutional and private equity clients. Are you seeing more interest in Chicago-area multifamily from clients that haven’t invested here previously?

Pohl: Opportunistic funds, private REITs, private capital and family offices have been the most active investors in the Chicago area. Many of these investors have and have not previously invested in Chicago, but are attracted to the 25- to 50+ bps cap rate premium that may be realized, not easily found in other primary markets across the U.S. today.

Institutional investors remain active in Chicago as they always have, with a more narrow focus on urban core locations, on newer-stabilized product, lower yields.

Q: What have been some of your clients’ key priorities lately when making land use decisions?

Pohl: In suburban multifamily development deals, developers look for transit-oriented/village town center types of locations in strong, more affluent suburban markets with an established “downtown” area, that have great schools and access to the Metra Train line into the City of Chicago.

The job market and higher income levels are very strong in the downtown areas of Chicago. Urban multifamily development supply-demand metrics also remain very positive despite thousands of new Class A apartments being delivered to the market, but a slowdown is underway for some of the reasons we describe below.

Q: The passage of a new and more stringent rent-regulation package by the New York legislature recently has impacted multifamily investment, especially in New York City. Do you anticipate that the higher property valuations in Cook County could have a similar effect here?

Pohl: Obtaining JV equity for new development deals has been more difficult to get committed, as has construction loans. Continually rising hard construction costs have reduced projected returns, in addition to more stringent affordable housing regulations that require an affordable housing component of up to 10%, 20% and even 30% be included in the unit mix of new apartment development today.

Also, with the current reassessment taking place on all commercial properties at much higher values in Chicago, there has been a pull-back by developers due to the uncertainty of where property taxes will go. Owners will undoubtedly see a rise in real estate taxes, but it is uncertain as to how multifamily will specifically be impacted and to what level.

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