Understanding Chicagoland Area Investment Real Estate

Introduction and Overview

Multifamily real estate is one of the strongest ways to build an investment portfolio in Chicago. Though, taking advantage of the multifamily space can be a challenge without the right understanding. Chicago’s real estate market is dynamic, with a multitude of trends at play. We’re going to break down the basics of multifamily investing, discuss some of the advantages of investing in the Chicago real estate market in 2021, and review lessons we’ve learned while working in the Chicago investment real estate space over the past 31 years.

Before we go any further, let's define multifamily real estate: A multifamily building is considered a property where there are multiple residences for renters (families) to reside - hence why it’s called multifamily. In order for a building to be considered multifamily, they must allow for distinct families to live independently from one another - our property listings normally focus on properties between 6-100 units. For a quick example, take one of our multifamily listings below in Chicago’s Uptown neighborhood:

Property Address: 4635-4637 N. Winthrop Avenue, Chicago, IL 60640

4635-4637 N. Winthrop Avenue is a classic center entrance six-flat comprised of all 2 bed/1 bath apartment units plus a new 5-car parking pad in the rear.

What To Look For When Investing In Chicago-Area Real Estate

Advantages to the Chicago Market

One advantage to purchasing investment real estate in the Chicagoland market is the capitalization rate (also known as the cap rate) achieved on renovated or newer construction apartment buildings in Chicago. The cap rate is the expected annual unlevered rate of return of an investment property and is a metric commonly used to measure and compare multifamily and mixed-use real estate. The cap rate is calculated by dividing the net operating income by the purchase price. The Chicago area has seen a cap rate of 5.0%-5.3% for these types of apartment buildings located throughout Chicago’s north-side neighborhoods, which is noticeably higher than other large metropolitan areas around the country. When purchasing a property with a higher cap rate it means an investor is expected to earn more on their investment. For example, in June 2021, Essex Principal Steve Livaditis represented the seller of a 10-unit luxury boutique multifamily property located in Ravenswood that sold at a cap rate of approximately 5.2%. A similar property in the Denver market, for example, is likely to trade at a cap rate between 3.75-4%.

Rent growth is another reason to purchase investment real estate in the Chicagoland market. The following chart uses data from our proprietary database created from 31 years of collecting operating statements, rent rolls and analyzing comparable properties and Chicago-area transactions. Typical rent growth projections average between 2%-3% annually, but after reviewing the chart, most Chicago neighborhoods we track have beaten those typical growth rates over the last 20-years. This is an encouraging metric for Chicago area investors.

Another advantage we see is that given current market conditions, real estate, especially in the city of Chicago could be a great diversification play. Given the current stock market valuations and the flow out of the city during the pandemic (which is now very healthily reversing), there is a great opportunity to purchase property in the city and diversify your investment portfolio into well-made, cash-flowing investment properties.

Finally, we wanted to touch on property taxes. Considering Illinois historically has high-income tax rates, it is something that as an investor you should review when calculating expected returns for any property. In the past, Chicago-area property taxes have been inconsistent, but the new Cook County Assessor (Fritz Kaegi) is in the process of changing the way investment properties are taxed. Some of his goals include overhauling the property tax process to make it more accurate, transparent, and professional. While it is certainly frustrating for current landlords, down the road there is hope for more predictable tax assessment process.

It is also worth noting, though property taxes in Chicago might feel high, especially now in the middle of a re-assessment by a new assessor, at an average cost of 12%-18% of current gross income they are often less than other comparable metropolitan areas like Dallas and New York City.

Market Data and Lessons Learned

Finally, let’s get into some Chicago-specific data and lessons learned while operating as a Chicagoland area brokerage firm.

There are three general markets in the Chicagoland area. The North Side, the South Side, and the Suburbs and each of these markets is filled with distinct sub-markets. Here is where some of our Directors are predicting to be the next hot sub-market.

North Side:

• The northwest side, think neighborhoods like Jefferson Park, Norwood Park, Old Irving Park and Portage Park. Essex Director Clay Maxfield believes these neighborhoods are attracting multifamily investors because of their great retail corridors and ideal residential mix of mostly single-family homes interspersed with multifamily apartment buildings, a unique combo that creates a great sense of community.
• The northern lakefront neighborhoods like Uptown and Edgewater. Essex Director Matt Feo believes these neighborhoods offer investors an abundance of potential. Even though these neighborhoods have captured the attention of many developers in recent years, the supply of investment opportunities remains untapped.

The South Side:

• Essex Director Brian Mond leads the company’s South Side team and believes investors should be paying attention to multifamily real estate located in South Shore. South Shore and nine additional neighborhoods located across the south and west side are benefitting from INVEST South/West an incredible initiative funneling more than $750 million into these neighborhoods to enrich key commercial corridors by supporting infrastructure development, programming, and policies that impact these select neighborhoods. Plus, the neighborhood lies along the shores of Lake Michigan, and is home to several beaches and lakefront parks.

The Suburbs:

• The northern Chicago suburbs, cities like Niles, IL. Essex Director Anthony Citriglia believes the demand for apartments in these suburbs has continued to increase year over year which makes it a solid market for investors.

Market data-wise, in the last six months, as the market has begun to rebound from COVID-related investment fears, we have noticed investment properties are trading quickly throughout the entire Chicagoland area and our average marketing time is now between 14-30 days. For example, Essex Director Derek Kaptanoglu recently closed a 12-unit multifamily property in Tinley Park in under 10 weeks. The property was under contract within two weeks and closed less than 60-days later.

We asked Principal Jordan Gottlieb for his opinion on the Chicago real estate market in 2021. Gottlieb says, “a constant news story you might have heard last year was that renters and homeowners were fleeing Chicago, and it is important to note that that is simply not the case. In June Crain’s reported that downtown apartment landlords experienced a record first quarter with 2,667 apartment units absorbed. Additionally, according to another recent Crain’s report, Chicago area metro home sales are up, while nationwide home sales decline.” He continued, “Chicago continues to draw the attention of renters and homeowners alike due to its world-class restaurants, architecture, outdoor space, and beautiful waterfront.”

Conclusion

We hope that you found this post on the state of the Chicago real estate market in 2021 helpful. We defined multifamily real estate, discussed advantages in the Chicago real estate market, and review lessons that we’ve gathered from the market over the last 31 years of operating a brokerage firm in this city.

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