Why Chicago Works for Investors in 2020
The Windy City is weighted with opportunity if you know where to look.
Chicago, Illinois, was dubbed “The City That Works” during the more than two decades that Richard J. Daley was mayor. Daley, whose son also served as Chicago mayor for a record-breaking 22 years before refusing to run for a seventh term in 2011, used the slogan as part of his own mayoral campaign.
The phrase implied that Chicago was a hardworking city dedicated to getting the job done. Daley first debuted it when he said, “This is a working city, an immigrant city, and there’s just something about the Blackhawks [ice hockey team] that inspires everyone out there. … They give 100 percent … and that’s what Chicago is all about.”
Today, Chicago is known for being a lot of things, including:
- The “most immigrant-friendly city in America,” according to a recent Cities Index report.
- A city whose housing is still recovering while other markets may be peaking or softening.
- Home to one of the most highly nuanced housing markets in the country.
- Home to the second-highest property taxes in the nation.
- One of the hottest markets in the country for certain sectors of commercial and residential real estate.
With that type of “mixed bag” market, it can be hard for real estate investors to know exactly what to do with the Windy City.
“The one thing investors really do not like is uncertainty. When it is present, it slows investment,” said Scott Larson, vice president at Chicago-based bridge lender Pangea Mortgage Capital. “However, at the end of the day, Chicago’s real estate market is growing consistently, and its employment base is strong. We would not own 10,000 units in Chicago or lend on other projects in this city if we did not feel confident on that front.”
Mike Wojcik, chief marketing officer at Fay Servicing LLC, said the lagging recovery in Chicago, which leaves many potential investors feeling uncertain about the market, is an advantage for property owners and private lenders in the area.
“The recovery in Chicago is not happening as quickly as it is in some of the other large metropolitan markets around the country,” he said. “That means there is still good investment potential in this area. For lenders who understand the nuances of this market, there is a lot of potential there as well.”
Ishay Grinberg, president of rental listings database Rental Beast Inc., agreed. “Chicago absolutely has room for recovery and growth,” he said. “Many neighborhoods are currently experiencing a revival, and the city’s rental and home prices are relatively affordable for residents.”
Grinberg noted there is a great deal of opportunity for investors who own midmarket properties, those that might be accessible to first-time homebuyers. “There is very little affordable rental inventory or affordable homes for first-time homebuyers being built in key areas of Chicago,” he said.
Wojcik said investors should particularly note several areas of the city.
“There is a very high concentration of higher-end properties on the north side of Chicago, while the south side was harder hit during the last housing crash and has not recovered as well. This is also an issue in parts of the west side of Chicago, and investors are sometimes a little apprehensive about getting into those markets,” he said. “The reality is that there are a lot of great places in Chicago to live, and investors who take the time to get to know the area or work with someone who does can still find good deals in this area.”
Negative Headlines
Of course, Chicago has had its share of high-profile headlines and media coverage that cast the city in a negative light. In 2015, Spike Lee’s controversial film Chi-raq compared Chicago’s crime rates to those of war-torn Iraq. At times, the city that bills itself as “The Quintessential American City” has struggled to defend itself from interior issues, including a chronic and pervasive lack of trust between the city police and local residents, some of the highest property taxes in the country, more total pension debt than 44 of the 50 U.S. states and a public school system that cannot stay out of the press or avoid high-profile walkouts and strikes.
According to Wojcik, investors already active in the Chicago area have a relatively prosaic outlook about the issues in their city.
“Everyone here understands that at some point, we are going to have to bite the bullet and figure these issues and obligations out,” he said. “Unfortunately, some politicians have kicked the can down the road until now, when we are starting to see some more serious conversations on these topics. There is no magic bullet to solve these problems and there are going to be hard decisions made.”
Wojcik said that although these issues might make some investors reconsider whether they want to invest in the Chicago area, it does not appear to be keeping most Chicago residents up at night. Although there has been a very slow trickle out of the city for many years, the city is still the third-most-populous in the country.
Furthermore, the 7.2 million residents in the Chicago metro area are earning more than ever before, reported YardiMatrix analysts in their 2019 Metro Outlook for the city. “The number of households with a total income of more than $100,000 has grown, while the total of those earning less has been declining,” Yardi economists wrote.
Those increasingly affluent households are showing a tendency to move to the suburbs, creating home-value stability and long-term appreciation outlooks in the areas around Chicago as well as within the city proper. Yardi analysts said current home values are around 17% higher than 2011 levels, and median home prices were up about 1.3% year-over-year in mid-2019.
With the average mortgage payment accounting for only about 16% of the area’s median income and rents accounting for about a quarter of that median income, the market is clearly well-positioned to sustain more growth before leveling off or experiencing another downswing.
A Sound Investment
Larson said that “workforce housing”—multifamily residential developments managed and maintained with an eye toward affordability and offering services and proximity to employers—could be a strong play. These investors would enjoy the benefits of a market well-positioned for appreciation and value- add strategies.
“At Pangea, our intention has always been to acquire multifamily, workforce housing,” Larson said. “For us, that is primarily on the south and west sides of the city.”
Currently, Pangea owns more than 13,000 multifamily units in the Chicago area as well as properties in Baltimore and Indianapolis.
“We have a unique strategy because when we acquire units, we do not plan to sell them later. We are long-term owners,” Larson said.
Pangea’s strategy includes acquiring distressed buildings, completely renovating them, stabilizing cash flow and then owning the building for the duration. They work with existing tenants to bring the building up to standard and to find them somewhere to live during construction, if necessary.
“A lot of these building have heavy deferred maintenance issues,” said Larson, “so it is not safe for the tenants to occupy the buildings. We stabilize the building, get it cash-flowing and then re-tenant the building. We are not acquiring these buildings to raise rent. We are investing in the properties. You can generate great returns for the investors just by making these buildings a safe, nice place to live and by making improvements to the management of the properties.”
Larson emphasized that as more investors begin investing in the Windy City, there will be less room for miscalculations.
“There is a lot of capital coming in from outside Chicago that does not always understand our neighborhoods or how important it is to operate buildings really, really well,” he said. “This type of capital may create short-term competition that investors must keep in mind when making acquisitions.”
Renovation is Better
Chicago investors should keep in mind that building new is not always best in the Windy City.
“We find that a lot of times, our older buildings come with really high replacement costs but are built really well if you look at their bones,” said Larson. “To the best of your ability, I would recommend buy it right, rehab and then rent. Do not assume you will have to demolish a garden-style or walk-up apartment building and put in a tower. That strategy will not work in most neighborhoods.”
Grinberg also noted there has already been an “influx of multifamily, Class A inventory” in the Chicago area recently.
“Rent prices continue to rise, although at a slower pace,” he said. “From the point of view of rental property performance, Chicago has always been a very stable market even during times of national economic volatility. In fact, economic downturns have even led to an uptick in rental occupancy and renewed investment—both personal and institutional—into rental properties.”
He predicted a softening sales market in 2020 that could keep millennial tenants in place for a few years longer.
2019’s Modest Growth Grounds 2020 Potential
Chicago and the surrounding area have such a split personality that it is simultaneously known as both “The Heart of America” and “The Big Onion.”
“In a large market like Chicago, some areas will do better than others, even if overall growth is mediocre,” said Ingo Winzer, founder and president of Local Market Monitor. “The Chicago economy, grounded in business services, grew very modestly in recently years, but did a bit better in 2019. Average prices were up just 3% last year, and we forecast very modest increases over the next three years. Investors should drive a hard bargain to ensure a good return from income only.” “There is still real investment potential in this area,” Wojcik said. “Our company often works with investors who otherwise have a difficult time getting financing because other national lenders may not understand the local market all that well. Success in Chicago requires you to accept this market is definitely a bit nuanced.”
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