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Regional Spotlight

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.

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Boston’s “Buried Treasures” Await Bold Investors

For investors willing to work for it, Beantown rewards are waiting. Two words will nearly always come up in any discussion covering Boston real estate: “tight” and “expensive.” Given a decade of population growth and a phenomenal jobs market based in high-demand, recession-resistant sectors like the life sciences that attract young professionals in droves, “tight” and “expensive” seem almost inadequate descriptors by today’s Beantown standards. But, thanks to a nearly unprecedented rate of growth across the board over the past decade, for investors willing to think creatively and to consider innovative assets, the Boston market has plenty of hidden treasures to leverage as part of a strong investment portfolio. “If you are an investor, Boston has a track record  for being one of the best long-term real estate investments in the nation,” said Marco Santarelli, founder and president of turnkey investment firm Norada Real Estate Investments. “Because of the large number of students and college and university faculty, it is a no-brainer for savvy, long-term investors to invest in a rental property in Boston.” Still, that strong demand can come with a price where housing affordability is concerned. In the current housing cycle, certain historic trends have not held true when it comes to how that affordability affects population demographics and demand. “Boston is a high-cost, relatively small market that has historically not grown rapidly because of our geographic barriers,” said Aaron Jodka, an economist and managing director of client services at Colliers International. “High cost-of-living and homeownership has historically caused younger residents to leave for more affordable living environments, but this housing cycle has flipped that.” Jodka cited a strong economy, new housing and a “phenomenal job market” for Boston’s current status as one of the few major metro areas currently  seeing the millennial  population expand within the city proper. This “flip” of historical norms in the Boston housing market has had far-reaching effects on the broader real estate market as well. Not only has the housing stock in the city changed dramatically, noted Jodka, there have been significant real estate-related policy changes as well. In a city where new construction lagged behind national rates and city planners referred to urbanization “as a trend, rather than a reality,” the current mayor recently launched an initiative intended to add as many as 70,000 housing units in the city proper by 2030. The move comes not a moment too soon, as much of the single-family residential inventory within the metro area and in the suburbs is holding steady near all-time high prices. “Median home prices in Boston rose to a new, all-time high of $475,000 in June of this year,” noted Auction.com chief economist Daren Blomquist. “Even though home prices have backed off that high in the last few months, they are still up from a year ago. The data shows a solid housing market in Boston, but one that is not necessarily easy pickings for real estate investors. However, when investors can find those distressed properties, impressive discounts are available.” Strong Home Sales Leave Conventional Strategies Cold For the real estate investor who is new to the Boston residential market and does not have an established source of leads on potential deals, the current climate in The Puritan City is not particularly welcoming. Blomquist noted investors are not presently “highly active” in Boston, where cash-sales volumes are well below national average at 19.8% and cash-buyer discounts are hovering around 8.9% in September (compared to nearly twice that just three years ago). He described flipping activity in the area as “tepid” as well, with home-flipping rates just over 3% in September. “Home flippers may  have been scared off by dwindling profits late last year, likely as a result of slowing home price appreciation,” Blomquist said. “However, flipping profits have started to pick back up again as mortgage rates have fallen, which may be good news for investors.” For investors hoping to acquire single-family residential properties in the Boston area, pickings are likely to remain slim through the end of the year, if not longer, when it comes to distressed properties. “Discounts are still sizable on bank-owned (REO) properties when those properties can be found. REO median prices were 36% lower than the market median in September,” Blomquist said, pointing out foreclosure-auction discounts are presently even greater, at 59%. However, only about 30 properties are being sold per month at those auctions. “The current market makes it tough to follow the tried-and-true investor mantra of buying low and selling high,” he said. Multifamily Represents a Viable Solution With the single-family residential market offering great rewards to the persistent—but presenting a difficult road for many investors—Boston’s multifamily sector is looking increasingly appealing. Boston led the country in year-over-year rent growth of 5.1% at the end of the summer according to the Yardi Matrix Multifamily National Report. The young professionals flocking to the area for high-paying jobs in a variety of attractive industry sectors are creating strong demand for luxury units located in areas of the city where owning a car is not necessary. “A lot of these new residents do not have cars and do not want them,” Blount said. “Fortunately, Boston is a transit-oriented city. Even in the inner suburbs, the communities that have access to reliable train lines are attracting those younger residents who don’t have an interest in owning cars.” Given that the city has the seventh-highest percentage of pedestrian commuters in the country and boasts the nickname “America’s Walking City,” Boston is a perfect fit—at least in terms of lifestyle preferences—for its younger residents. Many of these individuals attended school in the city and remained after graduation as part of the city’s growing millennial workforce. “We probably have the highest number of universities and colleges in the country on a per-square-foot basis,” said Blount. Anecdotal or not, the fact is that Boston is home to nearly three dozen colleges and universities supporting more than 82,000 jobs statewide and contributing nearly $5 billion to the Boston economy. As more

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Georgia on My Mind

The Real Estate Investor’s Ongoing Love Affair with Atlanta Housing By Carole VanSickle Ellis It had been more than three years since Atlanta, Georgia, had posted a double-digit temperature, but it did so this past June when the heat index hit 100. It’s also been about three years since the city’s housing market posted double-digit gains in value, but that doesn’t really worry local investors, local businesses or even local developers. Across nearly all real estate sectors, investors still believe in Atlanta. “Unlike some other hot-but-higher-priced housing markets, there is not much evidence yet that the Atlanta housing market has overheated,” said Daren Blomquist, vice president of market economics at Auction.com. “There is evidence of a recent slowdown in the number of sales, and the rate of home price appreciation is calming down a bit, but Atlanta is performing better than the nation on both of these metrics.” However, Blomquist and other local investors, such as Robert “RJ” Palano and Sanjay Raghavaraju, warn that a rising volume of available inventory could compel investors to accept shrinking profit margins in 2020 and beyond. Palano serves as acquisitions director for real estate investing company Buy Cash Flow Properties. He has been acquiring properties in Atlanta for decades. He describes the market as “frothy,” although he emphasized “there are always ways to find opportunities.” Raghavaraju, CEO and founder of 33 Holdings, a private equity real estate firm based in Atlanta and serving investors in North American and Asia, agreed. “We currently see a great deal of opportunity in value-add investments in single-family, office, retail and mixed-use asset classes,” he said, “but we are currently cautious at this point in time as e-commerce pushes these assets through a dramatic change. We want to see how we can be at the forefront of the changes as they happen.” 33 Holdings’ portfolio includes residential and commercial assets and development projects. Atlanta appears likely to be among the final major metropolitan areas standing as the scale begins to tip from a seller’s market to a buyer’s market in primary markets around the country. Although Atlanta, like most other 24-hour cities, has seen a certain degree of stagnation in sales volume in recent months, home prices have continued to rise. In July, the Atlanta Realtors Association (ARA) reported home sales prices were up 7.3% over the same time a year prior at a median value of $295,000. July sales also held steady in volume with July 2018, although a month prior, in June, sales volume was down nearly 13% year-over-year. The volume volatility is a result of a “mismatch between potential buyers and sellers,” ARA analysts said. They noted the prices of most homes in the area listed for sale in June were “substantially higher” than what most would-be buyers can afford. The total housing inventory in the city is just over three months’ worth, however, indicating demand is still high and the inventory is on the tight side of healthy. Residential Affordability Is Relative Fortunately for Atlanta-area real estate investors, the affordability factor in Atlanta is largely relative. While a median home price near $300,000 is certainly nothing to sneeze at, the cost of living in San Francisco, California, for example, is 96% higher. Brooklyn, New York, boasts a cost of living 82% higher. And, notably, those values come before considerations such as room to build (which concerns developers) the cost of acquiring land and materials for building new housing, or the cost of renovation. Compared to other gateway cities like Chicago, Illinois, and Washington, D.C., Atlanta’s metro rents are comparable but still favorable. Average Chicago rent in April 2019 was $1,511 each month, while D.C. posted $1,773. Atlanta rents were firmly below $1,300, at $1,272. As a result, many businesses are choosing to expand into the southeast with new regional hubs, or they are transplanting existing operations to Atlanta from other, more expensive areas. This keeps demand for real estate across sectors strong, despite the rising market heat. “As long as we stay within our operating parameters, our ‘box,’ so to speak, we are still acquiring properties, adding value, creating income-producing assets, then refinancing or reselling when the opportunity presents,” Raghavaraju said. “I doubt there is going to be a heavy slowdown in the Atlanta real estate market at this point because of how many of the fundamentals in the [national market] were corrected after the last crash.” Georgia’s business-friendly tax environment and willingness to aggressively court major corporations for headquarters and satellite offices in the state is aided by Atlanta’s relatively affordable housing when compared to other markets of similar sizes and resources. This not only brings in new commercial development and new tenants for existing commercial buildings, it also creates an ongoing demand for new residential developments as the population continues to grow and employees follow employers to the area. In January 2019, the state of Georgia lowered the corporate tax rate from 6% to 5.75%. It also added its own incentives to existing Opportunity Zone program incentives, offering new and existing businesses creating jobs in qualified opportunity zones (QOZs) the chance to qualify for tax credits of up to $3,500 per job. The city recently inked a deal with Starbucks to provide a $250,000 Economic Opportunity Fund grant to the company to support the creation of a new satellite office in the area. “The entire state has a long history of policies focusing on bringing in companies to insulate and build up the economy, and Atlanta reaps the vast majority of the benefits of those policies,” said Harding Easley, an account executive with Yardi Matrix. Easley noted that in 2019 alone, Atlanta was the recipient of 850 new jobs from Norfolk Southern (and associated new office space development), 1,000 potential “career opportunities” sourced from the BlackRock’s newest “innovation hub” (iHub) and 600 new jobs from Salesforce, which is already invested in the city and will take over the remainder of its existing building, renaming it Salesforce Tower Atlanta. Additionally, Pullman Yard Development

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Raleigh, North Carolina

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Dedicated to an Upward Trajectory Raleigh’s real estate market is the product of careful and strategic planning—227 years of it, to be exact. The capital of North Carolina, Raleigh was designated such in 1788 in the wake of the Revolutionary War and incorporated shortly after. At that time, the city was laid out in a careful grid pattern that remains intact, in large part, to this day. One of the first examples of a planned city in America, Raleigh’s current market clearly indicates the municipality remains popular with scientists, analysts and academics. For real estate investors, the results are both positive and long-term. The overall trajectory in the Raleigh real estate market has remained positive and upward for the better part of three decades. “The last 20 years, in particular, there has been a lot of growth in Raleigh,” said John Tedesco, senior vice president of business development at Appraisal Nation. Tedesco cited several examples of what enables Raleigh to remain planted so firmly at the top, while other cities tend to “pop in and out” of such lists. Among those examples are carefully placed and planned infrastructure projects; a well-curated public school system boasting 175 schools and a board with both a $2 billion budget and the accolades to indicate the money is well spent; and a growing, strategically designed highway system. “Raleigh is often overshadowed by the larger Charlotte market, but it is the second-largest city in the state, the capital of North Carolina, and home to roughly half a million people,” said Marco Santarelli, president of Norada Real Estate Investments, a national provider of cash-flowing, turnkey real estate. “What people do not realize is the Raleigh housing market is much larger than this, with the metropolitan area alone (the city and its suburbs) accounting for about 1.5 million people.”  “We’re one of the smartest cities in the country when measured by percentage of the population with bachelor’s degrees,” Tedesco added. He noted the high concentration of academics and tech professionals is largely maintained by Raleigh’s position in the heart of the Research Triangle, an area that includes North Carolina State University, Duke University and UNC Chapel Hill. The high concentration of these professionals is one of the main reasons for Raleigh’s market steadiness and growth. Because of the area’s relatively high median income and steady job sectors, Raleigh was one of the last major metro areas impacted by the housing and financial meltdown in the mid-2000s—and one of the first to come out on the other side. Sitting in the Sweet SpotSince hitting a nadir in 2012, Raleigh home values have trended steadily upward for the past seven years, and they appear poised to continue to rise. Even in 2012, Raleigh values were relatively strong, nearly $30,000 higher than the national median home value. From that point, values have risen nearly $100,000 in the area. What makes this market so attractive? In addition to the many social, cultural and financial advantages associated with living and working in the Research Triangle, Raleigh is sitting in a geographic sweet spot. Part of the southeastern United States, the climate is pleasant with short, cool winters and hot, humid summers. Perhaps most important, however, is the city’s proximity to other major metropolitan areas on the East Coast. “Raleigh is dead center,” Tedesco said, “just a little over an hour flight to New York City and a little over an hour flight to Florida.” “For us, the market is really strong right now and has been for quite some time,” said Neal Barnett, co-owner with his brother Cory at Garner Investment Company. The Barnetts have been active investors in Raleigh for more than a decade, working through the housing crash using short sale strategies and, in more recent years, focusing mainly on rehabbing properties for sale to retail buyers or for use as Airbnbs. “At present, our primary strategy is rehab-and-sell,” said Barnett, “but we are always looking to put a few more properties in our portfolio long-term.” Garner Investment Company is active mainly in the sub-$250,000 tier of the Raleigh-area market, which many analysts describe as prohibitively low on available inventory. At the end of the first quarter of 2019, analysts warned sales volumes would likely continue to fall, even as prices rose across the board because there are fewer and fewer homes available below $300,000. “Under $300,000, there [are] going to be multiple, competitive offers,” local agent Sharon Webb of Webb Realty told Raleigh’s News & Observer in March. “There [are] a lot of people looking [in that range] and not a lot of inventory.” Barnett noted that nearly all his investment properties are coming to him through leads generated from his network rather than through more traditional (and less personal) methods of lead generation that are reliant on publicly available inventory. “There are a ton of investors in this market right now and a lot more jumping in,” he said. “We find most of our deals off market. They come through relationships within our network as well as referrals.” It is easy to see why Barnett opts to rely on his network for deals these days. Competition for distressed properties in traditional venues is becoming increasingly fierce. For example, while properties certainly are still going for deep discounts at auction, sometimes as much as 21% less than their as-is value at time of purchase and much farther below after-repair retail value, the volume of inventory at the auctions is relatively low in the Raleigh area. According to data from Auction.com, although those properties sold at foreclosure auctions for about $160,000 in April (compared to a median monthly sales price of $260,000 on the retail market side), only 26 were brought to auction at all. This steep competition and scarcity of inventory makes it imperative that investors leverage every advantage to gain early access to potential deals, said Daren Blomquist, vice president of market economics for Auction.com. “More of our buyers are leveraging technology to gain a competitive edge

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Kansas City: Stable Growth in a Hot Market

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Many locals boast that Kansas City, Missouri, is experiencing a modern-day Renaissance. They aren’t alone in their assessment. The metro has been racking up numerous national accolades the last few years.

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Memphis, Tennessee: A Hot Market for Investors

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Hot real estate markets like Las Vegas and Phoenix can generate a lot of hype in the real estate world, but Jeremy Brandt, CEO of WeBuyHouses.com, would argue these aren’t always the most ideal markets for investors. His most successful affiliates work in secondary markets.

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