Local Investment News
Posted 3/21/19A Second Wind
Friends and Investors:
More and more positive news has come out recently about the state of the Chicago apartment market and I wanted to share a recent report. Here are some key takeaways from the Chicago Winter 2019 Outlook by Yardi Matrix titled "Chicago's Climb" (available here):
- Sale prices for apartments are at an all time high (up 13% YOY)
- Rent growth is accelerating (January's 3.2% YOY is the highest in the past 2 1/2 years)
- New construction declined (2018 delivered 1,100 fewer apartments than 2017, however this trend is expected to reverse in 2019)
- Apartment occupancy remains high and stable (94.3% occupancy in December 2018 down 0.2% YOY)
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New Strategies for Uncertain Market Conditions
I founded Division Street Capital, LLC ('DSC') to capitalize on the unique opportunity in the residential real estate market in 2012. The Chicago market was hitting its low point. Housing prices were at a cyclical low (near 2000 pricing levels), rents were at an all-time high (and rising) and mortgage rates were at an all-time low.
These factors were a once-in-a-lifetime signal to invest...and invest DSC did, purchasing seven multifamily buildings for a total of 38 units, diligently rehabbing them and leasing them to well-screened tenants. The DSC portfolio is currently valued at over $300,000 per unit, almost double the average purchase price of $155,000 per unit. Thanks to the investors that have stuck with me through the risks and rewards, DSC has raised $3 million of equity, 91% of which from repeat investors.
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Here is the Tribune article that was implied, but not referenced, in the article due to Crain's editors concerns that the Trib staff would be unable to respond in to criticism. The headline in the print version was "Area housing prices still lagging: Chicago posts its 3rd straight drop in monthly figures, small annual gain".
Chicago housing recovery continues trailing U.S. progress
The Chicago area's housing recovery continued to lag other cities and the nation in November, as prices fell 1.3 percent from a month earlier, according to a widely watched barometer of the housing...
Check out my article on the Chicago housing market in Crain's.
The media keeps missing the real story in Chicago's home-price data
The biggest piece of news to hit the local real estate market since the downturn was "hidden" right in the recent Case-Shiller reports: Chicago had its first year-over-year price increase in six years. ChicagoRealEstateDaily.com
Crains blew it. They didn't highlight the real nugget in new Case Shiller data - the fact that the Chicago area has achieved its FIRST Y-O-Y INCREASE in monthly home prices since April 2007. Nov 2012 data indicates a 0.8% increase over Nov 2011. This may be the indicator for Chicago buyers that FINALLY the bottom has been reached. Savvy market watchers knew it was only a matter of time since the composite index bottomed in May and has since risen 5% Y-O-Y.
Chicago-area home prices fall for third straight month
The new Case-Shiller report shows a 1.3 percent local decline in November. ChicagoRealEstateDaily.com
Chicago's Class A apartment market is hitting new highs. Rents are up 24% since the recession low, up 7.5% since 2011 and projected to continue to rise at a rate of 3-4% annually. Occupancy is at 95.6% up 0.5% from last year and continuing an upward trend. I predict that the Class B & C markets will show similar growth as many renters are priced out of Class A.
Record downtown apartment rents reflect shortage
But increases for Class A buildings are likely to subside next year nearly 2,700 new units are completed, with another 2,000 on tap for... Read Article: ChicagoRealEstateDaily.com
Multifamily apartment demand expected to increase by 425,000 renters per year through 2015 per Freddie Mac's new Multifamily Demand Forecast. More surprising is the single family rental market (including two- to four-unit properties) which has created 3 million new rental units since 2007. Freddie projects a continued decline in homeownership rates due to demographic trends and a further shift away from a homebuying preference.
Read Article: FreddieMac.com
August Case Shiller shows that Chicago is bucking the national trend and continuing a downward trajectory. The month of August has been the recent seasonal market peak for prices and Chicago prices declined 1.6% Y-O-Y while the top 20 Metros in the US (including Chicago) saw prices increase by 2.0% on average. The attached Crains article highlights the 0.7% increase over July. Not enough to pull Chicago out of the housing recession.
Chicago-area home prices rise again in August
A closely watched index of local home prices rose again in August, but the increase was much smaller than recent jumps. The S&P/Case-Shiller index of Chicago-area single-family home prices rose 0.7 percent from July to August,...Read Article: ChicagoRealEstateDaily.com
Private equity is buying up residential properties in Chicago and other areas where the prices are favorable because with proper management, it will generate outsized returns.
Housing Market's New Buyers: Private Equity
Blackstone Group LP has become the biggest U.S. investor in single-family rental homes by spending more than $1 billion since the start of 2012 to acquire more than 6,500 foreclosed houses in eight metropolitan areas, according... Read Article: The Wall Street Journal
Many investors are looking to real estate to balance their portfolio. The attached article mentions several vehicles positioned to profit from the current market dynamics. Private equity funds are mentioned. Of note: return-hungry hedge funds are buying up single family...
Real Estate Offers Opportunities, Risks
Like many savvy executives building their wealth, Jill Foucre knows it could be a good time to invest in real estate because property prices are so low. The former chief operating officer of United Health Networks left her job... Read Article: ChicagoBusiness.com
Depaul's housing price index reiterates what I have said many times, there is a huge dichotomy in the market for multifamily. The larger properties (5+ units) are down just 25% from the 3Q 2006 peak (after falling 50%) but the 2-4 family market has not budged from the bottom and remains down 55%. Larger multifamily market has increased 44% from its low in 3Q 2010, when the grave diggers danced. The small multi-family market has incredible potential for price growth, and in the meantime out-sized cash yields. See attached graphic (from the 9/25/12 Tribune).
Read Article: Chicago Tribune
Robert Shiller, creator of the Case-Shiller Index, is not calling the bottom yet. He takes this cautious stance because a lot of what the media and economists are interpreting as improvement in the current data may be due to a greater amplitude of seasonality. One sobering statement: "Chicago is reminding me of where Detroit was two years ago. It's really tough in that market." Even if we have reached the bottom, immediate prospects for growth are limited by the number of underwater homes and the phantom foreclosure/REO supply. I anticipate a long, slow recovery over the next 4-7 years.
Read Article: NPR
Can we now make the call that February 2012 was the BOTTOM for nationwide home prices? If prices can hold their gains this winter this will be a proven fact. A primary factor in the price increase to date is the dramatic reduction in supply of foreclosed (REO) homes. Banks are holding huge REO inventories that will have to come to market in the near future - putting a cap on housing gains. Nonetheless, there appears to be very little downside to investing in residential real estate now and rates are still near historic lows.
Read Article: Wall Street Journal Online
Posted September 2012
Division Street Capital was founded to capitalize on this unique opportunity in the residential real estate marketplace. The real estate market in Chicago is being buffeted by a perfect storm of forces making this an exceptional time to invest. Housing prices are at a cyclical low (near 2000 pricing levels), the rental market is at an all-time high and mortgage rates are at an all-time low. These factors are a clear signal to invest. This historic opportunity will not last for long—the time to act is now.
Division Street Capital advises investors and landlords on how to capitalize on market factors to profit in the mid- to long-term. The short-term strategy of flipping properties can generate income but the fundamentals point to a more profitable strategy. Division Street Capital advocates buying low, holding the asset while generating positive cash flow, and selling high once the market makes a significant rebound. Read More
Chicago home prices up 4.6% in June per Case-Shiller. But after looking at the graph, Crain's may be premature in saying "indicating that a recovery in the local housing market is well under way". The graph shows that there have been 3 prior false starts since the downturn started in 2007 and each peak and valley has been successively lower than the last. I'm no technical analyst, but to make the "call" that the market is recovering, I would want prices to increase above 125 (2002 prices). Nonetheless, prices are at 2001 levels and there is little downside risk. A great time to buy / invest!
Read Article: ChicagoRealEstateDaily.com
Chicago rents hit all-time high. Class A apartments are uber-tight pushing Class B rents up 7.2% from last year. Class A rent premium (over Class B) has compressed to just 15.7%. Good time to own Class B.
Read Article: ChicagoRealEstateDaily.com
See attached article on best ways to profit from distressed housing. If your risk appetite is low, the authors say that investing in REITs at a 5% yield may be a good option. However, if you believe that housing will make a modest recovery in the next 5-7 years, your risk appetite is high and returns of 25% IRR are attractive to you, email me for details about my new private investment fund. The fund will invest in distressed 2-4 unit properties in select Chicago neighborhoods where rents are at historical highs and property values are at a cyclical low.
Read Article: Forbes.com