Market Conditions: Investors Paying Record Prices For Luxury Apartment Buildings- Is It a Sign?
Crain’s reported that an investment group apparently has paid a record per unit price for the luxury apartment building at 1225 N. Wells in Old Town that was only completed last year.
Heitman LLC, a Chicago-based real estate investment firm, has agreed to pay about $158 million for a 250-unit luxury apartment building, according to people familiar with the transaction. The price equates to $632,000 per unit, a high for Chicago and a sign of soaring investor demand for trophy apartment towers, fueled by ultra-low interest rates.
The previous record was a 2007 sale of the Grand Plaza East Tower at 540 N. State for $545,738 per unit. That was just before the crash.
Few are predicting that the good times will end badly. But the feverish investment activity is eliciting comparisons to 2007, another golden period for real estate investors that ended when global financial markets crashed in 2008.
“Things are getting silly again,” says Dan Fasulo, managing director of Real Capital Analytics, a New York-based research firm.
That’s because the Federal Reserve’s loose monetary policy has pushed interest rates on bonds and other investments to near-historic lows, forcing many big investors to seek higher returns in real estate and other assets, he says.
And nearly 5,000 more apartments are slated to come on the market downtown by the end of 2014.
The Hines-JDL venture completed the 16-story building at 1225 N. Wells St. last year. The project is among the first in a wave of high-end downtown apartment towers launched in recent years by developers aiming to capitalize on high occupancies and soaring rents. Net rents at luxury downtown apartment buildings have risen 33 percent since bottoming out at the end of 2009, according to Appraisal Research.
In the fourth quarter, tenants at 1225 Old Town paid the second-highest net rents in the city: $3.04 a square foot, after Aqua Tower on the New East Side at $3.17, according to Appraisal Research.
Up to this point, demand for high-end apartments has outpaced supply. The question on many minds is whether the building boom will create a glut, forcing landlords to slash rents to attract and retain tenants.
What’s the end game for these landlords?
Just how high can rental prices go?
Is real estate’s ‘silly season’ returning? [Crain’s Chicago Business, Alby Gallun, May 6, 2013]
What do these places rent for?
Lenders, you’d think, would be less bullish about overpriced rental buildings.
“Lenders, you’d think, would be less bullish about overpriced rental buildings.”
Why? When have the banks, in the last ten years, figured ANYTHING out?
I think it’s so funny that everyone is like, “but the banks are lending so it’s okay.” They’re too big to fail. Of course they’re lending.
“What do these places rent for?”
The 700 square foot one bedroom would be about $2100 a month (without the parking.) The 2-bedrooms are probably around $3500.
Just how high can rental prices go?
I paid $2010 a month after the first month free for a year at Alta at K Station. Then tack on $95 for utilities, $215 if you want parking, $275 if you want your own assigned parking spot, plus $30 for electric bill, and $45 for HDTV DVR and more than 30 channels of fuzzy tv reception.
So ya I was paying $2085 for a 770 sq ft apartment with no balcony.
A 1 bed 750 square feet apartment at 1225 old town is renting for $2250 not including utilities, parking, or move in / out fees or pet security deposits. I’m not sure if they are offering any incentives.
High rent prices are why I bought a 2/2 in Fulton River with parking and will pay less in my monthly nut including assessments taxes and insurance. After I rent out the parking and second bedroom I will be paying half of what I did at Alta at K Station.
Also, if you haven’t thought about or don’t know about the Fulton River neighborhood, I would highly recommend that you come and see it. It’s right off 90/94, there’s the blue line at Milwaukee and Grand, Jewel on Des Plaines, park / dog park on Kinzie, Pink / Green Line stop at Canal and Lake and another at Morgan and Lake, you can easily walk to the Loop for work or River North for nightlife, East Bank Club is right there and all of the restaurants on Randolph a short stroll away.
Heitman, LLC – uh oh, this is going to end poorly.
These downtown rents are driving people to non GZ areas. Every for rent sign in my area, is gone in a week.
“Also, if you haven’t thought about or don’t know about the Fulton River neighborhood”
Love the neighborhood. I like urban and Fulton does it for me.
People love new and modern, so they probably won’t have too much trouble renting out the 5,000 new units for the first few years. What happens to all of the older units? I think that’s where the issue will be… No one is going to want to rent in Ye Olde Apartment Building without in-unit washer/dryers and modern kitchens.
I wonder how much I could rent out my place for (not that I’d want to), those prices are nutzo
1225 N Wells is still a bit of a hike from the loop. So I would not even consider it top location..
Wanna see a sign of the times?
look at this property’s 15 year sales history;
http://www.redfin.com/IL/Chicago/2458-N-Geneva-Ter-60614/home/13367680#main
“1225 N Wells is still a bit of a hike from the loop. So I would not even consider it top location..”
If one is actually hiking, yes. Granted, being near Division on Wells is certainly suboptimal for other reasons, but I doubt that most people would consider its loop proximity among them.
Groove, that Geneva listing has got to be one of the best I’ve seen for $1.5, even being on an alley, west of Clark, etc. Love it.
Great call homedelete. I read “Heitman, LLC” and immediately thought the same thing — ole’ Steve is at it again….
“What’s the end game for these landlords?”
I’m a mom and pop land lord and I’m renting out a large 2/2 a couple blocks north of the 1225 Wells place. With the current equity I have tied to the place I’m getting a 9% after tax return. I’m tempted to sell as my neighbor below sold for a price I’m willing to sell and he sold within weeks of listing, but what would I do with my equity?
looking to buy —> 9% return is fantastic
People seem to love Old Town. No price seems too high for that area these days.
“Groove, that Geneva listing has got to be one of the best I’ve seen for $1.5, even being on an alley, west of Clark, etc. Love it.”
That giant brick wall behind the property is a youth hostel. A giant youth hostel. You’ll have tons of European kids walking through your alley all the time.
@anonny
would you take it (if west of clark wasn’t an issue)
purely hypothetical
Sawdonkey: just noticed that. The hostel would be a concern, but not necessarily a deal killer. It’s not that different than having DePaul kids living nearby. But I’d want to take a closer look at the hostel, its guests, local incident reports, etc.
chichow: Subject to (i) the outcome of the above hostel-related diligence and (ii) an inspector signing off on the flood-proofness/mold-freeness of that basement, if we could afford it (it’s nearly twice what we’ll hope to pay in a couple of years), I think we’d be inclined to buy it, despite it being a tad far west/northwest.
“The 700 square foot one bedroom would be about $2100 a month (without the parking.) The 2-bedrooms are probably around $3500.”
Time to raise the rent on Mrs Icarus’ south loop condo
I can only speak for Loop, River North, Old Town, Gold Coast, Streeterville, Lakeshore East, and Fulton District when I say this, but rent prices are out of control in the downtown area. There have been virtually no new condo units coming on the market (besides ultra luxury like Trump and Ritz Carlton) in this area. This has put a short squeeze on the availability of people to buy and rent condo units. I wish I had bought last summer / fall, because as soon as I started to look at units in November, the market was on fire and things were selling within the first week of hitting the market. I cost myself an extra 10% on my purchase price because of my delay. Prices will be up another 10% year over year come this time next year because of lack of condo inventory.
I wonder which luxury apartment will turn condo first, and which stalled condo development is the first to get financing to start construction.
Looking to buy. if you think you can get more money in a few years and keep making 9% then its a no brainer to rent. If you don’t want the landlord headache and think this is a blip in the market,..then sell
If these places were in River North, they’d still be stupidly priced. But I can’t for the life of me understand the appeal of Wells st just north of Division. Its an OK area, but by no means awesome. I would never even consider paying the highest rent in the city to live here. At those prices, you could live in Lakeshore East or Streeterville which are both much much nicer.
Streeterville is boring. So is Lakeshore East.
I do agree that these rents are stupid.
“I’m getting a 9% after tax return. I’m tempted to sell … but what would I do with my equity?”
You could have bought today’s auction of 4-week T-bills , which the Treasury reports will produce an “Investment Rate %” of exactly 0.000%.
http://www.treasurydirect.gov/RI/OFBills
At least we savers won’t have to pay taxes on our 0.000% T-bill income. Whoo-hoo!!
But I think Treasury is taunting me with that 3-decimal place precision of “0.000%”.
“Bennnnnnnnnnn . . . Bennnnnnnn !!”
http://www.youtube.com/watch?v=wRnSnfiUI54
“Streeterville is boring. So is Lakeshore East.”
I totally agree.
Fwiw I think Sabrina & others misinterpret a statement in the article: “…soaring investor demand for trophy apartment towers, fueled by ultra-low interest rates…”. Imo this doesn’t mean buyers are bidding up trophy apartment values because banks are providing easy, cheap financing but instead means given that other investments are yielding low & risky returns, purchasers such as insurance companies are bidding up trophy apartment buildings in downtown Chicago, because they see them as likely to generate stable or increasing cash flow for years. Two primary reasons they believe cash flow will be stable or increase: Unlike locals quoted in the article they believe demand for new apartments downtown will continue to exceed supply as increases in job creation for young professionals continues downtown while empty nesters are also attracted to downtown. Second, they believe it’s very difficult for new competitors to overcome hurdles to buy great locations & secure construction financing to build more competing apartments than demand will support. It’s easy to announce a proposed 250 unit project but it’s an exceedingly lengthy, grueling process to secure a building permit which is required before lenders will fund a construction loan. And while 1225 N Wells seller hit a lotto payday, historically margins are much thinner for apartment developers than say retail developers so I believe lenders will be cautious.
Looking at rent trends in NYC along with parts of CA provides a final reason why investors are bullish on future returns from investing in downtown CHI apartments. Today Chicagoans pay a much lower % of income for housing costs than renters in NYC or similar high demand areas of CA. While analysts who think like Bob may believe downtown rents will be held down because people are mobile & can live much more cheaply in areas he believes have higher quality of life than downtown, imo he grossly overestimates how many jobs in those locales pay salaries close to downtown Chicago wages.
Fwiw WSJ has a great summary of history of investment in a somewhat related investment – NYC’s Empire State Building (see exhibit to article – I couldn’t find a link to the exhibit). I note that insurance companies repeatedly successfully invested in ESB over the years.
High rents are not sustainable in Chicago long-term. The reason is that, unlike Manhattan or San Francisco, Chicago has no shortage of buildable land. Combine that with the relatively easy and builder-friendly permitting process means that apartments will be built as long as there is any profit in it whatsoever. Supply will inevitably catch up to demand.
There’s an unprecedented amount of units coming onto the market in the upcoming 36 months. I heard the story on NPR this morning.
Southbound: They’re getting the loans. It is not hard, right now, for these developers to get financing. All you have to do is look around the GZ and count the number of cranes. In fact, it appears to be getting easier and easier as the economy “improves.”
Sure- a few have been announced that might not get built in the next 18 months- but a bunch of them are already being built.
They’ve learned nothing from the last 6 years. The credit expansion has simply shifted from condo buildings to apartment buildings. They overbuilt the last time and they’ll do it again this time.
“The reason is that, unlike Manhattan or San Francisco, Chicago has no shortage of buildable land.”
That’s right. Just look around River North sometime. There are STILL empty lots that could be built on- even after all that building during the boom years.
“Combine that with the relatively easy and builder-friendly permitting process means that apartments will be built as long as there is any profit in it whatsoever.”
It is still very difficult to get an apartment or condo tower built. First you have to be on good terms with the local alderman, otherwise they can put a hold on your PD plans and you will never even get to the zoning committee. Then you have to win over the local NIMBY’s (west loop nimbys are the worst) who say its too dense, it blocks my view, or there isn’t enough parking for the neighborhood. Well NIMBY, you live next to the second largest central business district in the country. If you wanted to live where everyone has a 1/4 lot and a 2 car garage then move to Plainfield. Then you have to get it through their heads that “views are never protected” according to the Illinois State constitution. If you buy a unit with a parking lot next to it, then you have to know at sometime something is going to be built on that lot. Then you have to get financing which is never easy.
“It is still very difficult to get an apartment or condo tower built.”
Then why are like 10 of them being built (have been built) in the last 2 years? Doesn’t seem that difficult to me. What have we had? Like 7,000 to 10,000 units approved and most of them being built?
The city WANTS the construction.
As long as rents keep going up and the occupancy rates are at near records, the banks will lend.
2/2 at 1225 N Wells are $2950. When you consider it is brand new and features all amenities (W/D, balcony, full gym, pool), I could rationalize the rent in comparison with other rentals nearby. That being said, this rent bubble will catch up sooner than later. How many people can really “afford” to pay 2100 for a 1 bedroom? The 2/2 I was renting for 2200 in 07 at Shoreham now rents for 2950….
Available land is unquestionably cheaper and more plentiful in Chicago vs NYC/SF/LA but just look at the Chicago market – insane rental prices <1 mile from the loop and nobody interested at all in anything 2 miles from the loop – except for north and northwest of the loop.
The gentrifiers will eventually make Garfield Park and Bronzeville "acceptable" to professional but until then the sheeple will pay a premium for the parts that are already built up.
Getting approval for a development in Chicago is many many times easier than many places. Try building something in New York, or for that matter anywhere in California. So much red tape you’d go broke just from the planning process. In Chicago, a few grand to your Alderman’s campaign fund is all that it takes. They’ll take care of the rest of the approvals.
A few grand? A trib story a few years back said all it took was $500 in many cases
“Heitman, LLC – uh oh, this is going to end poorly.”
Yes, let’s try an guess which state’s pension fund is being “advised” by Heitman to pay $600K per apt. unit. This is people’s retirement savings being put to work by these idiots at Heitman, playing around with OPM and “doin’ the deals” like they’re some big shots, eating steak dinners and getting fat on cheesecake, overpaying with the retirement money of state employees, who is going to have to bail out these pension funds when their assets aren’t worth enough, or appreciating enough, to fund all the liabilities?
If you’re a Seller of anything, and the buyer is a “Pension Fund Advisor” then you know you just hit it big.
Welcome to my new project! Anyone need a rental application?
In regards to your comments on rental prices and available land, think about the rental rate variance east or west of Western Ave in Bucktown. Remember that a good portion of the rental rate is attributed to what is outside of the building in addition to the upgrades and amenities of the property itself.
Purchase price is irrelevant to an investor if they plan to hold for the duration of a fully amortized loan. Cap rates drive purchase price.
Steve, did you choose east or west of Western, and why? Is the neighborhood demographics and attractions that much different from each other as you cross Western Ave?
Never go west of western, that’s been an adage for nearly 50 years in Chicago and there’s some truth to it.
I agree, never go west of western in Bucktown or WIcker Park. Of course your money goes farther, but there is more crime, violence, and less amenities past western.
“less amenities past western”
Logan square?
I just realized I rarely go east of Western unless I’m going to the beach, and I maybe go downtown once a year.
And no offense, but downtown Chicago is boring.
How many times can you walk down Michigan Avenue with all the country ass tourists and chain stores?
Sometimes I don’t know if I could make that permanent move after all.
“I agree, never go west of western in Bucktown or WIcker Park.”
Last March 17, for the first time in my life, I saw some fucktard walking across a street in Logan Square wearing green Mardi Gras beads and a green plastic bowler hat, and possibly giant green sunglasses. I almost crashed my car.
Keep that shit east of Western, motherfuckers!
Pete & HD are on drugs – “..Chicago has no shortage of buildable land. Combine that with the really easy and builder-friendly permitting process means that apartments will be built..”
Spoken like someone who’s never pulled a permit in Chicago. It is unbelievably miserable & builder-unfriendly to obtain permits to build a new building. And while it’s true there’re a lot of vacant lots, most are in locations that won’t generate enough rent to pay cost of building. (See Crain’s article about CMK’s south loop apartment announcement). Those vacant lots Sabrina drives by in River North & West generally have relatively low density zoning – FAR’s of 5 or 7 which basically limits building size on a 10,000 sq ft lot to 50K or 70K which after deducting common area sounds like 40 units to 56 units. HD: those $500 donations/ inducements were paid in wards where there won’t be new $3 ft/month apartments built. Imo the land that Sabrina points out is and may be built on (if and when those announced builders gather enough equity dollars & qualified guarantors to secure bank funding) benefit by having secured sufficient zoning in past under “Planned Developments” which grant flexibility from strict zoning guidelines. The aldermen representing the GZ are no longer up-zoning or rolling over for grand planned developments like previous aldermen. And Pete’s statement that a few grand to an alderman’s campaign fund and they’ll take care of the rest of the approvals sounds exactly like Z speaking authoritatively after 2 joints. City of Chicago’s planning dept and zoning dept are autonomous. While developer submittals are dead on arrival without aldermanic support, there is still unbelievably miserable miles of process to slog thru even when everyone (mayor, alderman, community groups etc) loves and supports a particular project. Hey Pete Omni, the Canadians who purchased the Clark & Barlow site on Grand Ave in 2012 wants to hire you. Omni needs a pie eyed optimist to walk their plans thru the bureaucratic tar pits so as to speedily receive those automatic approvals you know you can secure or they won’t break ground before 2015. Ask someone who knows where city hall is located how long to expect it will take you to get city’s bureau of underground to review and sign off on Omni’s plans.
Southbound, builders can build as far north, south, and west of downtown Chicago as they want. This land might as well be unlimited. New hipster neighborhoods are emerging all the time. Hence, there will never be a long-term shortage of housing in Chicago as is the case in landlocked cities like San Francisco.
And anyone in the city who is having trouble getting permits merely lacks the proper sponsor. It might take more than just your local alderman, but if Rahm wants a project to succeed everyone else knows to get in line behind it or else. Case in point: the Wolf Point development. The Kennedys want it done, hence Rahm wants it done, hence it will be done. The NIMBY group opposing it already lost their court challenges. Granted its a lot easier when you’re a Kennedy, but Omni should watch the process and take notes.
“Never go west of western, that’s been an adage for nearly 50 years in Chicago and there’s some truth to it.”
Gentrification is afoot west of Western, at least in certain, limited, parts (North Ave to Montrose bounded by Sacremento).
“Heitman LLC, a Chicago-based real estate investment firm, has agreed to pay about $158 million for a 250-unit luxury apartment building, according to people familiar with the transaction. The price equates to $632,000 per unit, a high for Chicago and a sign of soaring investor demand for trophy apartment towers, fueled by ultra-low interest rates.”
The thing is after 2008 instead of trying to cleanse the bad debt through the system through bankruptcies the powers that be doubled down on that strategy and did everything possible to keep the house of cards afloat. It worked to a degree (if you call debasing our currency by over $1T/year “working”). But now good money is being thrown after bad with deals like this. Good to see Steveo H. is at it again.
The yield starved capital markets are causing all sorts of distortions lately–anyone read about JPM’s AMJ? It’s now trading at a premium and MLP funds are now at 350B vs. 35B a few years ago. This is not going to end well. (I still own MLPs I suspect the tea leaves will change slowly enough for me to rotate out when needed).
Southbound- they just announced yet another new apartment high rise next to one they’re building right now in Streeterville. Plenty of empty lots in Streeterville.
Remember Hot Diggity Dog across from 600 N. Fairbanks? That was going to be a big high rise but the bust happened and now it’s back to being a parking lot. How soon will they announce the big apartment building that is going to be built there? I give it 6 months.
They’re building EVERYWHERE they can right now. Or haven’t you noticed all the cranes? My gosh. So obvious. Heck, they’re even building bigger buildings in Lakeview now.
There’s even a new “luxury” midrise going up at my favorite craphole intersection at Division/Milwaukee/Ashland!! The new tenants will have some great window viewing of the goings-on at the pigeon-shit infested park in that intersection, better than a sitcom.
“Then why are like 10 of them being built (have been built) in the last 2 years? Doesn’t seem that difficult to me. What have we had? Like 7,000 to 10,000 units approved and most of them being built?
The city WANTS the construction.”
Yes, but the developer always has to reduce the height of the building or the number of units because the local NIMBYS say “the neighborhood will be too crowded or traffic is already bad and will get worse”. People this is a city, it’s SUPPOSE to be crowded. And if you don’t like sitting in traffic, get off your obese rear end and walk or take the L.
There is a tower planned for the Jewel on Division and State. This building is right on top of a red line station and is a perfect example of transit oriented development. Everyone in the building shoul be able to walk or take public transit to work. So the tower should have 600+ units. But I guarantee the NIMBYS will complain about parking, traffic, their views, and crowded conditions as a reason to downsize or not allow the project. Then, hypocritically, they will bitch about property taxes being so high. Well you opposed a project that would have added millions to the city tax base.
” People this is a city, it’s SUPPOSE to be crowded.”
Supposed, or rather “SUPPOSED”.
” Everyone in the building shoul be able to walk or take public transit to work. ”
Yeah everyone who lives in downtown highrises can walk or take public transit to work.
“There is a tower planned for the Jewel on Division and State.”
I’m in total agreement. If your in a block or two radius of a L stop, zone it up for massive apartment buildings.
“Everyone in the building should be able to walk or take public transit to work. ”
I don’t live downtown and I walk and take public transportation to work. Chicago has a pretty good public transportation system, actually- with the El, buses and the METRA. It’s better than a lot of other cities. I know many people who live on the North Side who don’t own cars and they get along just fine.
Sabrina posted: “..They’re building EVERYWHERE they can right now…” I disagree – the fact that Optima, an exc. developer with a great track record will build a 60 story apt bldg steps off Mag Mile on site entitled per PD 10+ years ago does not mean moderately zoned property ‘EVERYWHERE’ will be built on. Apt developers are only getting financed for well conceived well backed projects (read an article about Optima’s 2 projects – backed by DeBartolo & hedge fund money/ guarantees and they paid seller less than 60% of ask for site – doesn’t sound bubblicious to me). And the midrise @ SWC Ashland & Division is an excellent example of what is really happening – of course Dan got it wrong. It’s the opposite of luxury apts – small units aimed at young professionals, providing little or no parking or amenities (across from L station) subsidized by securing approval to put a bank on 1st floor.
“And the midrise @ SWC Ashland & Division is an excellent example of what is really happening – of course Dan got it wrong. It’s the opposite of luxury apts – small units aimed at young professionals, providing little or no parking or amenities (across from L station) subsidized by securing approval to put a bank on 1st floor.”
When was the last time they built a midrise high rise in the Ukranian Village neighborhood Southbound?
Um…NEVER! Never have seen that happen.
I don’t disagree that the prime locations will get financing first. That’s how it worked during the condo boom and that’s how it’s working now. But there are plenty of parking lots in prime locations. For the banks, it’s a win-win if a developer wants to build a 50 story apartment rental building with Class A rents. There is nearly 100% occupancy for Class A right now and rents are rising. What can go wrong?
Not sure what you mean Sabrina: there is a 6+ year old midrise across the street @ NWQ of Division & Ashland (built as condos but unsold units got converted to apts) and other midrises in this neighborhood. In any event I’d prefer to own new apts in Ukie Vill/West Town/Wicker Pk with limited competition vs Fulton district west of river (where Fifield continues to prove me wrong). No matter how often you mention parking lots in prime locations you aren’t going to be proved correct imho.
Today’s Crain’s: “…To date, new lending has been anemic in the Chicago area. The total balance of outstanding commercial property loans here dropped to $44.5 billion in the first quarter from $45 billion in the fourth quarter and $47.9 billion one year ago, Trepp’s data show. Local loan balances peaked at $79.5 billion in late 2008..”.
That is the reality today for prospective developers. The win win for banks now and the foreseeable future is to continue making their small riskless spread on gov’t deposits, while avoiding issuing potentially loser loans that in hindsight look like speculative r.e. lending. Unless an unblemished builder with great equity partners shows up with great plan for an unquestionably strong location (see Optima example). Their success won’t help a garden variety developer get financing to build apartments in locations like 16th & Clark during 5 years imo.
“Not sure what you mean Sabrina: there is a 6+ year old midrise across the street @ NWQ of Division & Ashland (built as condos but unsold units got converted to apts) and other midrises in this neighborhood.”
This is a HIGHRISE!!!! Duh!!!!
There are midrises all over the god-damn place. When is the last time you saw a new high rise being built in the Ukranian Village? Um…NEVER! Because it’s the tallest thing in that neighborhood.
We were talking about how easy it is to get financing now and how new apartment buildings are sprouting up all over the place. Yeah- like this one in Ukranian Village. And, oh, the new one they just announced in an old loft building next to the Vic. According to Crain’s- they already have the financing to convert it (it is a storage/business right now.)
Because, like I said, money is flowing freely. Apartments are building built all over the place. We’ll keep on like this until there is too much supply (again.)
So- you’re wrong Southbound. New apartment announcements almost every day.