Does the second city attract investors from secondary cities?

Many commercial real estate experts have predicted an exodus of homeowners and investors from crowded urban areas like Chicago during the coronavirus pandemic. Big cities were seen as increasingly inhospitable to residents, who had to move in droves to so-called secondary cities, smaller metropolitan areas like Nashville or Austin where the cost of living was lower and residents could get more space.

At the very least, the pandemic was expected to create an additional incentive or sense of urgency for people who were already planning or considering leaving big cities like Chicago in 2020, said Sean Connelly, director of 33 Realty, based in Chicago. He noted that the trend is expected to create a mini-boom for small towns and a squeeze in occupancy rates in skyscrapers and other residential properties in some Chicago neighborhoods.

But did he do it?

“Yes, there was a big upheaval when people started working remotely due to the Covid-19 pandemic,” said Connelly, whose company provides management, brokerage and other services for multi-family properties. “But there was an overreaction of the market to the damage that cities would suffer. What we have seen is that the big cities have actually bounced back much faster than we thought a year ago.

Connelly, who has over a decade of commercial real estate experience in Chicago, attributed the phenomenon to a variation of an old axiom that could apply to CRE and pretty much everything in between.

“Maybe the grass isn’t always greener after all,” he said.

Investors found that secondary markets lacked the products and supporting infrastructure to cope with a sudden influx of buyers. At the same time, the availability of Covid vaccines and a cooling of the urban unrest seen in 2020 have restored the level of comfort for people living in dense and ancient cities.

As a result, he said, places like Chicago are once again attractive to shoppers, and the outlook for the multi-family market there is much more positive and optimistic than it was a year ago.

“We are finding that existing products are filling up much faster than expected when we looked at the rental horizon last year,” said Connelly. “We’ve seen rents come back, not to pre-pandemic levels, but they’re close. We anticipate an increase in rents in spring 2022 due to demand from young tenants returning to the city. Everything that attracts someone to live in Chicago is still there, and we remain an international destination for renters and investors.

However, he added, some important questions remain on the horizon for the Chicago multi-family market.

One of them is the Affordable Requirements Ordinance updated by Chicago City Council earlier this year. The ARO requires developers to devote a percentage of new apartments or condominiums to low and moderate income residents. In the city’s largely upscale downtown, the ordinance calls on developers to reserve 20% of new developments for affordable housing – or pay extra fees to the city.

This has created some uncertainty for Chicago developers who, like their peers across the country, have already seen their projects slowed down by supply chain disruptions and labor shortages, Connelly said.

“It’s difficult to build right now in Chicago, given the new ARO,” he said. “Products that were already in the process of being licensed and that were authorized are on the rise. But the new ARO will make it harder to make pencil deals. Until the developers can find a market solution to the new ordinance, I think we’ll see a slowdown on the construction side.

To further complicate matters, 2021 is a year for property assessments in Chicago. People are also keeping a careful eye on inflation.

“There is a real fear of what will happen with property taxes for long-term Chicago homeowners who may not have had real pressure on their taxes in a while,” Connelly said. “Conversely, there are buyers who have been successful in other markets in trying to invest capital in the real estate market as a hedge against inflation.”

With today’s historically low interest rates, he added, a property bought today is likely to be worth much more 10 years from now despite the current headwinds in Windy City. In addition, the odds are favorable that investors with new debt will overcome the uncertainty surrounding the tax increases that will inevitably be passed on to tenants.

Despite the uncertainties, Connelly is optimistic about the future of multi-family in Chicago.

“We expect the market to return to normal and will quickly return to a growth path,” he said.

This article was produced in collaboration between Studio B and 33 Realty. Bisnow News staff were not involved in the production of this content.

Studio B is Bisnow’s in-house content and design studio. To learn more about how Studio B can help your team, contact [email protected]

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