A consistent theme that I’ve heard from my local Chicago based clients over the course of this incredible run that the multifamily market has been on over the last 18-24 months is that they can’t make sense of the prices that people are paying for assets; in short, they could never make the numbers work. I have to remind them that Chicago is a world-class city with quality income-producing real estate that garners attention not just from all over the U.S., but all over the world. Sometimes I think that some local investors forget that, or have this pre-conceived notion that out-of-state or foreign capital only operates in the institutional space. This couldn’t be further from the truth. The amount of non-native capital that has entered Chicago, or is looking to enter Chicago in the mid-market space is at the highest level that I’ve seen in my career. (“Non-native capital” defined as not originating in Chicago for the purposes of this blog.)
We are all, naturally, products of our environment and if you’ve only done deals in Chicago and only looked at deal metrics through the lens of only doing deals in Chicago, then it’s easy to understand the head scratching at some of the current values in the market. The perception is that the Buyer overpaid and it’s only a matter of time before they go belly up. What we sometimes overlook, are the different environments that non-native investors are coming from and the lens with which they are able to view Chicago through. For example, a California investor who just sold an asset in San Francisco at a 3.5% CAP and is an exchange would look at a stabilized 5% CAP in Chicago as a bargain, relative to the asset they just sold. They’re probably able to replicate the quality of the real estate and improve their cash flow, without increasing their equity or risk profile. Price per unit and/or Gross Rent Multiplier metrics, local historical favorites, don’t carry as much weight, if any, to that investor.
As another example, foreign investors may be able to pay more for an asset because of tax laws in their home country, or currency exchange rates, or they could be motivated by citizenship through EB-5 investment, or they may view the U.S. as a more stable long-term investment than their home country. There are too many reasons to list, but the point is that their lens is drastically different than the neighborhood operator.
Whatever the reasons, it is important to remember as you try and make sense of values, or contemplate the value of your own asset, that mid-market apartment product in Chicago is garnering attention from all over the world. With that in mind, if you are making the decision to sell an asset, it is as important as ever to make sure that it is positioned in a way that it gets exposure to the correct buyer pool. In this broker’s opinion, that buyer pool is the entire world.