\u201cPlaces where people flooded to [during the pandemic] have been overbuilt, and I think the demographics and the job growth in those areas will self-correct over time. But right now, Chicago looks pretty attractive.\u201d<\/p>\n
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\n Chicago’s Navy Pier\n <\/p>\n
Chicago saw 4.2% year-over-year rent growth in May, the third highest in the nation, behind Brookline, Massachusetts, and Hollywood, Florida,\u00a0according to CoStar data<\/a>. Other Midwest cities also far surpassed\u00a0average national rent growth of 1% last month, with Indianapolis posting 2.6% growth and Madison, Wisconsin, hitting the 2.3% mark.\u00a0<\/p>\n A\u00a0growing number of capital sources are taking note and raising sizable funds to chase housing deals across the Midwest. Morgan Properties<\/a> made a $500M Midwest\u00a0multifamily bet<\/a>\u00a0in April, and Chicago-based Clear Investment Group<\/a> is\u00a0targeting $300M<\/a>\u00a0for a fund it launched in March aimed at workforce housing.<\/p>\n \u201cThe Sun Belt was obviously hot post-Covid,\u201d Morgan Properties co-President\u00a0Jonathan Morgan<\/a>\u00a0told\u00a0The Wall Street Journal<\/a>\u00a0at the time. \u201cAt the moment, it\u2019s the Midwest.\u201d<\/p>\n Whereas multifamily investors once parked money in gateway cities like San Francisco, LA and New York as a means to preserve capital, places like Indianapolis, Minneapolis and Chicago have become strong draws for core and core-plus investments. That is thanks to organic growth and a wealth of homegrown offices, Trepp<\/a> Senior Research Manager Tom Taylor<\/a> said on last week\u2019s edition of Bisnow\u2019s First Draft Live<\/a>.<\/p>\n In Chicago, first-quarter multifamily sales more than doubled compared to the same period in 2024, according to\u00a0a report from Northmarq<\/a>. Activity\u00a0was evenly distributed across property classes, though Class-A prices shot up, with the median price rising to $421,500 per unit, up 33% from the 2022-2024 average.<\/p>\n From top-shelf properties to Class-C buildings, Chicago is performing well with rental growth, CIG CEO Amy Rubenstein<\/a>\u00a0said. While the company hasn\u2019t done deals in the city of late, Rubenstein is optimistic about the outlook.\u00a0<\/p>\n \u201cWhat is a better investment right now with inflation going on than placing your money in multifamily, existing multifamily assets, where you are sheltered somewhat from some of those construction costs?\u201d Rubenstein said. \u201cYou are sheltered from inflation because you can continue to adjust rents accordingly. \u2026 It’s just a great place to be.\u201d\u00a0<\/p>\n But the area\u2019s growth will at least be initially limited by market headwinds pushing against deals. That includes a cost of capital that has remained elevated for a few years, higher construction costs and a volatile national political environment.\u00a0<\/p>\n There are only about 1,200 Class-A multifamily units under construction in the city set to deliver in the next three years, according to\u00a0a Luxury Living report<\/a>\u00a0from earlier this year.\u00a0<\/p>\n Acquisitions are easier to make work financially compared to ground-up construction because of a higher cost to build, said Jeff Brown, founder and CEO of Wheaton, Illinois-based T2 Capital Management.<\/p>\n Deportations<\/a> will only amplify those costs, as immigrants make up so much of the industry\u2019s labor pool, he said.\u00a0\u00a0<\/p>\n \u201cThat’s been a shift that’s been ongoing, I would even say since Covid, where construction costs just spiked so significantly and supply chains were constrained,\u201d Brown said. \u201cNow it’s only being exacerbated when you consider shrinking the labor pool.\u201d\u00a0<\/p>\n That hasn\u2019t stopped some developers. Last week, Focus celebrated the opening of the second phase of its redevelopment at Fox Valley Mall<\/a>. The newest addition to the mall, dubbed Lucca, adds a second luxury apartment community with a variety of\u00a0unit types.\u00a0<\/p>\n The project features 323 luxury rental apartments and 55K SF of public space. Anderson said even\u00a0with today\u2019s interest rates, there is still enough cushion in deals, if underwritten correctly, to justify new construction.<\/p>\n \u201cWe still have got enough margin, then, that we can build and take advantage of this lack of supply,\u201d Anderson said.<\/p>\n Investors that are acquiring multifamily properties are often taking advantage of broken capital stacks on properties that are otherwise healthy.\u00a0<\/p>\n Anderson said many of those buying properties in Chicago have been buying assets that aren’t distressed operationally but have gotten into trouble as rates have risen. The people and entities buying those properties at the right number are going to experience the benefits of the rent growth going forward, he said.\u00a0<\/p>\n T2 is paying\u00a0a lot of attention to \u201cbroken balance sheet\u201d situations, placing its bets on the uneven dynamic between renting and owning a home, Brown said.\u00a0<\/p>\n \u201cThis bifurcation between what it takes to buy a house versus what it takes to rent still greatly favors renting,\u201d he said. \u201cThere’s a lot of momentum and these tailwinds behind multifamily that leads to. Even though rents are up, they’re not near as severe as it would be to buy a house.\u201d<\/p>\n CIG operates in a slightly different space from most investors, targeting workforce housing<\/a>, which\u00a0most investors aren\u2019t pursuing. Rubenstein said the properties the company targets and acquires often have high vacancies and delinquencies. Cash flow is often negative.\u00a0<\/p>\n<\/p>\n