Cap rates below the cost of money already is happening in some of the hottest areas of the city, such as the Lincoln Park and Lakeview neighborhoods, where multifamily buildings used as rental properties have been bought for conversion to condominiums. However, cap rates remain in high single digits to double digits in most city neighborhoods, as well as the suburbs.

Regardless, owners of multifamily properties are enjoying low vacancy rates as well as healthy rent increases above the rate of inflation, real estate professionals were told at the Real Estate Investment Association's/Society for Industrial and Office Realtors' Summit 2001 here. Vacancy rates were around 2% in Lakeview and Lincoln Park on the city's North Side, around 3% in the northwest suburbs and DuPage County, says Alon Yonatan, research services manager for Marcus & Millichap--Chicago.

Meanwhile, asking rents have increased by 8.5%, Yonatan says, but actual increases for the entire market probably ranged from 4% to 4.5%, and as high as 8.5% in some city neighborhoods.

For the future, Yonatan sees increased upward pressure on rents as well as continued low vacancies thanks to a supply of rental housing that has failed to keep up with demand. The market started to catch up with the pent-up demand in 2000, Yonatan says, thanks to slower job growth. But for the previous seven years, it did not. For owners, who increasingly are individuals rather than institutional buyers, utility costs are expected to rise between 40% and 50% in 2001, Yonatan says, but that should be offset by low vacancy rates, above-average rent increases and lower interest rates.

Lower interest rates also will continue to boost values of multifamily properties, Wolkoff says, making 2001 a good time for buyers with the proper strategy. Adds Hugh Kelly, CRE, chief economist for Grubb & Ellis' Laundaur Realty Group, Inc., "The outlook for the next five to 10 years is a decline in interest rates by 200 basis points. Overall, you couldn't have a better foundation for the real estate industry."

Wolkoff recommends buyers in 2001 extend their holding periods, stay away from short-term mezzanine financing and focus their buying strategy. "In the '90s, you could've picked any market in the country and done well," he says. He expects more competition for deals, with scenarios such as "three to seven bidders on every property."

Who's buying? Wolkoff says individuals and syndicates made up 45% of the market last year, a big jump from their 31% share in 1999. Meanwhile, life and pension funds saw their share drop from 34% of the market to 26%. And REITs became increasingly smaller players, dropping from 10% to 8%.

Echoing sentiments heard in other reports on the Chicago market, Yonatan says multifamily properties here are attractive because of the area's "extremely diverse employment base.

Instant Insights /

Multifamily Market Could See 7% Cap Rates, Bidding Wars

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