Chicago Reports - RED Capital Group

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Chicago Reports - RED Capital Group
CHICAGO, ILLINOIS
MARKET OVERVIEW & MULTIFAMILY HOUSING UPDATE
RED Capital Group | 1Q15 | July 2015
1Q15 PAYROLL TRENDS AND FORECAST
PAYROLL JOB SUMMARY
Total Payrolls
3,552.1m
Annual Change
55.6m (1.6%)
2015 Forecast
49.3m (1.4%)
2016 Forecast
30.6m (0.8%)
2017 Forecast
14.5m (0.4%)
2018 Forecast
2.8m (0.1%)
Unemployment (NSA)
6.0% (May)
Chicagoland payroll growth accelerated for the second
consecutive quarter. Payroll employment grew at a
55,600-job, 1.6% year-on-year rate in 1Q15, up from
4Q14’s 51,000-job performance. The retail trade and
business services sectors were primarily responsible,
collectively expanding at a 25,900-job, 2.6% rate, up from
4Q14’s 13,400-job, 1.3% advance. By contrast, goods
producing industries exhibited a degree of weakness.
Manufacturing and wholesale trade continued to hemorrhage jobs, together recording attrition at a -5,600-job, 1.2% annual rate down from 4Q14’s -3,600, -0.8% decline.
2Q15 got off to a moderately slower start, as establish-
OCCUPANCY RATE SUMMARY
Occupancy Rate (Reis)
RED 50 Rank
96.5%
18th
Annual Chg. (Reis)
+0.1%
RCR YE15 Forecast
96.3%
RCR YE16 Forecast
95.9%
RCR YE17 Forecast
95.5%
RCR YE18 Forecast
95.1%
EFFECTIVE RENT SUMMARY
Mean Rent (Reis)
$1,121
Annual Change
2.7%
RED 50 Rent Change Rank
37th
RCR YE15 Forecast
2.2%
RCR YE16 Forecast
3.2%
RCR YE17 Forecast
2.6%
RCR YE18 Forecast
2.6%
TRADE & RETURN SUMMARY
$5mm+ / 100-unit+ Sales
Approx. Proceeds
Avg. Cap Rate (FNM)
Avg. Price/Unit
17
$920.0mm
5.8%
$155,514
Expected Total Return
6.6%
RED 46 ETR Rank
27th
Risk-adjusted Index
6.90
RED 46 RAI Rank
10th
ments hired at a 46,800-job, 1.3% rate April and May. Job
cuts in the key manufacturing and finance sectors were
the precipitating factor. The high-skilled business and
health care services sectors remained Chicago’s leading
lights, adding jobs at a brisk 27,300-job, 2.2% pace.
Chicago’s history of slow job creation (metro headcounts
were lower in March 2015 than March 2000) make modeling the market challenging. RCR’s best effort achieves a
97.5% adjusted-R2 using U.S. job growth and “Baa” yields
and metro personal income and home price growth as
independent variables. The model foresees slower growth
in Chicago’s future, dipping below 1% in mid-2016.
1Q15 ABSORPTION AND OCCUPANCY RATE TRENDS
Apartment demand softened during the first quarter as
tenants leased a net of 877 units, according to Reis, down
from 1,039 and 955 during the prior and year-earlier quarters, respectively. Supply totaled 1,152 units, representing
the largest one-quarter delivery since 2013. As a result,
occupancy fell 10 basis points sequentially to 96.5%. Preliminary 2Q15 data report another 10 bps decline to 96.4%.
Axiometrics surveys of 329 larger, stabilized properties
found average occupancy rates of 94.6% and 95.8% in
1Q15 and 2Q15, up 60 and 100 bps year-over-year, respectively. Class-C apartments recorded the highest 2Q15
occupancy, 96.8%, while classes A & B followed at 95.6%.
Among submarkets, occupancy was highest in suburban
areas that have received no recent supply, led by Downers
Grove (97.4%), Glendale Heights 97.3% and SW Cook Co.
(97.7%). By contrast, supply-rich infill areas (Loop, Gold
Coast, Lincoln Park) posted rates in the 94%-95% range.
RCR’s occupied stock growth model achieves a 93.3% ARS
using the rate of change of payroll and inventory growth,
home price appreciation and apartment vacancy as independent variables. The model projects steady annual space
demand of 3,300-4,300 units but still heavier supply.
1Q15 EFFECTIVE RENT TRENDS
Reis report that effective rents increased sequentially at a
sluggish 0.4% rate for the second consecutive quarter. As a
result, the year-on-year comparison declined sharply in
1Q15, falling from 3.7% in the prior quarter to 2.7%. Metro
rent growth was hampered by soft conditions in Lake Co.
and several Northwest Cook suburban submarkets.
Axiometrics surveys were more upbeat, recording faster
rent growth in 1H15. Rents at stabilized same-store properties increased at unit-weighted y-o-y averages of 4.6% and
4.8% during 1Q15 and 2Q15, respectively. Sequentially,
rents increased 2.5% and 2.3% in the same periods. By
segment, class-B properties recorded the fastest progress,
rising 5.1% and 5.7% y-o-y, while class-A properties lagged.
Trends in the supply-rich City West and Loop submarkets
were slower than average while gains in established infill
neighborhoods were constructive, exceeding five percent.
RED’s rent model uses U.S. payroll, nominal GDP and metro
occupied stock growth, the slope of the yield curve and
the GDP deflator as independent variables to achieve a
93.3% ARS. The model foresees sluggish trends for the
balance of 2015, followed by a bounce next year fueled by
faster absorption, a flatter yield curve and higher inflation.
1Q15 PROPERTY MARKETS AND TOTAL RETURNS
The surge in interest among foreign, hedge and investment fund and public REIT buyers in Chicagoland properties that produced a sharp rise in 4Q14 sales continued in
the first half 2015. Sales of properties valued at $5 million
or more for which price data were available numbered 17
during 1Q15, generating $920mm of proceeds, comparing
closely to seasonally stronger 4Q (19 sales/$880mm proceeds) activity. Preliminary 2Q data suggest sales velocity
continued at a brisk clip as 16 trades were recorded by the
third week of June for total proceeds of $632mm.
Cap rates for high-rise trophies in the Gold Coast/River
North area were in the low-4% area. Class-A/B+ high rises
in the Loop traded in the high 4% range. Class-B suburban
garden apartments were priced to yield buyers low-5% to
high-5% initial yields. Published cap rates suggest that
class-C product was valued in the 7% to 8% range.
Using a 5.4% proxy cap rate for a standard class-B/B+
asset; a 6.1% terminal cap rate; and model derived occupancy and rent forecasts, RCR estimate that a buyer would
expect to earn a 6.6% 5-year unlevered total return from a
Chicago investment. This figure ranks 27th among the RED
46, about 30 basis points below the group mean. Low
model standard error lowers investment uncertainty, however, elevating Chicago to 10th risk-adjusted return rank.
MARKET OVERVIEW | 1Q15 | CHICAGO, ILLINOIS
Chicago Occupancy Rate Trends
Source: Reis History, RCR Forecasts
Average Occupancy
97.0%
96.5%
96.3%
96.5%
97.0%
RED 46 AVERAGE
CHICAGO (REIS/RCR)
96.5%
95.9%
96.0%
96.0%
95.5%
95.5%
95.1%
95.0%
95.0%
95.5%
95.0%
94.5%
94.5%
94.0%
94.0%
2012
2013
2014
2015f
2016f
2017f
2018f
2019f
1Q20f
Chicago Absorption and Supply Trends
Source: Reis History, RCR Forecasts
ABSORPTIONS
COMPLETIONS
Units (T12 Months)
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
2012
2013
2014
2015f
2017f
2018f
2019f
1Q20F
Chicago Cap Rate Trends
7.5%
Average Cap Rate
2016f
Source: eFannie.com, RCR Calculations
EAST NO CENTRAL REG
CHICAGO
7.0%
6.5%
6.3%
6.2%
6.4%
6.6%
6.1%
5.9%
6.0%
5.6%
6.3%
6.2%
5.6%
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
5.8%
5.9%
1Q15
2Q15
5.5%
5.5%
5.0%
1Q12
6.1%
4Q13
1Q14
2Q14
3Q14
4Q14
NOTABLE TRANSACTIONS
Property Name (Submarket)
Property Class/
Type (Constr.)
Approx. Date of
Transaction
Total Price /
(in millions)
Price /
per unit
Estimated
Cap Rate
4.0%
The Chicagoan (River North)
A- / HR (1990)
16-Mar-2015
$104.0
$470,588
The Meadows (West Lake County)
B / GLR (1990)
26-Mar-2015
$53.0
$106,855
5.8%
Pensacola Place (Belmont/Montrose)
B+ / HR (1981)
6-Apr-2015
$44.9
$170,056
5.0%
Wheaton 121 (Glen Ellyn/Wheaton)
A- / MR (2014)
20-May-2015
$95.8
$312,908
4.3%/4.8% p.f.
Burnham Pointe (South Loop/Printer’s Row)
A / HR (2008)
17-Jun-2015
$126.0
$422,819
4.9%
RED Capital Research | July 2015
MARKET OVERVIEW | 1Q15 | CHICAGO, ILLINOIS
Chicago Effective Rent Trends
Sources: Reis, Inc., Axiometrics and RCR Forecast
YoY Rent Trend
6%
RED 46 AVERAGE
CHICAGO (REIS/RCR)
6%
CHICAGO AXIOMETRICS SAME-STORE
5%
5%
2.7%
4%
4%
3.1%
3%
2.7%
2.2%
2.6%
3%
2.6%
2%
2%
1%
1%
2012
2013
2014
2015f
2016f
2017f
2018f
2019f
1Q20f
Chicago Home Price Trends
Source: S&P Case-Shiller and FHFA Home Price Indices and RCR
YoY Growth Trend
12%
12%
8%
8%
5.4%
4%
4%
3.0%
0%
0%
1.9%
-4%
U.S. FHFA HPI
CHICAGO FHFA HPI
1.4%
0.6%
0.9%
-4%
CHICAGO S&P C-S HPI
-8%
-8%
2012
2013
2014
2015f
2016f
2017f
2018f
2019f
1Q20f
Chicago Payroll Employment Trends
Source: BLS, BEA Data, RCR Forecasts
YoY Growth Trend
4%
4%
3%
3%
1.6%
2%
2%
1%
1.4%
0%
US GDP GROWTH
-1%
2012
2013
2014
0.7%
US JOB GROWTH
2015f
2016f
0.2%
0.1%
0.2%
0%
CHICAGO JOB GROWTH
2017f
1%
2018f
2019f
-1%
1Q20f
The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting or financial
advice, or recommendations to buy or sell currencies or securities or to engage in any specific transactions. Information has been gathered from third
party sources and has not been independently verified or accepted by RED Capital Group. RED makes no representations or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the report. RED cannot be held responsible for any errors
or misrepresentations contained in the report or in the information gathered from third party sources. Under no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Any
reliance upon this information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your
specific situation. Any views expressed herein are subject to change without notice due to market conditions and other factors.
RED Capital Research | July 2015
MARKET OVERVIEW | 1Q15 | CHICAGO, ILLINOIS
SUBMARKET TRENDS (REIS)
Effective Rent
Submarket
Physical Vacancy
1Q14
1Q15
Change
1Q14
1Q15
Aurora / Naperville
$1,086
$1,113
2.5%
3.0%
2.2%
-80 bps
Belmont-Montrose
$1,243
$1,277
2.7%
2.1%
2.5%
40 bps
City West
$1,072
$1,103
2.9%
6.6%
6.6%
0 bps
-30 bps
Downers Grove
Change
$974
$995
2.1%
3.2%
2.9%
$1,018
$1,031
1.2%
2.3%
2.1%
-20 bps
$984
$1,002
1.9%
4.4%
3.6%
-80 bps
Glendale Heights
$1,160
$1,189
2.5%
2.4%
1.8%
-60 bps
Glenview / Evanston
$1,089
$1,139
4.6%
2.7%
2.8%
10 bps
Gold Coast
$1,853
$1,928
4.0%
5.2%
5.3%
10 bps
East Lake County
Glen Ellyn/Wheaton
Joliet
$832
$855
2.8%
5.2%
3.6%
-160 bps
Kane County
$1,037
$1,075
3.8%
3.1%
5.5%
240 bps
Lincoln Park
$1,283
$1,301
1.4%
1.3%
1.4%
10 bps
McHenry County
$941
$973
3.4%
2.3%
3.4%
110 bps
O'Hare
$924
$946
2.5%
3.5%
3.1%
-40 bps
Oak Park
$959
$959
0.0%
3.4%
2.9%
-50 bps
Palatine
$1,146
$1,186
3.5%
4.5%
3.6%
-90 bps
$832
$848
1.9%
3.5%
3.4%
-10 bps
$1,032
$1,047
1.4%
3.2%
3.1%
-10 bps
Rogers Park / Uptown
Schaumburg / Hoffman Estates
South Shore
$921
$939
1.9%
4.1%
3.6%
-50 bps
Southeast Cook County
$848
$860
1.5%
3.5%
3.1%
-40 bps
Southwest Cook County
$835
$847
1.4%
3.2%
2.6%
-60 bps
$1,672
$1,761
5.3%
7.0%
9.8%
280 bps
$943
$954
1.2%
2.9%
2.0%
-90 bps
The Loop
West Lake County
Wheeling
$1,079
$1,136
5.3%
2.1%
2.4%
30 bps
Woodridge / Lisle
$1,042
$1,056
1.3%
3.4%
2.9%
-50 bps
$1,091
$1,121
2.7%
3.6%
3.5%
-10 bps
Metro
FOR MORE INFORMATION ABOUT RED’S RESEARCH CAPABILITIES CONTACT:
Daniel J. Hogan
Director of Research
[email protected]
+1.614.857.1416 office
+1.800.837.5100 toll free
THE FACE OF LENDING
RED Capital Group, LLC  RED Mortgage Capital, LLC  RED Capital Markets, LLC (Member FINRA/SIPC)  RED Capital Partners, LLC
10 West Broad Street, Columbus, Ohio 43215
 redcapitalgroup.com  +1.800.837.5100
© 2015 RED Capital Group, LLC
CHICAGO, ILLINOIS
MARKET OVERVIEW & MULTIFAMILY HOUSING UPDATE
RED Capital Group | 2Q14 | September 2014
2Q14 PAYROLL TRENDS AND FORECAST
PAYROLL JOB SUMMARY
Total Payrolls
3,802.7m
Annual Change
26.3m (0.7%)
2014 Forecast
44.9m
2015 Forecast
75.8m
2016 Forecast
27.7m
2017 Forecast
12.0m
Unemployment (NSA)
6.8% (July)
OCCUPANCY RATE SUMMARY
Occupancy Rate (Reis)
96.5%
RED 50 Rent Chg. Rank
19th
Annual Chg. (Reis)
+0.10%
RCR YE14 Forecast
96.4%
RCR YE15 Forecast
96.4%
RCR YE16 Forecast
96.0%
RCR YE17 Forecast
95.7%
Mean Rent (Reis)
$1,098
Annual Change
3.7%
17th
RCR YE14 Forecast
3.5%
RCR YE15 Forecast
3.3%
RCR YE16 Forecast
2.5%
RCR YE17 Forecast
1.9%
TRADE & RETURN SUMMARY
$5mm+ Sales
Approx. Proceeds
Avg. Cap Rate (FNM)
Avg. Price/Unit
By contrast, the health care and education services and construction sectors reported vigorous growth. Construction concerns
hired at a 5,500-job, 4.6% y-o-y pace during 2Q, the fastest
quarter recorded since 2006. Annual hiring accelerated to 6.5%
in July, representing the fastest 12-month advance since 2000.
Seasonally-adjusted data suggest that weather-related attrition
during 1Q14 was largely responsible for the recent soft patch. Net
payrolls dipped -16,600 jobs during 1Q but rebounded 17,800 in the
following quarter, largely due to a 16,400-job surge during June.
The RED Research Chicago payroll model employs U.S. payroll
and GDP growth and Chicago home price and personal income
growth as variables. The 97.7% A-R2 model foresees a return to
form during 2H14 and 2015, with gains in the 50—75,000 y-o-y job
range, followed by slower growth as the recovery loses steam.
2Q14 ABSORPTION AND OCCUPANCY RATE TRENDS
Tenant demand was seasonally stronger during the second quarter
as renters leased a net of 964 vacant units (Reis), up from 783
during the seasonally-weaker first quarter but down from 1,014 in
the year-earlier period. New unit deliveries were unexpectedly few
(687), allowing occupancy to rise another 10 basis points sequentially (and year-on-year) to a 13-year high 96.5%. By contrast,
Axiometrics surveys of larger stabilized same store properties
recorded 95.4% average occupancy, down 20 bps year-over-year.
Axiometrics same-store analysis indicates that class-C properties
recorded the highest occupancy again at an average of 96.2%.
Class-A properties followed (95.6%), with class-B assets (95.0%)
bringing up the rear. Class-A occupancy exhibited the strongest
momentum rebounding 260 bps from 1Q14’s supply-driven decline
to 93% area. Axiometrics report that ten recent construction midrise and high-rise infill building posted 300+ bps sequential occupancy gains, fueling the class-A recovery.
RCR finds that the best Chicago absorption model relies on lagged
payroll, rent and vacancy variables. The model indicates that occupied stock growth above the 0.4% long-term metro average will
continue through 2015, followed by weaker demand in 2016—2018,
largely attributable to slower job growth. This trend and supply
pressures may push occupancy about 100 bps lower by 2018.
2Q14 EFFECTIVE RENT TRENDS
EFFECTIVE RENT SUMMARY
RED 50 Rank
The tempo of payroll job creation decelerated for the second
consecutive quarter, falling from 1Q14’s weather effected 31,500job, 0.9% year-over-year rate to a 26,300-job, 0.7% pace, slowest advance recorded in nearly four years. Weak trends were
observed across a host of industry sectors, but softness was
most pronounced in manufacturing, retail trade and financial and
business services. The foregoing sectors trimmed headcounts at
a -130-job,0.0% annual pace during 2Q14, down from a 19,400-job,
1.2% advance during the stronger fourth quarter 2013.
19
$365mm
6.2%
$87,399
Expected Total Return
5.3%
RED 46 ETR Rank
36th
Risk-adjusted Index
4.09
RED 46 RAI Rank
26th
Reis report that both average asking and effective rents increased
$9 sequentially, gains of 0.8% and 0.9%, respectively, to $1,166 and
$1,098. Expressed on a year-over-year basis, rents increased 3.7%,
representing the largest annual gain since 2Q08. A smaller Axiometrics survey of 280 properties recorded a 2.3% y-o-y growth
rate to an average effective rent metric of $1,355.
concentrated in infill submarkets close to the Lakefront. At least 13
new buildings with about 4,500 units were delivered to the Rogers
Park to Loop corridor since April 2013. By the end of the second
quarter only two had reached 88% occupancy, according to this
source. Class-A rents are likely to rise at a slower pace than the
metro average while leasing agents backfill the vacant inventory.
Among stabilized properties surveyed by Axiometrics, the class-B
segment recorded the fastest rent growth at 2.8%, and class-C
followed with a 2.3% advance. Class-A assets trailed, garnering
only a 1.0% increase. Class-A gains were impeded by the large
number of new properties in lease-up, the majority of which are
The RCR rent model uses an unusually high 10 lags of the dependent
variable, national payroll trends and lagged absorption in the rent
model to achieve a 93.9% A-R2. This model forecasts a gradual
deceleration of Chicago rents from the mid-3% area to the high-1%
range in 2017 as job growth and absorption slow with the economy.
2Q14 PROPERTY MARKETS AND TOTAL RETURNS
Investor’s exhibited strong demand for Chicagoland properties
during the spring, closing 19 trades ($365 million) during 2Q14, the
largest number of transactions valued at $5 million or more since
the fourth quarter 2012. The majority of the trades involved older,
class-C properties, however, resulting in a relatively low $87,399
average unit price. These data compare to 15 transactions valued
at nearly $470mm ($165,589/unit) recorded during 1Q14.
chases demonstrate strong confidence in the metro rental market.
Preliminary data suggest that sales velocity was rather slower
during the summer. Through the first week of September only six
closings were observed. But the trades were concentrated in high
value assets acquired by some of Chicago’s most established
integrated real estate development and servicing firms. The pur-
RCR increased the generic cap rate assumption 10 basis points
from last quarter to 5.5%. With this purchase cap, a terminal cap
of 6.4% and model derived rent and occupancy forecasts an expected 5-year total return of 5.3% was derived, 130 bps below the
R46 mean. Risk-adjusted returns were near the 4.76 group mean.
Relatively generous available cap rates for a deep, liquid market
were the primary draws. Although infill trophies still trade in the
mid-4s, investors were able to acquire quality suburban properties
at initial yields in the mid-6% - 7% area, and some infill value-add
and repositioning trades were on offer in the mid-5% range.
MARKET OVERVIEW | 2Q14 | CHICAGO, ILLINOIS
Chicago Occupancy Rate Trends
Source: Reis History, RCR Forecasts
YoY Rent Trend
97%
96%
96.4%
96.4%
95%
96.2%
95.9%
95.6%
95.5%
94%
93%
RED 46 AVERAGE
92%
CHICAGO (REIS/RCR)
91%
90%
4Q09
4Q10
4Q11
4Q12
4Q13
4Q14f
4Q15f
4Q16f
4Q17f
4Q18f
Units (T12 Months)
Chicago Absorption and Supply Trends
Source: Reis History, RCR Forecasts
7,500
6,000
4,500
3,000
1,500
0
-1,500
-3,000
-4,500
4Q09
ABSORPTIONS
4Q10
4Q11
4Q12
4Q13
4Q14f
4Q15f
COMPLETIONS
4Q16f
4Q17f
4Q18f
Chicago Cap Rate Trends
Source: eFannie.com, RCR Calculations
Average Cap Rate
7.5%
EAST NO CENTRAL REGION
CHICAGO
7.0%
6.5%
6.0%
5.5%
6.2%
6.5%
6.9%
6.4%
6.3%
5.6%
5.9%
6.2%
6.4%
6.6%
5.6%
6.1%
6.3%
6.2%
5.5%
5.0%
1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14
NOTABLE TRANSACTIONS
Property Class/Type
(Constr.)
Approx. Date of
Transaction
Total Price /
<Appr. Value>
(in millions)
Price /
<Appr. Value>
per unit
Estimated
<Underwritten>
Cap Rate
Southgate Apartments (SW Cook County)
C / GLR (1973)
30-Apr-2014
$28.5
$67,059
8.5%
Eagle Creek Apartments (Downers Grove)
C / GLR (1978)
16-Jul-2014
$28.3
$81,647
7.4%
Chestnut Place (Gold Coast)
B / HR (1980)
17-Jul-2014
$80.5
$287,500
4.0%
Property Name (Submarket)
Tanglewood Apts. (O’Hare / Arlington Heights)
C+ / GLR (1972)
20-Jul-2014
$78.0
$93.079
6.5%
Hunter’s Glen Apts. (Aurora/Naperville)
B- / GLR (1991)
19-Aug-2014
$20.2
$116,094
6.5%
RED Capital Research | September 2014
MARKET OVERVIEW | 2Q14 | CHICAGO, ILLINOIS
Chicago Effective Rent Trends
Sources: Reis, Inc., Axiometrics, RCR Forecast
YoY Rent Trend
6.0%
3.7%
4.5%
3.0%
3.2%
1.5%
3.1%
2.6%
1.7%
0.0%
RED 46 AVERAGE
-1.5%
1.6%
CHICAGO (REIS/RCR)
CHICAGO AXIOMETRICS SAME-STORE
-3.0%
4Q09
4Q10
4Q11
4Q12
4Q13
4Q14f
4Q15f
4Q16f
4Q17f
4Q18f
Chicago Home Price Trends
Y-o-Y % Change
Source: FHFA Home Price Indices and RCR Forecasts
8%
6%
4%
2%
0%
-2%
-4%
-6%
-8%
2011
6.7%
5.8%
6.0%
4.3%
2.4%
0.1%
U.S.A.
2012
2013
2014f
2015f
2016f
CHICAGO (FHFA)
2017f
2018f
Chicago Payroll Employment Trends
Source: BLS, RCR Forecasts
Y-o-Y % Change
2.5%
1.9%
2.0%
1.5%
1.4%
1.0%
0.7%
0.5%
0.6%
0.0%
-0.5%
2011
U.S.A.
2012
0.0%
CHICAGO
2013
2014
2015f
2016f
2017f
0.2%
2018f
The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting or financial advice, or recommendations to buy or sell currencies or securities or to engage in any specific transactions. Information has been gathered from third party sources and has not been
independently verified or accepted by RED Capital Group. RED makes no representations or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the report. RED cannot be held responsible for any errors or misrepresentations contained in the report or in the information
gathered from third party sources. Under no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to
participate in any particular transaction or strategy. Any reliance upon this information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Any views expressed herein are subject to change without notice due to market conditions and other factors.
RED Capital Research | September 2014
MARKET OVERVIEW | 2Q14 | CHICAGO, ILLINOIS
SUBMARKET TRENDS (REIS)
Effective Rent
Submarket
Aurora / Naperville
Physical Vacancy
2Q13
2Q14
Change
2Q13
2Q14
$1,072
$1,094
2.1%
3.2%
2.7%
Change
-50 bps
Belmont-Montrose
$1,208
$1,247
3.2%
2.6%
2.1%
-50 bps
City West
$1,060
$1,082
2.1%
7.2%
6.1%
-110 bps
Downers Grove
$952
$983
3.2%
3.7%
3.1%
-60 bps
East Lake County
$995
$1,025
3.0%
2.5%
2.1%
-40 bps
Glen Ellyn / Wheaton
$968
$989
2.1%
3.6%
4.2%
60 bps
Glendale Heights
$1,126
$1,168
3.8%
2.5%
2.3%
-20 bps
Glenview / Evanston
$1,073
$1,102
2.7%
2.7%
2.7%
0 bps
Gold Coast
$1,721
$1,877
9.1%
3.5%
4.1%
60 bps
Joliet
$802
$836
4.1%
3.7%
4.2%
50 bps
Kane County
$1,006
$1,058
5.3%
3.4%
5.6%
220 bps
Lincoln Park
$1,263
$1,299
2.9%
1.4%
1.5%
10 bps
McHenry County
$919
$940
2.4%
2.7%
2.6%
-10 bps
O'Hare
$902
$927
2.7%
2.6%
3.7%
110 bps
Oak Park
$953
$959
0.7%
3.5%
3.3%
-20 bps
Palatine
$1,131
$1,166
3.1%
5.2%
4.4%
-80 bps
$819
$840
2.6%
3.9%
3.4%
-50 bps
$1,005
$1,030
2.6%
3.8%
3.3%
-50 bps
Rogers Park / Uptown
Schaumburg / Hoffman Estates
South Shore
$909
$924
1.7%
4.5%
3.9%
-60 bps
SE Cook County
$842
$849
0.8%
3.7%
3.4%
-30 bps
SW Cook County
$808
$841
4.0%
3.4%
3.2%
-20 bps
The Loop
$1,632
$1,716
5.2%
6.8%
8.0%
120 bps
$913
$945
3.4%
3.6%
2.7%
-90 bps
$1,053
$1,086
3.2%
2.5%
2.0%
-50 bps
$959
$1,054
9.9%
3.1%
3.1%
0 bps
$1,059
$1,098
3.7%
3.6%
3.5%
-10 bps
West Lake County
Wheeling
Woodridge / Lisle
Metro
FOR MORE INFORMATION ABOUT RED’S RESEARCH CAPABILITIES CONTACT:
Daniel J. Hogan
James P. Hensley
Director of Research
[email protected]
+1.614.857.1416 office
+1.800.837.5100 toll free
Senior Managing Director
Head of Multifamily Originations
[email protected]
+1.770.753.6472 office
+1.800.837.5100 toll free
THE FACE OF LENDING
RED Capital Group, LLC  RED Mortgage Capital, LLC  RED Capital Markets, LLC (Member FINRA/SIPC)  RED Capital Partners, LLC
Two Miranova Place, Columbus, Ohio 43215
 redcapitalgroup.com  +1.800.837.5100
© 2014 RED Capital Group, LLC
RED CAPITAL GROUP® | MARKET OVERVIEW
Chicago, Illinois
Multifamily Housing Update 1Q14 July 2014
Payroll Job Summary
Total Payrolls
3,718.7m
Annual Change
31.5m(0.9%)
2014 Forecast
36.8m
2015 Forecast
41.4m
2016 Forecast
35.3m
2017 Forecast
18.5m
Unemployment
7.2% (May)
1Q14 Payroll Trends and Forecast
The pace of Chicagoland payroll job formation
slowed materially during the first quarter, in part
due to unusually harsh winter weather. Employers
expanded at a 31,500-job, 0.9% annual rate,
down from 4Q13’s robust 55,500-job advance.
Consumer-driven sectors were hardest hit by the
Arctic blast as hiring in the retail and food services / accommodations industries slipped from
10,900 jobs year-on-year in 4Q to 700 jobs in 1Q.
Not everything could be chalked down to weather,
however, as skilled services hiring also decelerated. Expansion in the professional, technical, medi-
Occupancy Rate Summary
1Q14 Absorption and Occupancy Rate Trends
Occupancy Rate (Reis)
The cold temperatures also may have had an affect on apartment shoppers as absorption
plunged from 1,459 units in 4Q13 to 665 in
1Q14, representing the smallest first quarter occupied stock add since 2009 (Reis). But supply
was smaller still (132 units), allowing occupancy
to crawl another 10 basis points higher
(sequentially and year-on-year) to 96.4%.
RED 50 Rank
96.4%
20th
Annual Chg. (Reis)
+0.1%
RCR YE14 Forecast
96.1%
RCR YE15 Forecast
95.8%
RCR YE16 Forecast
95.7%
RCR YE17 Forecast
95.5%
Effective Rent Summary
Mean Rent (Reis)
$1,089
Annual Change
3.4%
RED 50 Rent Chg. Rank
19th
RCR YE14 Forecast
3.2%
RCR YE15 Forecast
2.9%
RCR YE16 Forecast
2.9%
RCR YE17 Forecast
2.3%
Axiometrics surveys of larger, stabilized properties
measured a 94.4% 1Q14 average rate, down -10
bps sequentially and -40 bps y-o-y. The class-A
$5mm+ Sales
Approx. Proceeds
Avg. Cap Rate (FNM)
Avg. Price/Unit
14
$490mm
6.4%
$185,080
Expected Total Return
6.9%
RED 46 ETR Rank
33rd
Risk-adjusted Index
3.55
RED 46 RAI Rank
25th
The RCR Chicago payroll model relies on national
payroll, GDP, home value, income and interest
rate variables to achieve a 96.0% adjusted-R2.
The slow start to 2Q14 notwithstanding, the model anticipates that the metro economy will heat up
in 2H14, and continue to record moderate, sustainable growth through the end of 2015.
segment posted the weakest performance, falling
-200 bps y-o-y to 93.2%. Class-C properties recorded the only gains, rising 50 bps y-o-y to 95.7%,
while class-B assets fell -40 bps to 94.2%.
RCR’s statistical studies of the Reis data history
find that metro supply, employment, vacancy and
rent and GDP are positively correlated to absorption, while metro home prices are negative. The
95.9% R2 model forecasts weaker prospective
demand that likely will precipitate an occupancy
drop of approximately 20 bps/year through 2017.
1Q14 Effective Rent Trends
Cold weather and soft demand notwithstanding,
rent trends remained vigorous, rising $12 (1.1%)
sequentially and $36 (3.4%) year-on-year (Reis).
The latter metric was the fastest gain recorded in
six years. Axiometrics findings, by contrast, were at
odds with Reis. This service reported a small sequential quarter same-store effective rent decrease (-0.2%) and just a 1.0% year-on-year advance. Weakness was largely confined to submarkets digesting large helpings of new supply, especially the Gold Coast (-3.4%) and Loop (-1.1%).
Indeed, it was the class-A segment that weighed
Trade & Return Summary
cal and education service subsectors dropped
from a 20,100-job pace in 4Q to an 11,200-job
rate in 1Q14, with the “pro-sci-tech” service subsector accounting for the brunt of it. Notably, the
same areas were soft in April and May as well.
heavily on broader metro trends. Sector rents
plunged about -$26 (-1.2%) sequentially and -$46
(-2.1%) y-o-y. Class-B and –C properties managed
to squeeze out 2.2% and 1.4% respective gains.
The Chicago rent model consists largely of lags of
the dependent variable and payroll (+) and home
price (-) metrics. The 93.3% R2 equation projects
slower but constructive rent growth for the forecast period, peaking at 3.6% during 2Q14 before
gradually slowing to the high 2% region by 2016.
The expected compound annual rate of 2.7%
ranks 31st among the RED 46 peer group.
1Q14 Property Markets and Total Returns
Liquidity remained deep in the Chicago property
market over the winter as 14 properties valued at
$5 million or more exchanged hands for proceeds
of about $490mm, up from 10 trades for total
value of $415mm in the year earlier period. Institutional investors acquired several trophy properties, bolstering total value statistics, most notably
units in a fractured Gold Coast condo property
valued at nearly $700 per square foot and a West
Loop tower valued at about $420,000 per unit.
Activity in the spring was heavily concentrated in
class-B and class-C suburban properties at cap
rates in the mid-6% to low-9% range. Institutional
engagement was less conspicuous, suggesting
that the spread between seller and buyer cap rate
expectations may be slightly wider than before.
As a result, we revised our generic cap rate assumption up 25 basis points to 5.75%. Using a
6.5% exit assumption and model derived rent and
occupancy forecasts, we estimate that a Chicago
investor would expect to achieve a 6.9% unlevered
return and mid-tier (#25) risk-adjusted returns.
MARKET OVERVIEW 1Q14 | CHICAGO, ILLINOIS
Chicago Occupancy Rate Trends
Source: Reis History, RCR Forecasts
Average Occupancy Rate
97%
96%
RED 46 AVERAGE
96.4%
C HIC A GO (REIS/ RC R)
96.1%
95.8%
95.8%
95.5%
95.6%
95%
94%
93%
92%
91%
4Q09
4Q10
4Q11
4Q12
4Q13
4Q14f
4Q15f
4Q16f
4Q17f
4Q18f
Chicago Absorption and Supply Trends
Source: Reis History, RCR Forecasts
Units (T12 Months)
8,000
Projected slower payroll job growth in 2H15 and 2016 is
expected to trim occupied stock growth below the 0.4%
annual average with moderate negative connotations for
average metro occupancy
6,000
4,000
2,000
0
-2,000
ABSORPTIONS
COMPLETIONS
-4,000
4Q09
4Q10
4Q11
4Q12
4Q13
4Q14f
4Q15f
4Q16f
4Q17f
4Q18f
Chicago Cap Rate Trends
Source: eFannie.com, RCR Calculations
Average Cap Rate
8.0%
EA ST NO CENTR A L R EG
CHI CA GO
7.5%
7.0%
6.7%
6.5%
6.0%
6.4%
5.8%
6.2%
6.4%
6.6%
5.9%
5.6%
5.3%
5.5%
6.4%
6.0%
6.1%
3Q13
4Q13
6.4%
6.5%
1Q14
2Q14
5.0%
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
NOTABLE TRANSACTIONS
Property Name (Submarket)
Property Class/
Type (Constr.)
Approx. Date of
Transaction
Total Price /
<Appr. Value>
(in millions)
Price /
<Appr. Value>
per unit
Estimated
<Underwritten>
Cap Rate
Park Lincoln (Lincoln Park)
B / HR (1973)
16-Jan-2014
$30.0
$214,286
5.3%
Fordham Glen (Glen Ellyn / Wheaton)
The Drexel Apartments (South Shore)
Southgate Apartments (SW Cook County)
B / GLR (1989)
B- / LR (1959)
C / GLR (1973)
3-Apr-2014
16-Apr-2014
1-May-2014
$31.3 (allocated)
$5.8
$28.5
$105,840
$67,151
$67,059
7.0%
9.2%
9.0%
RED CAPITAL Research | July 2014
MARKET OVERVIEW 1Q14 | CHICAGO, ILLINOIS
Chicago Effective Rent Trends
Sources: Reis, Inc., Axiometrics, RCR Forecast
8%
YoY Rent Trend
6%
4%
3.4%
2.9%
2%
2.9%
2.9%
2.3%
2.5%
0%
RED 46 AVERAGE
CHICAGO AXIOMETRICS SAME-STORE
CHICAGO (REIS/RCR)
-2%
-4%
4Q09
4Q10
4Q11
4Q12
4Q13
4Q14f
4Q15f
4Q16f
4Q17f
4Q18f
Y-o-Y % Change
Chicago Home Price Trends
Sources: FHFA and S&P Case-Shiller Home Price Indices
and RCR Forecasts
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
-2.0%
-4.0%
-6.0%
-8.0%
2011
U.S.A.
2012
2013
2014f
CHICAGO (FHFA)
2015f
CHICAGO (CASE-SHILLER)
2016f
2017f
2018f
U.S.A.
CHICAGO
Chicago Payroll Employment Trends
Source: BLS, Institute for Economic Competitiveness at UCF & RCR
2.0%
Y-o-Y % Change
1.8%
1.5%
1.3%
1.3%
1.0%
0.9%
1.0%
0.9%
0.9%
0.8%
0.5%
0.3%
0.3%
0.0%
2011
2012
2013
2014
2015f
2016f
2017f
2018f
The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting or
financial advice, or recommendations to buy or sell currencies or securities or to engage in any specific transactions. Information has been
gathered from third party sources and has not been independently verified or accepted by RED CAPITAL GROUP. RED makes no representations or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the report.
RED cannot be held responsible for any errors or misrepresentations contained in the report or in the information gathered from third party
sources. Under no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to
participate in any particular transaction or strategy. Any reliance upon this information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Any views expressed herein are subject to change without notice due to market conditions and other factors.
RED CAPITAL Research | July 2014
SUBMARKET TRENDS
Submarket
Effective Rent
Physical Vacancy
1Q13
1Q14
Change
1Q13
1Q14
Change
Aurora / Naperville
$1,066
$1,086
1.8%
3.3%
3.0%
-30 bps
Belmont-Montrose
$1,208
$1,243
2.9%
2.8%
2.1%
-70 bps
City West
$1,039
$1,072
3.1%
7.7%
6.6%
-110 bps
Downers Grove
$957
$974
1.8%
4.0%
3.2%
-80 bps
East Lake County
$990
$1,018
2.8%
2.7%
2.3%
-40 bps
Glen Ellyn / Wheaton
Glendale Heights
$962
$984
2.2%
3.8%
4.4%
60 bps
$1,115
$1,160
4.0%
2.7%
2.4%
-30 bps
Glenview / Evanston
$1,068
$1,089
2.0%
2.1%
2.7%
60 bps
Gold Coast
$1,701
$1,853
8.9%
3.7%
5.2%
150 bps
Joliet
$797
$832
4.4%
3.9%
5.2%
130 bps
Kane County
$1,000
$1,037
3.7%
3.6%
3.1%
-50 bps
Lincoln Park
$1,258
$1,283
2.0%
1.3%
1.3%
0 bps
McHenry County
$916
$941
2.7%
2.5%
2.3%
-20 bps
O'Hare
$897
$924
3.0%
2.7%
3.5%
80 bps
-60 bps
Oak Park
$949
$959
1.1%
4.0%
3.4%
WĂůĂƟŶĞ
$1,130
$1,146
1.4%
5.4%
4.5%
-90 bps
$814
$832
2.3%
3.9%
3.5%
-40 bps
Schaumburg / Hoffman
$996
$1,032
3.6%
4.0%
3.2%
-80 bps
South Shore
$901
$921
2.2%
4.3%
4.1%
-20 bps
Rogers Park / Uptown
SE Cook County
$841
$848
0.8%
3.7%
3.5%
-20 bps
SW Cook County
$806
$835
3.7%
3.6%
3.2%
-40 bps
$1,629
$1,672
2.6%
5.9%
7.0%
110 bps
$914
$943
3.2%
4.5%
2.9%
-160 bps
The Loop
West Lake County
Wheeling
Woodridge / Lisle
Metro
$1,050
$1,079
2.8%
2.5%
2.1%
-40 bps
$954
$1,042
9.2%
3.3%
3.4%
10 bps
$1,053
$1,089
3.4%
3.7%
3.6%
-10 bps
RED CAPITAL GROUP
For more information about RED’s research capabilities contact:
Daniel J. Hogan, Director of Research
[email protected]
614.857.1416
James P. Hensley, Senior Managing Director
Head of Mortgage Origination
[email protected]
770.753.6472
RED CAPITAL GROUP® | MARKET OVERVIEW
Chicago, Illinois
Multifamily Housing Update 4Q13 April 2014
Payroll Job Summary
Total Payrolls
3,718.6m
Annual Change
31.4m(0.9%)
2014 Forecast
33.9m
2015 Forecast
41.3m
2016 Forecast
42.3m
2017 Forecast
17.7m
Unemployment
8.1% (Mar.)
1Q14 Payroll Trends and Forecast
After recording eight consecutive quarters of
50,000–job (1.4%) or faster year-on-year employment growth, metro job creation slowed to a chillier 31,400-job, 0.8% rate during the winter quarter. Slower service industry hiring was primarily
responsible. Among the skilled service sectors,
financial, professional, technical, education and
health care service concerns added workers to
payrolls at an 8,200-job, 0.8% annual rate, down
from 18,800 during 4Q13. Likewise, lower skilled
service hiring was softer as leisure service and
retail trade establishments expanded at only a
Occupancy Rate Summary
4Q13 Absorption and Occupancy Rate Trends
Occupancy Rate (Reis)
Annual Chg. (Reis)
+0.2%
RCR YE14 Forecast
96.3%
RCR YE15 Forecast
96.3%
RCR YE16 Forecast
96.5%
Healthy renter demand for Chicago apartment
space was observed in the fall quarter as tenants
occupied a 3-year high net of 1,459 vacant units,
up from 635 and 1,240 in the year-earlier and
prior quarters, respectively. But demand was not
able to keep pace with a supply deluge as developers put finishing touches on a total of 1,698
units. As a result, Reis estimate that occupancy
fell about 3 basis points sequentially to 96.34%.
RCR YE17 Forecast
96.2%
Axiometrics surveys of larger properties found that
same-store stabilized asset occupancy averaged
RED 50 Rank
96.3%
19th
Effective Rent Summary
Mean Rent (Reis)
$1,077
Annual Change
3.1%
RED 50 Rank
23rd
RCR YE14 Forecast
4.0%
RCR YE15 Forecast
3.3%
RCR YE16 Forecast
3.6%
RCR YE17 Forecast
2.8%
Trade & Return Summary
$5mm+ Sales
Approx. Proceeds
Avg. Cap Rate (FNM)
Avg. Price/Unit
22
$763mm
6.1%
$109,956
Expected Total Return
7.8%
RED 46 ETR Rank
19th
Risk-adjusted Index
2.27
RED 46 RAI Rank
27th
300-job, 0.0% annual pace, down from 10,300.
The RCR payroll model anticipated some slowing
in 1Q14. The model achieves a 98.0% adjusted
R2 using U.S. payroll and GDP growth; metro home
price (Case-Shiller Index) and personal income
growth; the Treasury yield curve; and BAA credit
spreads as independent variables. This model
projected a 1.0% growth rate for 1Q. Much of the
difference may be attributable to inclement winter
weather. The model foresees a slowdown to about
33,900 jobs for 2014, followed by annual gains in
the low-40,000 job range in 2015 and 2016.
94.4%, down -10bps year-on-year and -90bps
sequentially. Class-B exhibited the greatest weakness, sliding -240bps y-o-y and -180bps q-o-q to
92.6% due to supply pressures. Class-C scored
the strongest results at 95.9% (+0.7%/-0.5%).
RCR supply and demand models indicate that
supply levels peaked in 4Q13 and will begin to
subside. Demand is projected to exceed supply in
2014, pushing occupancy about 20bps higher
toward year end. Near supply/demand balance is
likely to evolve from 2015 through 2018.
4Q13 Effective Rent Trends
Reis report that effective rents increased $7
(0.7%) sequentially and $32 (3.1%) year-over-year
in 4Q13, up from $6 (0.6%) and $27 (2.6%) advances in the prior quarter. Axiometrics surveys
found a less favorable outcome, with stabilized
same-store properties tumbling -$22.53 (-1.8%)
sequentially and rising only $21.10 (1.6%) y-o-y.
Weakness in the Axiometrics survey was largely
attributable to the supply pressured class-A segment. Luxury property average rents declined
–$54.27 (-2.4%) sequentially and -$16.13 (-2.4%)
y-o-y. Class-B (2.5%) and –C (1.7%) assets man-
aged to post positive year-on-year comparisons,
but each succumbed to seasonal sequential declines during 4Q13 (-1.7%, -1.0%). New property
rents also fell q-o-q, sliding -$54.29 to $2,330.04.
RCR’s rent model is specified to the more optimistic Reis series, and it yields a relatively bright forecast. The 94.2% R2 model projects a 3.5% y-o-y
increase in 1Q14, rising to a cycle peak of 4.3% in
3Q14. Rents are expected to vary in a tight 3.2%
to 3.7% range in 2015 and 2016 before reverting
to the more typical long-term average range of
2.2% to 2.8% in the out-years of the forecast.
4Q13 Property Markets and Total Returns
Sales velocity accelerated in the fourth quarter
and continued at a brisk pace over the winter.
Investors acquired 22 properties valued at $5
million or more during 4Q13 and 15 in 1Q14 for
total proceeds of approximately $763mm and
$373mm respectively. Regional investor/
managers, funds and trusts were active buyers.
Among national institutional investors, a large
university pension fund that typically acquires infill
mid– and high-rise assets entered the market in
early April with a purchase of three class-B suburban properties from a U.K.-based global fund.
Chicago assets traded at cap rates 50 to 75 bps
higher than properties located in the “Magnificent
Seven” markets. A Near Westside trophy high-rise
transacted at a high-4% cap, while class-B low rise
prices mostly equated to mid-5% to mid-6% yields.
Utilizing a 5.5% generic going in cap rate (6.1%
terminal), RCR estimate that an investor would
expect to achieve a 7.8% unlevered annual IRR
over five years, ranking R46 #19, unchanged from
3Q13. Higher income model standard error
trimmed risk-adjusted returns from 18th to 27th.
MARKET OVERVIEW 4Q13 | CHICAGO, ILLINOIS
Chicago Occupancy Rate Trends
Source: Reis History, RCR Forecasts
Average Occupancy Rate
99%
98%
RED 46 AVERAGE
97%
C HIC A GO (REIS/ RC R)
96.3%
96.3%
96.3%
96.5%
96.1%
95.9%
96%
95%
94%
93%
92%
91%
4Q08
4Q09
4Q10
4Q11
4Q12
4Q13
4Q14f
4Q15f
4Q16f
4Q17f
4Q18f
Chicago Absorption and Supply Trends
Units (T12 Months)
Source: Reis History, RCR Forecasts
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
-1,000
-2,000
-3,000
-4,000
-5,000
4Q08
ABSORPTIONS
4Q09
4Q10
4Q11
4Q12
4Q13
4Q14f
COMPLETIONS
4Q15f
4Q16f
4Q17f
4Q18f
Chicago Cap Rate Trends
Source: eFannie.com, RCR Calculations
Av e r a ge Ca p R a te
8.5%
E AST NO CE NT RAL RE G
8.0%
CHI CAGO
7.5%
7.0%
6.5%
6.0%
6.7%
5.8%
6.4%
6.4%
5.9%
5.5%
6.4%
6.2%
6.6%
6.4%
6.0%
6.1%
3Q13
4Q13
5.6%
5.5%
5.0%
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
NOTABLE TRANSACTIONS
NOTABLE TRANSACTIONS
1Q13
2Q13
1Q14
Property Class/
Type (Constr.)
Approx. Date of
Transaction
Total Price /
<Appr. Value>
(in millions)
Price /
<Appr. Value>
per unit
Estimated
<Underwritten>
Cap Rate
2555 North Clark (Lincoln Park)
Fieldpointe of Schaumburg (Schaumburg)
B+ / HR (1987)
B / GLR (1972)
13-Feb-2014
27-Mar-2014
$39.7
$46.6
$245,123
$117,677
5.5%
5.9%
Trio Apartments (Near West Side)
A+ / HR (2010)
29-Mar-2014
$42.0
$420,000
4.9%
1-Apr-2014
1-Apr-2014
$66.9 (Allocated)
$105,840
$142,975
6.7%
6.1%
Property Name (Submarket)
Residence at the Links (Glen Ellyn/Wheat.) B / GLR (1987)
Dunton Tower (Wheeling)
B / HR (1987)
$30.9 (Allocated)
RED CAPITAL Research | April 2014
MARKET OVERVIEW 4Q13 | CHICAGO, ILLINOIS
Chicago Effective Rent Trends
Sources: Reis, Inc., Axiometrics, RCR Forecast
12.5%
YoY Rent Trend
10.0%
7.5%
3.1%
5.0%
4.0%
3.4%
3.5%
2.5%
2.9%
0.0%
1.6%
-2.5%
RED 46 AVERAGE
-5.0%
4Q08
2.2%
4Q09
4Q10
CHICAGO (REIS/RCR)
4Q11
4Q12
4Q13
CHICAGO AXIOMETRICS SAME-STORE
4Q14f
4Q15f
4Q16f
4Q17f
4Q18f
Y-o-Y % Change
Chicago Home Price Trends
Source: FHFA Home Price Indices, S&P Case-Shiller Home Price Index and RCR Forecasts
12%
10%
8%
6%
4%
2%
0%
-2%
-4%
-6%
-8%
-10%
0.7%
U.S.A.
2011
2012
2013
CHICAGO FHFA
2014f
2015f
1.4%
ENC REGION
2016f
2.1%
2.8%
2.7%
CHICAGO CASE-SHILLER
2017f
2018f
Chicago Payroll Employment Trends
Source: BLS, Institute for Economic Competitiveness at UCF & RCR
2.5%
Y-o-Y % Change
2.0%
U.S.A.
CHICAGO
1.5%
1.5%
1.0%
0.9%
0.5%
1.2%
0.2%
0.6%
1.1%
0.0%
2011
2012
2013
2014f
2015f
2016f
2017f
2018f
The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting or
financial advice, or recommendations to buy or sell currencies or securities or to engage in any specific transactions. Information has been
gathered from third party sources and has not been independently verified or accepted by RED CAPITAL GROUP. RED makes no representations or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the report.
RED cannot be held responsible for any errors or misrepresentations contained in the report or in the information gathered from third party
sources. Under no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to
participate in any particular transaction or strategy. Any reliance upon this information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Any views expressed herein are subject to change without notice due to market conditions and other factors.
RED CAPITAL Research | April 2014
SUBMARKET TRENDS (REIS)
Effective Rent
Submarket
Aurora / Naperville
Physical Vacancy
4Q12
4Q13
Change
4Q12
4Q13
Change
$1,063
$1,075
1.1%
3.4%
2.9%
-50 bps
Belmont-Montrose
$1,213
$1,224
0.9%
2.8%
2.1%
-70 bps
City West
$1,023
$1,054
3.1%
7.6%
6.8%
-80 bps
Downers Grove
$952
$966
1.4%
4.3%
3.2%
-110 bps
East Lake County
$983
$1,002
2.0%
3.1%
2.4%
-70 bps
Glen Ellyn / Wheaton
$961
$967
0.7%
4.2%
4.3%
10 bps
Glendale Heights
$1,113
$1,138
2.2%
2.9%
2.6%
-30 bps
Glenview / Evanston
$1,068
$1,077
0.9%
2.5%
2.8%
30 bps
Gold Coast
$1,693
$1,816
7.3%
3.8%
5.7%
190 bps
Joliet
$793
$830
4.7%
4.1%
5.5%
140 bps
Kane County
$997
$1,022
2.5%
4.2%
3.3%
-90 bps
Lincoln Park
$1,240
$1,274
2.7%
1.4%
1.3%
-10 bps
McHenry County
$910
$930
2.2%
3.0%
2.5%
-50 bps
O'Hare
$891
$915
2.7%
2.9%
2.7%
-20 bps
Oak Park
$951
$958
0.8%
4.2%
3.6%
-60 bps
Palatine
$1,110
$1,134
2.2%
5.9%
4.7%
-120 bps
$806
$823
2.2%
3.9%
3.6%
-30 bps
Schaumburg / Hoffman
$994
$1,023
3.0%
4.1%
3.5%
-60 bps
South Shore
$901
$915
1.5%
4.5%
4.4%
-10 bps
Southeast Cook County
$824
$844
2.4%
4.0%
3.5%
-50 bps
Rogers Park / Uptown
Southwest Cook County
The Loop
West Lake County
Wheeling
Woodridge / Lisle
Metro
$801
$836
4.4%
3.9%
3.5%
-40 bps
$1,597
$1,668
4.5%
4.8%
6.7%
190 bps
$908
$929
2.3%
4.9%
3.0%
-190 bps
$1,046
$1,060
1.3%
2.6%
2.3%
-30 bps
$954
$1,022
7.2%
3.6%
3.9%
30 bps
$1,045
$1,077
3.1%
3.9%
3.7%
-20 bps
RED CAPITAL GROUP
For more information about RED’s research capabilities contact:
Daniel J. Hogan, Director of Research
[email protected]
614.857.1416
James P. Hensley, Senior Managing Director
Head of Mortgage Origination
[email protected]
770.753.6472
RED CAPITAL GROUP® | MARKET OVERVIEW
Chicago, Illinois
Multifamily Housing Update 4Q13 April 2014
Payroll Job Summary
Total Payrolls
3,718.6m
Annual Change
31.4m(0.9%)
2014 Forecast
33.9m
2015 Forecast
41.3m
2016 Forecast
42.3m
2017 Forecast
17.7m
Unemployment
8.1% (Mar.)
1Q14 Payroll Trends and Forecast
After recording eight consecutive quarters of
50,000–job (1.4%) or faster year-on-year employment growth, metro job creation slowed to a chillier 31,400-job, 0.8% rate during the winter quarter. Slower service industry hiring was primarily
responsible. Among the skilled service sectors,
financial, professional, technical, education and
health care service concerns added workers to
payrolls at an 8,200-job, 0.8% annual rate, down
from 18,800 during 4Q13. Likewise, lower skilled
service hiring was softer as leisure service and
retail trade establishments expanded at only a
Occupancy Rate Summary
4Q13 Absorption and Occupancy Rate Trends
Occupancy Rate (Reis)
Annual Chg. (Reis)
+0.2%
RCR YE14 Forecast
96.3%
RCR YE15 Forecast
96.3%
RCR YE16 Forecast
96.5%
Healthy renter demand for Chicago apartment
space was observed in the fall quarter as tenants
occupied a 3-year high net of 1,459 vacant units,
up from 635 and 1,240 in the year-earlier and
prior quarters, respectively. But demand was not
able to keep pace with a supply deluge as developers put finishing touches on a total of 1,698
units. As a result, Reis estimate that occupancy
fell about 3 basis points sequentially to 96.34%.
RCR YE17 Forecast
96.2%
Axiometrics surveys of larger properties found that
same-store stabilized asset occupancy averaged
RED 50 Rank
96.3%
19th
Effective Rent Summary
Mean Rent (Reis)
$1,077
Annual Change
3.1%
RED 50 Rank
23rd
RCR YE14 Forecast
4.0%
RCR YE15 Forecast
3.3%
RCR YE16 Forecast
3.6%
RCR YE17 Forecast
2.8%
Trade & Return Summary
$5mm+ Sales
Approx. Proceeds
Avg. Cap Rate (FNM)
Avg. Price/Unit
22
$763mm
6.1%
$109,956
Expected Total Return
7.8%
RED 46 ETR Rank
19th
Risk-adjusted Index
2.27
RED 46 RAI Rank
27th
300-job, 0.0% annual pace, down from 10,300.
The RCR payroll model anticipated some slowing
in 1Q14. The model achieves a 98.0% adjusted
R2 using U.S. payroll and GDP growth; metro home
price (Case-Shiller Index) and personal income
growth; the Treasury yield curve; and BAA credit
spreads as independent variables. This model
projected a 1.0% growth rate for 1Q. Much of the
difference may be attributable to inclement winter
weather. The model foresees a slowdown to about
33,900 jobs for 2014, followed by annual gains in
the low-40,000 job range in 2015 and 2016.
94.4%, down -10bps year-on-year and -90bps
sequentially. Class-B exhibited the greatest weakness, sliding -240bps y-o-y and -180bps q-o-q to
92.6% due to supply pressures. Class-C scored
the strongest results at 95.9% (+0.7%/-0.5%).
RCR supply and demand models indicate that
supply levels peaked in 4Q13 and will begin to
subside. Demand is projected to exceed supply in
2014, pushing occupancy about 20bps higher
toward year end. Near supply/demand balance is
likely to evolve from 2015 through 2018.
4Q13 Effective Rent Trends
Reis report that effective rents increased $7
(0.7%) sequentially and $32 (3.1%) year-over-year
in 4Q13, up from $6 (0.6%) and $27 (2.6%) advances in the prior quarter. Axiometrics surveys
found a less favorable outcome, with stabilized
same-store properties tumbling -$22.53 (-1.8%)
sequentially and rising only $21.10 (1.6%) y-o-y.
Weakness in the Axiometrics survey was largely
attributable to the supply pressured class-A segment. Luxury property average rents declined
–$54.27 (-2.4%) sequentially and -$16.13 (-2.4%)
y-o-y. Class-B (2.5%) and –C (1.7%) assets man-
aged to post positive year-on-year comparisons,
but each succumbed to seasonal sequential declines during 4Q13 (-1.7%, -1.0%). New property
rents also fell q-o-q, sliding -$54.29 to $2,330.04.
RCR’s rent model is specified to the more optimistic Reis series, and it yields a relatively bright forecast. The 94.2% R2 model projects a 3.5% y-o-y
increase in 1Q14, rising to a cycle peak of 4.3% in
3Q14. Rents are expected to vary in a tight 3.2%
to 3.7% range in 2015 and 2016 before reverting
to the more typical long-term average range of
2.2% to 2.8% in the out-years of the forecast.
4Q13 Property Markets and Total Returns
Sales velocity accelerated in the fourth quarter
and continued at a brisk pace over the winter.
Investors acquired 22 properties valued at $5
million or more during 4Q13 and 15 in 1Q14 for
total proceeds of approximately $763mm and
$373mm respectively. Regional investor/
managers, funds and trusts were active buyers.
Among national institutional investors, a large
university pension fund that typically acquires infill
mid– and high-rise assets entered the market in
early April with a purchase of three class-B suburban properties from a U.K.-based global fund.
Chicago assets traded at cap rates 50 to 75 bps
higher than properties located in the “Magnificent
Seven” markets. A Near Westside trophy high-rise
transacted at a high-4% cap, while class-B low rise
prices mostly equated to mid-5% to mid-6% yields.
Utilizing a 5.5% generic going in cap rate (6.1%
terminal), RCR estimate that an investor would
expect to achieve a 7.8% unlevered annual IRR
over five years, ranking R46 #19, unchanged from
3Q13. Higher income model standard error
trimmed risk-adjusted returns from 18th to 27th.
MARKET OVERVIEW 4Q13 | CHICAGO, ILLINOIS
Chicago Occupancy Rate Trends
Source: Reis History, RCR Forecasts
Average Occupancy Rate
99%
98%
RED 46 AVERAGE
97%
C HIC A GO (REIS/ RC R)
96.3%
96.3%
96.3%
96.5%
96.1%
95.9%
96%
95%
94%
93%
92%
91%
4Q08
4Q09
4Q10
4Q11
4Q12
4Q13
4Q14f
4Q15f
4Q16f
4Q17f
4Q18f
Chicago Absorption and Supply Trends
Units (T12 Months)
Source: Reis History, RCR Forecasts
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
-1,000
-2,000
-3,000
-4,000
-5,000
4Q08
ABSORPTIONS
4Q09
4Q10
4Q11
4Q12
4Q13
4Q14f
COMPLETIONS
4Q15f
4Q16f
4Q17f
4Q18f
Chicago Cap Rate Trends
Source: eFannie.com, RCR Calculations
Av e r a ge Ca p R a te
8.5%
E AST NO CE NT RAL RE G
8.0%
CHI CAGO
7.5%
7.0%
6.5%
6.0%
6.7%
5.8%
6.4%
6.4%
5.9%
5.5%
6.4%
6.2%
6.6%
6.4%
6.0%
6.1%
3Q13
4Q13
5.6%
5.5%
5.0%
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
NOTABLE TRANSACTIONS
NOTABLE TRANSACTIONS
1Q13
2Q13
1Q14
Property Class/
Type (Constr.)
Approx. Date of
Transaction
Total Price /
<Appr. Value>
(in millions)
Price /
<Appr. Value>
per unit
Estimated
<Underwritten>
Cap Rate
2555 North Clark (Lincoln Park)
Fieldpointe of Schaumburg (Schaumburg)
B+ / HR (1987)
B / GLR (1972)
13-Feb-2014
27-Mar-2014
$39.7
$46.6
$245,123
$117,677
5.5%
5.9%
Trio Apartments (Near West Side)
A+ / HR (2010)
29-Mar-2014
$42.0
$420,000
4.9%
1-Apr-2014
1-Apr-2014
$66.9 (Allocated)
$105,840
$142,975
6.7%
6.1%
Property Name (Submarket)
Residence at the Links (Glen Ellyn/Wheat.) B / GLR (1987)
Dunton Tower (Wheeling)
B / HR (1987)
$30.9 (Allocated)
RED CAPITAL Research | April 2014
MARKET OVERVIEW 4Q13 | CHICAGO, ILLINOIS
Chicago Effective Rent Trends
Sources: Reis, Inc., Axiometrics, RCR Forecast
12.5%
YoY Rent Trend
10.0%
7.5%
3.1%
5.0%
4.0%
3.4%
3.5%
2.5%
2.9%
0.0%
1.6%
-2.5%
RED 46 AVERAGE
-5.0%
4Q08
2.2%
4Q09
4Q10
CHICAGO (REIS/RCR)
4Q11
4Q12
4Q13
CHICAGO AXIOMETRICS SAME-STORE
4Q14f
4Q15f
4Q16f
4Q17f
4Q18f
Y-o-Y % Change
Chicago Home Price Trends
Source: FHFA Home Price Indices, S&P Case-Shiller Home Price Index and RCR Forecasts
12%
10%
8%
6%
4%
2%
0%
-2%
-4%
-6%
-8%
-10%
0.7%
U.S.A.
2011
2012
2013
CHICAGO FHFA
2014f
2015f
1.4%
ENC REGION
2016f
2.1%
2.8%
2.7%
CHICAGO CASE-SHILLER
2017f
2018f
Chicago Payroll Employment Trends
Source: BLS, Institute for Economic Competitiveness at UCF & RCR
2.5%
Y-o-Y % Change
2.0%
U.S.A.
CHICAGO
1.5%
1.5%
1.0%
0.9%
0.5%
1.2%
0.2%
0.6%
1.1%
0.0%
2011
2012
2013
2014f
2015f
2016f
2017f
2018f
The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting or
financial advice, or recommendations to buy or sell currencies or securities or to engage in any specific transactions. Information has been
gathered from third party sources and has not been independently verified or accepted by RED CAPITAL GROUP. RED makes no representations or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the report.
RED cannot be held responsible for any errors or misrepresentations contained in the report or in the information gathered from third party
sources. Under no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to
participate in any particular transaction or strategy. Any reliance upon this information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Any views expressed herein are subject to change without notice due to market conditions and other factors.
RED CAPITAL Research | April 2014
SUBMARKET TRENDS (REIS)
Effective Rent
Submarket
Aurora / Naperville
Physical Vacancy
4Q12
4Q13
Change
4Q12
4Q13
Change
$1,063
$1,075
1.1%
3.4%
2.9%
-50 bps
Belmont-Montrose
$1,213
$1,224
0.9%
2.8%
2.1%
-70 bps
City West
$1,023
$1,054
3.1%
7.6%
6.8%
-80 bps
Downers Grove
$952
$966
1.4%
4.3%
3.2%
-110 bps
East Lake County
$983
$1,002
2.0%
3.1%
2.4%
-70 bps
Glen Ellyn / Wheaton
$961
$967
0.7%
4.2%
4.3%
10 bps
Glendale Heights
$1,113
$1,138
2.2%
2.9%
2.6%
-30 bps
Glenview / Evanston
$1,068
$1,077
0.9%
2.5%
2.8%
30 bps
Gold Coast
$1,693
$1,816
7.3%
3.8%
5.7%
190 bps
Joliet
$793
$830
4.7%
4.1%
5.5%
140 bps
Kane County
$997
$1,022
2.5%
4.2%
3.3%
-90 bps
Lincoln Park
$1,240
$1,274
2.7%
1.4%
1.3%
-10 bps
McHenry County
$910
$930
2.2%
3.0%
2.5%
-50 bps
O'Hare
$891
$915
2.7%
2.9%
2.7%
-20 bps
Oak Park
$951
$958
0.8%
4.2%
3.6%
-60 bps
Palatine
$1,110
$1,134
2.2%
5.9%
4.7%
-120 bps
$806
$823
2.2%
3.9%
3.6%
-30 bps
Schaumburg / Hoffman
$994
$1,023
3.0%
4.1%
3.5%
-60 bps
South Shore
$901
$915
1.5%
4.5%
4.4%
-10 bps
Southeast Cook County
$824
$844
2.4%
4.0%
3.5%
-50 bps
Rogers Park / Uptown
Southwest Cook County
The Loop
West Lake County
Wheeling
Woodridge / Lisle
Metro
$801
$836
4.4%
3.9%
3.5%
-40 bps
$1,597
$1,668
4.5%
4.8%
6.7%
190 bps
$908
$929
2.3%
4.9%
3.0%
-190 bps
$1,046
$1,060
1.3%
2.6%
2.3%
-30 bps
$954
$1,022
7.2%
3.6%
3.9%
30 bps
$1,045
$1,077
3.1%
3.9%
3.7%
-20 bps
RED CAPITAL GROUP
For more information about RED’s research capabilities contact:
Daniel J. Hogan, Director of Research
[email protected]
614.857.1416
James P. Hensley, Senior Managing Director
Head of Mortgage Origination
[email protected]
770.753.6472
RED CAPITAL GROUP® | MARKET OVERVIEW
Chicago, Illinois
Multifamily Housing Update 3Q13 January 2014
Payroll Job Summary
Total Payrolls
3,792,3.m
Annual Change
55.9(1.5%)
2013 Forecast
56.0m
2014 Forecast
44.1m
2015 Forecast
40.1m
2016 Forecast
42.9m
Unemployment
8.1% (Nov.)
3Q13 Payroll Trends and Forecast
The Chicagoland labor market continued to exhibit
surprising strength in the second half 2013, adding workers to payrolls at faster than a 45,000-job
year-on-year pace for the 29 consecutive month in
November. Employment grew at a 55,900-job,
1.5% rate during 3Q13, and began the fourth
quarter with solid 56,500– and 55,300-job y-o-y
adds in October and November. Seasonallyadjusted figures also were constructive, indicating
that real job creation in the July through November period totaled 24,200 jobs, consistent with
the 28,400-job add recorded during 1H13.
Occupancy Rate Summary
3Q13 Absorption and Occupancy Rate Trends
Occupancy Rate (Reis)
RED 50 Rank
19th
Annual Chg. (Reis)
0.3%
RCR YE13 Forecast
96.4%
RCR YE14 Forecast
96.4%
RCR YE15 Forecast
96.6%
Apartment demand gained momentum as metro
households net leased 1,240 apartments, according to Reis, up from 1,014 and 1,015 in the prior
and year-earlier quarters, respectively. The service
added 1,411 recently completed units to its Chicago inventory, however, resulting in a 10 basis
point sequential quarter decrease in average occupancy to 96.3%. Axiometrics surveys of larger
properties recorded a 95.3% average rate, up 80
bps year-over-year but down 20 bps sequentially.
RCR YE16 Forecast
96.8%
Occupancy in the Loop, River North and Gold
96.3%
Effective Rent Summary
Mean Rent (Reis)
$1,070
Annual Change
2.6%
RED 50 Rank
33rd
RCR YE13 Forecast
2.5%
RCR YE14 Forecast
2.6%
RCR YE15 Forecast
3.1%
RCR YE16 Forecast
3.1%
Trade & Return Summary
$5mm+ Sales
9
Approx. Proceeds
$283
Avg. Cap Rate (FNM)
6.0%
Avg. Price/Unit
$94,312
Expected Total Return
7.5%
RED 46 ETR Rank
19st
Risk-adjusted Index
3.01
RED 46 RAI Rank
18th
Expansion by business service employers was
largely responsible, accounting for 28,100 jobs
over-the-year. Transportation and information
employers also made robust contributions.
Chicago consistently outperformed RCR forecast
models over the past eight quarters and should
recapture all of the jobs lost in the recession by
spring 2015. Consequently, we think it is appropriate to add positive bias to the models, producing further gains in the 1% to 1.5% range through
2015. Chicago will add about 44,100 jobs in
2014; 35,000-40,000 annually 2015 to 2018.
Coast submarkets averaged 94.9%, up 170 bps
y-o-y but down 40 bps sequentially. New properties delivered in 2012/13 were 84.9% occupied
on average, while properties in lease-up tenanted
a constructive average of 21 units per month.
RCR models indicate that demand will keep pace
with supply in 2014 and slightly overbalance inventory growth in 2015-2018. Occupancy will
remain nearly stable this year, followed by moderate annual improvement in the 5 to 15 bps range
for the duration of the forecast.
3Q13 Effective Rent Trends
Effective rents increased $12 (1.1%) sequentially
in 3Q13 (Reis), the largest quarterly advance reported since 2Q12. Expressed on a year-on-year
basis, rents advanced $27 (2.6%), up 10 basis
points from 2Q13. Axiometrics surveys recorded a
comparable 2.8% y-o-y gain to $1,305, but in this
instance the metric represents the smallest annual advance posted in three years.
Axiometrics data suggest that class-A rent trends
were considerably softer during the third quarter.
Indeed, the unit-weighted effective rent of the 56
class-A properties in the service’s survey tumbled
$21 (-1.1%) sequentially, sending the y-o-y comparison to 2.2% from 6.1% in 2Q. By contrast,
B&C trends were firm, recording a 3.0% 3Q13 y-oy increase, in line with 2Q’s 3.1% advance.
The RCR rent model finds that market vacancy
and inventory growth have an unusually large influence on metro rent growth. Both are expected
to rise moderately through 2015, holding rent
growth below 3%. But supply pressures should
recede in 2016, allowing rents to retest the 3%
threshold and achieve a Midwest region best 2.9%
2013-18 annual compound growth rate.
3Q13 Property Markets and Total Returns
Asset sales velocity decelerated during the third
quarter as nine sales of $5 million properties or
larger were closed for total proceeds of about
$282mm, down from 12 sales valued at about
$478mm during 2Q. But transaction volume regained momentum in the fall as 23 sales were
recorded October to December for aggregate proceeds of approximately $828mm. The average
price per traded unit reached $114,436, up from
3Q’s $94,312 but down from 2Q’s trophy boosted
$158,947 per unit mean.
Cap rates for institutional quality assets were moderately higher, drifting to the high-4% area. Quality
suburban GLRs were mostly in the 6% range.
Based on recent trade activity we believe 5.8%
represents a good proxy for the Chicago cap rate.
Using this level, a 6.5% terminal cap rate and our
model occupancy and rent forecast, we derive a
7.5% expected 5-year total return for metro investments, ranked 19th among the RED 46. Chicago’s
risk-adjusted index is 3.01, ranking R46 18th.
MARKET OVERVIEW 3Q13 | CHICAGO, ILLINOIS
Chicago Occupancy Rate Trends
Source: Reis History, RCR Forecasts
Average Occupancy Rate
RED 46 AVERAGE
96.3%
C HIC A GO (REIS HISTORY / RC R
97%
96.4%
96.3%
96.2%
96.4%
96.4%
95%
93%
91%
3Q 07
3Q 08
3Q 09
3Q 10
3Q 11
3Q 12
3Q 13
3Q 14
3Q 15
3Q 16
3Q 17
3Q 18
Chicago Absorption and Supply Trends
Source: Reis History, RCR Forecasts
Units (T12 Months)
7,500
ABSORPTIONS
COMPLETIONS
5,000
2,500
0
-2,500
-5,000
3Q2007
3Q2008
3Q2009
3Q2010
3Q2011
3Q2012
3Q2013
3Q2014
3Q2015
3Q2016
3Q2017
3Q2018
Chicago Cap Rate Trends
Source: eFannie.com, RCR Calculations
Average Cap Rate
7.5%
CHI CA GO
7.0%
EA ST NO CENT
6.5%
6.0%
5.5%
5.0%
5 .8 %
5 .5 %
6 .7 %
1Q11
2Q11
3Q11
6 .4 %
5 .6 %
6 .4 %
5 .9 %
6 .2 %
6 .4 %
6 .6 %
6 .0 %
6 .1%
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
4.5%
NOTABLE TRANSACTIONS
NOTABLE TRANSACTIONS
Property Name (Submarket)
Property Class/
Type (Constr.)
Date of
Transaction
Total Price /
<Appr. Value>
(in millions)
Price /
<Appr. Value>
per unit
Estimated
<Underwritten>
Cap Rate
The Lex (Prairie Dist. / Near South Side)
B+/HR (2012)
18-Oct-2013
$120.3
$365,747
4.5%
Kirkland Crossing (Kane Co. / Aurora)
B/GLR (2004)
29-Oct-2013
$42.0
$157,714
6.5%
Preserve Cross Creek (Naperville)
B-/GLR (81/03)
15-Nov-2013
$51.3
$112,511
6.0%
Renaissance Carol Stream (Glen Ellyn)
Historic Gold Coast High Rise
C+/GLR (1972)
B / HR (1929)
30-Dec-2013
Oct-2013
$29.2
<$35.9>
$99,488
<$202,627>
6.0%
<5.3%>
RED CAPITAL Research | January 2014
MARKET OVERVIEW 3Q13 | CHICAGO, ILLINOIS
Chicago Effective Rent Trends
Sources: Reis, Inc., Axiometrics, RCR Forecast
12.5%
10.0%
RED 46 AVERAGE
CHICAGO AXIOMETRICS SAME-STORE
CHICAGO (REIS HISTORY /RCR FORECAST)
YoY Rent Trend
7.5%
5.0%
2.5%
2. 8%
0.0%
2. 4%
2. 9%
3. 2%
3Q 16
3Q 17
3. 1%
-2.5%
-5.0%
Y-o-Y % Change
3Q 07
3Q 08
3Q 09
3Q 10
3Q 11
3Q 12
3Q 13
3Q 14
3Q 15
3Q 18
Chicago Home Price Trends
5%
4%
3%
2%
1%
0%
-1%
-2%
-3%
-4%
-5%
-6%
-7%
Sources: FHFA Home Price Indices and RCR Forecasts
U.S.A.
2011
2012
2013f
CHICAGO
2014f
EAST NO CENT REGION
2015f
2016f
2017f
Chicago Payroll Employment Trends
Source: BLS, Institute for Economic Competitiveness at UCF & RCR
Y-o-Y % Change
2.0%
U.S.A.
CHICAGO
1.5%
1.0%
0.5%
2011
2012
2013f
2014f
2015f
2016f
2017f
The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting or
financial advice, or recommendations to buy or sell currencies or securities or to engage in any specific transactions. Information has been
gathered from third party sources and has not been independently verified or accepted by RED CAPITAL GROUP. RED makes no representations or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the report.
RED cannot be held responsible for any errors or misrepresentations contained in the report or in the information gathered from third party
sources. Under no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to
participate in any particular transaction or strategy. Any reliance upon this information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Any views expressed herein are subject to change without notice due to market conditions and other factors.
RED CAPITAL Research | January 2014
SUBMARKET TRENDS
Effective Rent
Submarket
Physical Vacancy
3Q12
3Q13
Change
3Q12
3Q13
Change
Aurora / Naperville
$1,077
$1,080
0.3%
3.4%
2.9%
-50 bps
Belmont — Montrose
$1,216
$1,215
-0.0%
2.7%
2.3%
-40 bps
City West
-110 bps
$1,027
$1,055
2.8%
8.1%
7.0%
Downers Grove
$947
$957
1.0%
4.4%
3.4%
-100 bps
East Lake County
$977
$1,000
2.4%
3.4%
2.4%
-100 bps
Glen Ellyn / Wheaton
$953
$975
2.3%
4.5%
4.2%
-30 bps
Glendale Heights
$1,117
$1,138
1.9%
3.0%
2.6%
-40 bps
Glenview / Evanston
$1,045
$1,074
2.8%
2.6%
2.7%
10 bps
Gold Coast
$1,695
$1,774
4.7%
4.0%
4.3%
30 bps
Joliet
$793
$806
1.6%
4.3%
3.5%
-80 bps
Kane County
$984
$1,005
2.2%
4.5%
3.5%
-100 bps
Lincoln Park
$1,228
$1,264
2.9%
1.5%
1.3%
-20 bps
McHenry County
$915
$927
1.3%
3.3%
2.6%
-70 bps
O'Hare
$884
$905
2.4%
2.9%
2.7%
-20 bps
Oak Park
$944
$959
1.7%
4.4%
3.4%
-100 bps
Palatine
$1,113
$1,134
1.9%
6.3%
4.9%
-140 bps
$805
$821
2.1%
3.9%
3.8%
-10 bps
Schaumburg / Hoffman
$990
$1,026
3.6%
4.1%
3.7%
-40 bps
South Shore
$903
$918
1.6%
4.6%
4.5%
-10 bps
Southeast Cook County
$829
$844
1.9%
4.2%
3.6%
-60 bps
Rogers Park / Uptown
Southwest Cook County
The Loop
West Lake County
Wheeling
Woodridge / Lisle
Metro
$809
$834
3.2%
3.9%
3.6%
-30 bps
$1,589
$1,681
5.8%
5.2%
7.0%
180 bps
$919
$919
Unchd
4.0%
3.5%
-50 bps
$1,042
$1,058
1.6%
3.0%
2.4%
-60 bps
$957
$997
4.1%
3.3%
4.2%
90 bps
$1,043
$1,070
2.6%
4.0%
3.7%
-30 bps
RED CAPITAL GROUP
For more information about RED’s research capabilities contact:
Daniel J. Hogan, Director of Research
[email protected]
614.857.1416
James P. Hensley, Senior Managing Director
Head of Mortgage Origination
[email protected]
770.753.6472
RED CAPITAL GROUP® | MARKET OVERVIEW
Chicago, Illinois
Multifamily Housing Update 2Q13 September 2013
Payroll Job Summary
Total Payrolls
3,769.1m
Annual Change
56.6m(1.5%)
2013 Forecast
48.7m
2014 Forecast
53.1m
2015 Forecast
56.4m
2016 Forecast
48.9m
Unemployment
9.2% (Aug.)
2Q13 Payroll Trends and Forecast
The Chicago labor market made further progress
toward backfilling positions lost during the recession as establishments added to payrolls at a
56,600-job, 1.5% annual rate, marginally faster
than 1Q’s 55,000-job pace. With a boost from the
professional and technical component, the business services sector remained the principal economic driver: headcounts increased at a 14-year
fastest 27,500-job, 4.3% year-on-year rate. Expansion in the key finance and manufacturing sectors
also was constructive. Seasonally-adjusted data
provided reasons for optimism as well. The series
Occupancy Rate Summary
2Q13 Absorption and Occupancy Rate Trends
Occupancy Rate (Reis)
Strong space demand persisted in the spring as
tenants occupied a net of 1,014 units, according
to Reis, 13% above the 14-year 2Q average. But
momentum was a bit weaker as quarterly absorption fell from 1,828 and 1,387 units in the previous and year-early quarters, respectively. Average
occupancy increased 10 basis points sequentially
and 50 bps year-on-year to 96.4%, a 12-year high.
96.4%
RED 50 Rank
15th
Annual Chg. (Reis)
0.5%
RCR YE13 Forecast
96.4%
RCR YE14 Forecast
96.5%
RCR YE15 Forecast
96.7%
RCR YE16 Forecast
96.9%
Effective Rent Summary
Mean Rent (Reis)
$1,058
Annual Change
2.5%
RED 50 Rank
30th
RCR YE13 Forecast
2.5%
RCR YE14 Forecast
2.6%
RCR YE15 Forecast
2.7%
RCR YE16 Forecast
2.7%
Trade & Return Summary
$5mm+ Sales
Approx. Proceeds
Avg. Cap Rate (FNM)
Avg. Price/Unit
14
$580mm
6.6%
$143,756
Expected Total Return
6.6%
RED 46 ETR Rank
25th
Risk-adjusted Index
3.22
RED RAI Rank
25th
Axiometrics surveys of larger, stabilized properties
found a 95.8% average 2Q13 occupancy rate,
with same store occupancy up 80 bps sequentially
indicates metro concerns created 20,200 jobs
during 2Q — the largest 3-month add since 2006
— and that the third quarter got off to a solid start
with 11,300 jobs added in July and August.
The 97.0% adj-R2 RCR payroll model is unusually
simple, relying on lags of metro and U.S. payroll
growth as variables. The model anticipates a
moderate slowing during 2H13, followed by a
return of mid-1% growth rates through 2015.
Annual gains should remain in the 40,000- to
60,000- job range, allowing the Division to replace
all the jobs lost during the recession by 2016.
and 70 bps y-o-y. Twelve properties in lease-up (8
months on average) reported mean occupancy of
47.1%. Absorption rates among them averaged 17
units/month during the second quarter.
Occupied stock growth rates have remained in a
tight 0.8% to 1.6% range for the past three years
and our models suggest that the pattern will abide
for the next five. Absorption rates should stay a
step ahead of supply levels and average occupancy will grind higher by roughly 15 bps per year,
breaching the 97% threshold by 2016 or 2017.
2Q13 Effective Rent Trends
Effective rents crept higher, rising $6 (0.6%) sequentially, according to Reis, down slightly from
1Q’s $7 (0.7%) advance. Expressed on a year-over
-year basis, rents increased at a 2.5% rate, down
from 3.2% during 1Q13 and the first sub-3% metric recorded in 12 months. Axiometrics surveys of
larger, stabilized properties found faster rent
growth, recording a 4.3% same-store y-o-y increase, down from 4.7% in 1Q13 and as fast as
6.7% during the year earlier quarter.
Local performance was overwhelmingly favorable
as 24 of Chicago’s 25 Reis-defined submarkets
posted sequential quarter rent growth. Infill areas
recorded the largest same-store gains, most notably City West (2.0%) and Gold Coast (1.2%). Conversely, the Loop (0.2%) was slower due to supply.
The 94.9% adj-R2 RCR Chicago rent model finds
absorption, supply and personal income to be the
most statistically significant variables. In general,
the model doesn’t find much in the way of forward
volatility in the series, forecasting growth in a tight
2.4%- to 2.9%-range through 2017.
2Q13 Property Markets and Total Returns
Sales velocity was steady during the spring as
investors closed on 14 properties valued at $5
million or more for total proceeds exceeding
$575mm. These data compare to 13 transactions
valued at about $460mm during the first quarter.
Among ten trades for which pricing data were
available, the average unit price was $143,756,
up from $118,040 in the prior quarter. Sales were
steady during 3Q13 as 14 trades were closed for
about $425mm by mid-September.
The bellwether transaction involved a 2012-
vintage Old Town high rise, which exchanged
hands at a price equating to $545,000/unit, adjusted for ground floor retail space. We estimate a
low-4% cap rate for the multifamily component.
While recent construction, class-A infill product
continues to trade in the mid-4s, we think going-in
yields for standard investment quality assets recently have drifted higher. Using 5.9% and 7.0%
going-in and terminal yields, we estimate a 6.6%
expected, 5-year unlevered return, ranking 25th
among the R46. Chicago also ranks 25th for RAI.
MARKET OVERVIEW 2Q13 | CHICAGO, ILLINOIS
Metro Occupancy Rate Trends
Average Occupancy Rate
Source: Reis History, RCR Forecasts
98%
RED 46 AVERAGE
97%
C HIC A GO (REIS/ RC R)
96.4%
96%
96.8%
96.6%
96.5%
97.0%
95%
94%
93%
92%
91%
2Q 07
2Q 08
2Q 09
2Q 10
2Q 11
2Q 12
2Q 13
2Q 14
2Q 15
2Q 16
2Q 17
Metro Absorption and Supply Trends
Source: Reis History, RCR Forecasts
Units (T12 Months)
8,000
6,000
4,000
2,000
0
-2,000
ABSORPTIONS
-4,000
COMPLETIONS
-6,000
2Q 07
2Q 08
2Q 09
2Q 10
2Q 11
2Q 12
2Q 13
2Q 14
2Q 15
2Q 16
2Q 17
Metro Cap Rate Trends
Source: eFannie.com, RCR Calculations
Average Cap Rate
7.5%
EAST NO CENTRAL REG
7.0%
CHICAGO
6. 6%
6. 6%
6.5%
6.0%
6. 3%
5. 9%
6. 4%
5. 7%
5. 6%
6. 4%
5. 9%
2Q12
3Q12
6. 4%
5. 9%
5.5%
5.0%
1Q11
2Q11
3Q11
4Q11
1Q12
NOTABLE TRANSACTIONS
NOTABLE TRANSACTIONS
4Q12
1Q13
2Q13
3Q13
Property Class/
Type (Constr.)
Date of
Transaction
Total Price /
<Appr. Value>
(in millions)
Price /
<Appr. Value>
per unit
Estimated
Cap Rate
Deer Valley Luxury Apts. (East Lake Co.)
B+/GLR (1991)
1-May-2013
$28.6
$127,679
6.0%
1225 Old Town (Gold Coast/River North)
Meadows at River Run (Woodridge/Lisle)
A+ / HR (2012)
B / GLR (2001)
4-Jun-2013
29-Jun-2013
$156.9
$54.5
$545,258 (est.)
$158,430
4.3%
4.8%
Seventeen17 (Evanston)
A- / MR (2013)
Briarwood Terrace Apts. (Prospect Heights) B / GLR (1966)
10-Sep-2013
July-2013
$70.3
<$52.2>
$401,429
<$115,956>
4.9% p.f.
5.5% FNM Refi
Property Name (Submarket)
RED CAPITAL Research | September 2013
MARKET OVERVIEW 2Q13 | CHICAGO, ILLINOIS
Metro Effective Rent Trends
Sources: Reis, Inc., Axiometrics, RCR Forecast
8%
YoY Rent Trend
6%
2. 4%
4%
2. 7%
2. 6%
2. 8%
2%
0%
-2%
-4%
-6%
RED 46 AVERAGE
2Q 07
2Q 08
2Q 09
2Q 10
CHICAGO (REIS/RCR)
2Q 11
2Q 12
2Q 13
CHICAGO AXIOMETRICS SAME-STORE
2Q 14
2Q 15
2Q 16
2Q 17
Metro Home Price Trends
Source: FHFA Home Price Indices and RCR Forecasts
8%
Y-o-Y % Change
6%
4%
2%
0%
-2%
-4%
U.S.A.
-6%
CHICAGO
EAST NO CENTRAL REGION
-8%
2011
2012
2013f
2014f
2015f
2016f
2017f
Metro Payroll Employment Trends
Source: BLS, Institute for Economic Competitiveness at UCF & RCR
2.00%
U.S.A.
Y-o-Y % Change
1.75%
CHICAGO
1.50%
1.25%
1.00%
0.75%
2011
2012
2013f
2014f
2015f
2016f
2017f
The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting or
financial advice, or recommendations to buy or sell currencies or securities or to engage in any specific transactions. Information has been
gathered from third party sources and has not been independently verified or accepted by RED CAPITAL GROUP. RED makes no representations or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the report.
RED cannot be held responsible for any errors or misrepresentations contained in the report or in the information gathered from third party
sources. Under no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to
participate in any particular transaction or strategy. Any reliance upon this information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Any views expressed herein are subject to change without notice due to market conditions and other factors.
RED CAPITAL Research | September 2013
SUBMARKET TRENDS
Effective Rent
Submarket
Physical Vacancy
2Q12
2Q13
Change
2Q12
2Q13
Change
Aurora / Naperville
$1,063
$1,072
0.8%
3.6%
3.2%
-40 bps
Belmont-Montrose
$1,196
$1,208
1.0%
3.0%
2.6%
-40 bps
City West
$1,020
$1,060
3.9%
8.2%
7.2%
-100 bps
Downers Grove
$939
$952
1.4%
4.7%
3.7%
-100 bps
East Lake County
$972
$995
2.4%
3.7%
2.5%
-120 bps
Glen Ellyn / Wheaton
$941
$968
2.8%
4.9%
3.6%
-130 bps
$1,105
$1,126
1.9%
3.4%
2.5%
-90 bps
Glendale Heights
Glenview / Evanston
$1,036
$1,073
3.6%
2.7%
2.7%
Unchd
Gold Coast
$1,671
$1,721
3.0%
3.8%
3.5%
-30 bps
Joliet
$786
$802
2.1%
4.4%
3.7%
-70 bps
Kane County
$977
$1,006
2.9%
4.5%
3.4%
-110 bps
Lincoln Park
$1,213
$1,263
4.1%
1.7%
1.4%
-30 bps
McHenry County
$903
$919
1.8%
3.2%
2.7%
-50 bps
O'Hare
$875
$902
3.1%
3.1%
2.6%
-50 bps
Oak Park
$939
$953
1.5%
4.5%
3.5%
-100 bps
Palatine
$1,107
$1,131
2.1%
6.9%
5.2%
-170 bps
Rogers Park / Uptown
$799
$819
2.5%
4.1%
3.9%
-20 bps
Schaumburg / Hoffman
$982
$1,005
2.3%
4.2%
3.8%
-40 bps
South Shore
$892
$909
1.9%
4.9%
4.5%
-40 bps
Southeast Cook County
$820
$842
2.7%
4.3%
3.7%
-60 bps
Southwest Cook County
$803
$808
0.7%
4.0%
3.4%
-60 bps
$1,567
$1,632
4.1%
4.5%
6.8%
230 bps
$910
$913
0.4%
4.3%
3.6%
-70 bps
$1,039
$1,053
1.3%
3.1%
2.5%
-60 bps
$952
$959
0.8%
3.5%
3.1%
-40 bps
$1,032
$1,058
2.5%
4.1%
3.6%
-50 bps
The Loop
West Lake County
Wheeling
Woodridge / Lisle
Metro
RED CAPITAL GROUP
For more information about RED’s research and originations capabilities contact:
Daniel J. Hogan, Director of Research
RED Capital Group, LLC
[email protected]
614-857-1416
James P. Hensley, Senior Managing Director
Head of Mortgage Origination
RED Mortgage Capital, LLC.
[email protected]
800-837-5100
RED CAPITAL GROUP® | MARKET OVERVIEW
Chicago, Illinois
Multifamily Housing Update 1Q13 June 2013
Payroll Job Summary
Total Payrolls
3,682.3m
Annual Change
55.0m(1.5%)
2013 Forecast
49.3m
2014 Forecast
48.9m
2015 Forecast
56.3m
2016 Forecast
44.7m
Unemployment
9.3% (Apr)
1Q13 Payroll Trends and Forecast
Distinguishing itself from most Midwest peers,
Chicago payroll trends held a steady course and
largely resisted the downward pressure observed
throughout the region. Metro establishments added to headcounts at a 55,000-job, 1.5% year-onyear rate during the first quarter, up 1,200 jobs
from the prior period and consistent with the
57,400-job gain recorded in the year-earlier period. Notably, hiring in the critical skilled services
sectors was strong: financial, business and health
care service concerns expanded at a 36,000-job,
2.7% y-o-y pace during 1Q13, the fastest quarterly
Occupancy Rate Summary
1Q13 Absorption and Occupancy Rate Trends
Occupancy Rate (Reis)
Apartment demand was exceptional during the
first quarter as tenants absorbed a net of 1,996
vacant units, the largest one-quarter total since
3Q10. Supply also was the heaviest in some time,
however, as 1,324 units were added to the Reis
inventory, as much as the previous seven quarters
combined, limiting sequential occupancy gains to
20 basis points, from 96.1% to 96.3%.
RED 50 Rank
96.3%
16th
Annual Chg. (Reis)
+0.7%
RCR YE13 Forecast
96.4%
RCR YE14 Forecast
96.5%
RCR YE15 Forecast
96.7%
RCR YE16 Forecast
96.8%
Effective Rent Summary
Mean Rent (Reis)
$1,052
Annual Change
3.2%
RED 50 Rank
29th
RCR YE13 Forecast
3.1%
RCR YE14 Forecast
3.0%
RCR YE15 Forecast
3.0%
RCR YE16 Forecast
3.2%
Trade & Return Summary
$5mm+ Sales
14
Approx. Proceeds
$432mm
Avg. Price/Unit
$118,040
Median Cap Rate (FNM)
6.4%
Expected Total Return
8.5%
RED 46 ETR Rank
17Th
Risk-adjusted Index
4.70
RED RAI Rank
12th
Only two submarkets experienced sequential occupancy declines — Loop and City West — in each
case entirely due to supply: 682 units in the for-
job increase recorded since 2006.
April data were somewhat weaker and bear close
observation. Although April’s unadjusted y-o-y
comparison was a healthy 47,300-job gain, seasonally-adjusted figures declined-9,800 jobs sequentially, following March’s -4,500-job decrease.
The RCR payroll model foresees further stable,
moderate job growth for the next several years.
The forecast calls for 49,300 jobs in 2013;
48,900 jobs in 2014; and 46,300 jobs in 2015.
mer and 496 in the latter. But submarket lease-up
is proceeding well: 888 core units delivered in
2012 were 89.4% occupied in 1Q13 (Axiometrics).
We expect supply pressures to intensify through
2014 and crest in early 2015, adding 11,289
units by MY2015. Our demand model suggests
that demand will keep pace, maintaining occupancy above 96% throughout the period. As the supply wave wanes during the out-years of the forecast occupancy may begin to rise moderately
again, perhaps approaching 97% by late 2016.
1Q13 Effective Rent Trends
Average effective rent trends rebounded strongly
after 4Q12’s tepid $2 (0.1%) gain with a robust $7
(0.7%) advance. Expressed on a year-over-year
comparison basis, rents advanced 3.2%, up from
3.1% in the prior quarter and the second fastest
metric posted since the first half of 2008.
Only two of Chicago’s 25 Reis-defined submarkets
recorded sequential quarter effective rent declines: Belmont-Montrose (-0.4%) and Oak Park
(-0.2%). The addition of new luxury inventory propelled City West (1.6%) and the Loop (2.0%) to the
head of the submarket pack, joined by Lincoln
Park and Palatine, where same-store rents surged
$18 (1.5%) and $19 (1.8%), respectively.
Our rent model projects stable, moderate growth
throughout the 5-year forecast period. The Chicago model is primarily influenced by absorption,
supply and personal income growth variables. The
former two are largely constructive, but income
growth is projected to be sluggish, holding rent
gains within a 3.0% to 3.4% range and a 3.2% fiveyear compound rate, ranking RED 46 #23.
1Q13 Property Markets and Total Returns
After a heavy closing calendar during 4Q12, investment sales activity declined by half during the
winter quarter. A total of 14 sales of properties of
80 units or more were closed during 1Q13, down
from 27 in the prior period. Proceeds of trades
with price data available totaled $432.3 million,
and the average unit sold for $118,040, compared to $902.9mm and $167,664 in 4Q12.
Sales of trophy properties in and around the Loop
also moderated. The exception was a 1986construction mixed-use Streeterville tower that
sold for the equivalent of $282,470 per unit. The
cap rate was in the mid– to high-4% range.
Although cap rates appeared to be slightly elevated from the 2H12 lows, we maintain our cap rate
assumption of 5.7% for a cross-section of metro
investment quality assets. Using this beginning
yield and our model forecasts we estimate expected five-year total returns of 8.5%, ranking
17th among the RED 46. Economic volatility is
relatively low, giving rise to a higher ranking riskadjusted index, in this case 4.70: RED 46 #12.
MARKET OVERVIEW 1Q13 | CHICAGO, ILLINOIS
Metro Occupancy Rate Trends
Source: Reis History, RCR Forecasts
Metro Occupancy Rate
98%
RED 46 AVERAGE
97%
CHICAGO
96%
95%
94%
93%
92%
91%
1Q 07
1Q 08
1Q 09
1Q 10
1Q 11
1Q 12
1Q 13
1Q 14
1Q 15
1Q 16
1Q 17
Metro Cap Rate Trends
Source: eFannie.com, RCR Calculations
Average Cap Rate
7.5%
CHI CAGO
7.0%
WEST NO CENT REGION
6.5%
6.0%
5.5%
5.0%
6. 1%
5. 9%
5. 7%
1Q11
2Q11
6. 6%
6. 4%
3Q11
4Q11
5. 6%
6. 4%
5. 9%
6. 3%
6. 4%
6. 6%
3Q12
4Q12
1Q13
2Q13
4.5%
4Q10
1Q12
2Q12
Metro Payroll History and Forecast
Annual Chg (000)
Source: BLS History, RCR Forecasts
60
30
0
-30
-60
-90
-120
-150
-180
-210
CHI CA GO
Metro Cap Rate Trends
Source: eFannie.com, RCR Calculations
2008
2009
2010
2011
2012
2013f
2014f
2015f
2016f
2017f
(28. 1)
(200. 9)
(37. 0)
48. 7
53. 4
49. 3
48. 9
56. 3
44. 7
58. 3
NOTABLE TRANSACTIONS
NOTABLE TRANSACTIONS
Property Name (Submarket)
Onterie Center Apts. (Gold Coast)
Country Wood (Aurora/Naperville)
Oakhurst North (Aurora/Naperville)
Retreat at Seven Bridges (Woodbridge)
Property Class/
Type (Constr.)
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated
Cap Rate
B+/HR (1985)
LIHTC / (1996)
B+/GLR (1999)
B/GLR (1996)
12-Feb-2013
5-Mar-2013
24-Mar-2013
2-Apr-2013
$173.7
$13.6
$60.5
$38.8
$282,479
$75,511
$138,388
$153,770
4.5%
7.2%
5.4%
6.8%
RED CAPITAL Research | June 2013
MARKET OVERVIEW 1Q13 | CHICAGO, ILLINOIS
Metro Effective Rent Trends
Sources: Reis, Inc., Axiometrics, RCR Forecast
8%
YoY Rent Trend
6%
4%
2%
0%
-2%
-4%
RED 46 AVERAGE
-6%
CHICAGO (AXIOM)
1Q 07
1Q 08
1Q 09
1Q 10
1Q 11
1Q 12
CHICAGO (REIS/RCR)
1Q 13
1Q 14
1Q 15
1Q 16
1Q 17
Metro Home Price Trends
Source: FHFA Home Price Index
15%
Y-o-Y % Change
10%
5%
0%
-5%
-10%
-15%
C SX - 20 METROS
CHICAGO
-20%
2007
2008
2009
2010
2011
2012
2013
Y-o-Y % Change
Metro Payroll Employment Trends
Source: BLS , INSITUTE FOR ECONOMIC COMPETITIVENESS & RCR
3%
2%
1%
0%
-1%
-2%
-3%
-4%
-5%
-6%
-7%
U.S.A.
2008
2009
2010
2011
2012
2013f
2014f
CHICAGO
2015f
2016f
The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting or
financial advice, or recommendations to buy or sell currencies or securities or to engage in any specific transactions. Information has been
gathered from third party sources and has not been independently verified or accepted by RED CAPITAL GROUP. RED makes no representations
or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the report. RED cannot
be held responsible for any errors or misrepresentations contained in the report or in the information gathered from third party sources. Under
no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any
particular transaction or strategy. Any reliance upon this information is solely and exclusively at your own risk. Please consult your own counsel,
accountant or other advisor regarding your specific situation. Any views expressed herein are subject to change without notice due to market
conditions and other factors.
RED CAPITAL Research | June 2013
SUBMARKET TRENDS
Effective Rent
Submarket
Physical Vacancy
1Q12
1Q13
Change
1Q12
1Q13
Aurora / Naperville
$1,041
$1,066
2.4%
3.7%
3.3%
-40 bps
Belmont-Montrose
$1,182
$1,208
2.2%
3.2%
2.8%
-40 bps
City West
$1,012
$1,039
2.7%
8.7%
7.7%
-100 bps
Downers Grove
$930
$957
2.8%
4.9%
4.0%
-90 bps
East Lake County
$960
$990
3.1%
4.0%
2.7%
-130 bps
Glen Ellyn / Wheaton
Change
$928
$962
3.8%
5.2%
3.8%
-140 bps
Glendale Heights
$1,096
$1,115
1.7%
4.0%
2.7%
-130 bps
Glenview / Evanston
$1,022
$1,068
4.4%
3.4%
2.1%
-130 bps
Gold Coast
$1,649
$1,701
3.2%
4.2%
3.7%
-50 bps
$776
$797
2.7%
4.8%
3.9%
-90 bps
Kane County
$963
$1,000
3.9%
4.8%
3.6%
-120 bps
Lincoln Park
$1,198
$1,258
5.0%
1.9%
1.3%
-60 bps
McHenry County
$896
$916
2.3%
3.5%
2.5%
-100 bps
O'Hare
$864
$897
3.9%
3.4%
2.7%
-70 bps
Joliet
Oak Park
$928
$949
2.3%
4.7%
4.0%
-70 bps
Palatine
$1,096
$1,130
3.2%
7.3%
5.4%
-190 bps
Rogers Park / Uptown
$791
$814
2.8%
4.3%
3.9%
-40 bps
Schaumburg / Hoffman
$969
$996
2.8%
4.3%
4.0%
-30 bps
South Shore
$881
$901
2.3%
5.1%
4.3%
-80 bps
Southeast Cook County
$800
$841
5.1%
4.3%
3.7%
-60 bps
Southwest Cook County
$796
$806
1.2%
4.1%
3.6%
-50 bps
$1,545
$1,629
5.5%
4.7%
5.9%
120 bps
$893
$914
2.3%
4.4%
4.5%
10 bps
$1,024
$1,050
2.5%
3.7%
2.5%
-120 bps
$937
$954
1.8%
3.5%
3.3%
-20 bps
$1,019
$1,052
3.2%
4.4%
3.7%
-70 bps
The Loop
West Lake County
Wheeling
Woodridge / Lisle
Metro
RED CAPITAL GROUP
For more information about RED’s research capabilities contact:
Daniel J. Hogan, Director of Research
[email protected]
614-857-1416
Kenneth H. Bowen, President, Red Mortgage Capital, LLC
[email protected]
800-837-5100
RED CAPITAL GROUP® | MARKET OVERVIEW
Chicago, Illinois
Multifamily Housing Update 4Q12 April 2013
Payroll Job Summary
Total Payrolls
3,760.6m
Annual Change
53.8m(1.5%)
2013 Forecast
50.0m
2014 Forecast
42.8m
2015 Forecast
36.3m
2016 Forecast
36.5m
Unemployment
10.3% (Feb.)
4Q12 Payroll Trends and Forecast
Chicago was not short-changed by the BLS in its
annual payroll job re-benchmarking exercise. The
bureau added 8,100 and 27,300 positions to
respective initial 2011 and 2012 estimates of
average monthly payrolls. As a result, employment
growth last year was revised up 19,200 jobs to
53,400 (1.5%), roughly consistent with the U.S.
average. Moreover, the revisions suggest that the
Chicago economy ended 2012 with stronger momentum than previously understood, growing at a
robust 53,800-job 1.5% rate rather than the previously released 32,500-job, 0.9% pace.
Occupancy Rate Summary
4Q12 Absorption and Vacancy Rate Trends
Occupancy Rate (Reis)
Tenants net leased 628 apartment units during
4Q12, down from 1,401 in the year-earlier period
and 1,032 units in the previous quarter. But only
70 units were added to the metro inventory, allowing occupancy to rise 10 basis points sequentially
to 96.1%, highest level in eleven years.
RED 50 Rank
96.1%
20th
Annual Chg. (Reis)
+0.6%
RCR YE13 Forecast
96.4%
RCR YE14 Forecast
96.5%
RCR YE15 Forecast
96.6%
RCR YE16 Forecast
96.7%
Effective Rent Summary
Mean Rent (Reis)
$1,045
Annual Change
3.2%
RED 50 Rank
39th
RCR YE13 Forecast
3.7%
RCR YE14 Forecast
3.1%
RCR YE15 Forecast
2.6%
RCR YE16 Forecast
2.9%
Trade & Return Summary
$5mm+ Sales
Approx. Proceeds
Median Cap Rate (FNM)
Avg. Price/Unit
22
$1.1bn
.%
$159,006
Expected Total Return
7.9%
RED 46 ETR Rank
17Th
Risk-adjusted Index
3.49
RED RAI Rank
25th
Sixteen of Chicago’s 25 Reis-defined submarkets
chalked down sequential occupancy gains, led by
City West (+50 bps) and the Loop submarkets
(+40 bps). Other tight infill areas also reported
constructive demand levels as Gold Coast (+20
Business, health care and leisure service establishments were largely responsible for late-year
strength, collectively accounting for about 45,000
year-on-year job growth. Conversely, expansion in
goods producing, financial service and consumerdriven industries remained on the sluggish side.
The revisions infuse a degree of buoyancy to our
metro employment forecast. The RCR payroll model now projects net creation of 50,000, 42,800
and 36,500 jobs during 2013, 2014 and 2015
respectively, up from 42,900, 36,300 and 37,600
jobs forecasted prior to the BLS revision.
bps), Lincoln Park (+10 bps) and South Shore
(+10 bps) submarkets chalked down gains.
RCR absorption and supply models project further
steady improvement in market occupancy. The
demand model forecasts absorption of 7,005 and
6,103 units in 2013 and 2014, respectively,
against supply of 5,930 and 5,989 units. Consequently, occupancy is projected to rise 30 bps this
year and 10 bps in 2014. Further progress in the
10 to 30 bps range is projected for the out-years
of the five-year forecast.
4Q12 Rent Trends
Following two consecutive quarters of robust
growth (average metro effective rents increased
2.4%, between March and September) rent trends
decelerated during 4Q12. Effective rents increased $2 sequentially, according to Reis, rising
approximately 0.1%, ranking 46th among the RED
50. Expressed on a year-on-year basis, rent
growth was 3.2%, moderately slower than the
3.8% average of the top 83 U.S. metro markets.
Twelve Chicago-land submarkets recorded sequential effective rent declines, most notably in
outlying suburban areas like Aurora (-1.3%); West
Lake Co. (-1.2%) and SW Cook Co. (-1.0%). Infill
areas were mixed as the Loop (0.5%) and Lincoln
Park (0.9%) recorded solid rent gains while Gold
Coast (-0.1%) and City West (-0.4%) retreated.
The RCR rent model projects a solid 3.7% effective
rent increase in 2013, topping the 3.5% average
forecast for the R46. But gains in 2014 (3.1%)
and 2015 (2.8%) and expected to slip below the
peer group average, largely due to below average
income growth forecast for the Chicago area.
4Q12 Property Markets and Total Returns
A flurry of year-end deals lifted total sales proceeds of properties valued at $5 million or more to
$1.07 billion during 4Q12, up from 10 trades valued at $296.5 million during 3Q12. Five large
Loop/River North trophies exchanged hands during the year’s final two weeks, raising the average
price of sold units to $159,000, representing an
increase of about 21% from the third quarter.
Trophy properties traded mostly to mid-4% yields.
Suburban garden projects were priced at meaningful discounts as cap rates were mostly above 6%.
Indeed, a number traded in the 6.75% to 9.0%
range, according to broker sources.
RCR increased the generic cap rate for Chicago 20
basis points from 3Q12 to 5.7%. This initial yield
boost combined with compound annual rent
growth of 3.1% elevates expected total returns to
7.9%, ranked 17th among the RED 46. Chicago
cash flows are moderately more volatile than average, however, hampering risk-adjusted returns.
We calculate a 3.49 risk-adjusted index, ranked
25th among the large metro peer group.
MARKET OVERVIEW 4Q12 | CHICAGO, ILLINOIS
Metro Occupancy Rate Trends
Source: Reis History, RCR Forecasts
Metro Occupancy Rate
98%
RED 46 AVERAGE
97%
CHICAGO
96%
95%
94%
93%
92%
91%
4Q 06
4Q 07
4Q 08
4Q 09
4Q 10
4Q 11
4Q 12
4Q 13
4Q 14
4Q 15
4Q 16
Metro Cap Rate Trends
Source: eFannie.com, RCR Calculations
Average Cap Rate
7.0%
CHI CAGO
WST NO CENT REGION
6.5%
6.0%
5.5%
6. 5%
5. 8%
5.7%
5. 7%
4Q10
1Q11
2Q11
6. 4%
5. 6%
6. 0%
6. 2%
3Q12
4Q12
6. 4%
5. 4%
5.0%
3Q11
4Q11
1Q12
2Q12
1Q13
Metro Payroll History and Forecast
Annual Chg (000)
Source: BLS History, RCR Forecasts
60
30
0
-30
-60
-90
-120
-150
-180
-210
-240
CHI CA GO
Metro Cap Rate Trends
Source: eFannie.com, RCR Calculations
2008
2009
2010
2011
2012
2013f
2014f
2015f
2016f
2017f
(28. 1)
(200. 9)
(37. 0)
48. 7
53. 4
50. 0
42. 8
36. 3
37. 6
26. 8
NOTABLE TRANSACTIONS
NOTABLE TRANSACTIONS
Property Class/
Type (Constr.)
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated
Cap Rate
Berkshires of Glen Ellyn (Glen Ellyn)
B- / GLR (1992)
11-Nov-2012
$24.2
$91,667
6.4%
Alta at K Station (City West)
A- / HR (2010)
15-Dec-2012
$302.0
$356,132
4.2%
A / HR (2010)
17-Dec-2012
$120.0
$308,783
4.9%
B+ / LFT (1987)
B / GLR (1986)
19-Dec-2012
16-Feb-2013
$16.0
$101.0
$190,578
$141,854
5.8%
5.2%
Property Name (Submarket)
215 West (The Loop/Washington St.)
The Regal (The Loop/Wells Street)
TGM Willowbrook (Downers Grove)
RED CAPITAL Research | April 2013
MARKET OVERVIEW 4Q12 | CHICAGO, ILLINOIS
Metro Effective Rent Trends
Sources: Reis, Inc./ RCR Forecast and Axiometrics
Same Store Trends
12%
YoY Rent Trend
9%
6%
3%
0%
-3%
RED 46 AVERAGE
-6%
4Q 06
4Q 07
4Q 08
4Q 09
4Q 10
4Q 11
CHI (REIS/RCR)
4Q 12
4Q 13
CHI (AXIOM)
4Q 14
4Q 15
4Q 16
MetroHome
HomePrice
PriceTrends
Trends
Metro
Source:
S&PFHFA
Case Home
ShillerPrice
HomeIndex
Price Index
Source:
10%
Y-o-Y % Change
5%
0%
-5%
-10%
-15%
C SX - 20 METROS
-20%
2008
2009
2010
2011
Chicago
2012
2013
Metro Payroll Employment Trends
Source: BLS , INSITUTE FOR ECONOMIC COMPETITIVENESS & RCR
3.0%
Y-o-Y % Change
1.5%
0.0%
-1.5%
-3.0%
-4.5%
U.S.A.
-6.0%
CHICAGO
-7.5%
2008
2009
2010
2011
2012
2013f
2014f
2015f
2016f
The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting or
financial advice, or recommendations to buy or sell currencies or securities or to engage in any specific transactions. Information has been
gathered from third party sources and has not been independently verified or accepted by RED CAPITAL GROUP. RED makes no representations
or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the report. RED cannot
be held responsible for any errors or misrepresentations contained in the report or in the information gathered from third party sources. Under
no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any
particular transaction or strategy. Any reliance upon this information is solely and exclusively at your own risk. Please consult your own counsel,
accountant or other advisor regarding your specific situation. Any views expressed herein are subject to change without notice due to market
conditions and other factors.
RED CAPITAL Research | April 2013
SUBMARKET TRENDS
Effective Rent
Submarket
Physical Vacancy
4Q11
4Q12
Change
4Q11
4Q12
$1,032
$1,182
$1,063
$1,213
3.0%
2.6%
3.6%
3.4%
3.4%
2.8%
-20 bps
-60 bps
City West
$994
$1,023
2.9%
9.8%
7.6%
-220 bps
Downers Grove
East Lake County
$933
$953
$952
$983
2.1%
3.2%
4.8%
4.3%
4.3%
3.1%
-50 bps
-120 bps
Glen Ellyn / Wheaton
$927
$961
3.6%
5.5%
4.2%
-130 bps
$1,105
$1,113
0.7%
4.1%
2.9%
-120 bps
Aurora / Naperville
Belmont - Montrose
Glendale Heights
Change
Glenview / Evanston
$1,018
$1,068
4.9%
3.9%
2.5%
-140 bps
Gold Coast
$1,639
$1,693
3.3%
4.3%
3.8%
-50 bps
Joliet
$771
$793
2.9%
5.1%
4.1%
-100 bps
Kane County
$966
$997
3.2%
5.2%
4.2%
-100 bps
Lincoln Park
$1,177
$1,240
5.4%
2.1%
1.4%
-70 bps
McHenry County
$892
$910
2.1%
3.8%
3.0%
-80 bps
O'Hare
$856
$891
4.2%
3.4%
2.9%
-50 bps
Oak Park
$912
$951
4.3%
5.1%
4.2%
-90 bps
$1,094
$785
$1,110
$806
1.5%
2.7%
6.6%
4.5%
5.9%
3.9%
-70 bps
-60 bps
Schaumburg/Hoffman Estates
South Shore
$962
$870
$994
$901
3.3%
3.6%
4.6%
5.0%
4.1%
4.5%
-50 bps
-50 bps
Southeast Cook County
$801
$824
2.9%
4.5%
4.0%
-50 bps
Southwest Cook County
$795
$801
0.7%
4.5%
3.9%
-60 bps
$1,568
$1,597
1.8%
4.4%
4.8%
40 bps
$893
$908
1.7%
4.5%
4.9%
40 bps
$1,020
$1,046
2.5%
3.5%
2.6%
-90 bps
$921
$954
3.5%
3.5%
3.6%
10 bps
$1,013
$1,045
3.2%
4.5%
3.9%
-60 bps
Palatine
Rogers Park / Uptown
The Loop
West Lake County
Wheeling
Woodridge / Lisle
Metro
RED CAPITAL GROUP
For more information about RED’s research capabilities contact:
Daniel J. Hogan, Director of Research
[email protected]
614-857-1416
Kenneth H. Bowen, President, Red Mortgage Capital, LLC
[email protected]
800-837-5100
RED CAPITAL GROUP® | MARKET OVERVIEW
Chicago, Illinois
Multifamily Housing Update 1Q12 May 2012
Payroll Job Summary
Total Payrolls
3,608.7m
Annual Change
+39.1m
2012 Forecast
+40.9m
2013 Forecast
+35.3m
2014 Forecast
+35.2m
2015 Forecast
+42.1m
Unemployment
9.0% (Mar)
Vacancy Rate Summary
Vacancy Rate (Reis)
4.4%
RED 50 Rank
23rd
Annual Chg (Reis)
4.4%
RCR YE12 Forecast
3.8%
RCR YE13 Forecast
3.5%
RCR YE14 Forecast
3.3%
RCR YE15 Forecast
3.3%
Effective Rent Summary
Mean Rent (Reis)
$1,019
Annual Change
2.0%
RED 50 Rank
35th
RCR YE12 Forecast
2.7%
RCR YE13 Forecast
3.3%
RCR YE14 Forecast
3.0%
RCR YE15 Forecast
3.0%
Trade & Return Summary
$5mm+ Sales
7
Approx. Proceeds
$363mm
Median Cap Rate6
6.5%
Avg. Price/Unit
$215,700
Expected Total Return
6.6%
RED 46 ETR Rank
32nd
Risk-adjusted Index
3.21
RED RAI Rank
20th
1Q12 Payroll Trends and Forecast
After hitting a soft patch in the fall (the 12-month
payroll comparison in December was the weakest
in 14 months) the Chicago economy rebounded
in 1Q12 posting a solid 39,100-job, 1.1% year-onyear advance. The highlight was a 6-month high
42,300-job gain registered during the 12 months
ended in March. The rally was largely attributable
to continued strength in the business services
sector supported by faster hiring in the hospitality
and manufacturing industries. Headcounts in the
foregoing sectors grew at a 38,200-job pace in
1Q12, up from 26,000 jobs during 4Q11.
The seasonally-adjusted series suggests growth
was even stronger. These data indicate that a net
of 23,500 jobs were added January to March, the
largest three-month add since December 1999.
While recent data are encouraging, RCR don’t
expect Chicago to roam far from its normal 0.8%
to 1.1% growth path. Therefore, 2012 should produce about 41,000 jobs; 2013 and 2014 about
35,000 each; and 2015 42,000.
1Q12 Absorption and Vacancy Rate Trends
Demand for Chicago-land apartments subsided
during the winter, reflecting the effects of tighter
markets, higher rents, (particularly in popular infill
submarkets), and a dearth of fresh new product.
Tenants absorbed 723 units during 1Q, a useful
enough statistic — it significantly exceeds the 13year first quarter average of –313 units — but
weak relatively as it was the lowest quarterly figure for net move-ins in more than two years. Nevertheless, occupancy increased 20 basis points
sequentially to 95.6%, highest in eleven years.
The City West submarket recorded the largest
number of net move-ins as it welcomed about 250
new tenants to the neighborhood, despite a 1.8%
sequential increase of effective rents. Likewise,
the tight Lincoln Park market grew tighter as vacant stock decreased by 45 units, sending occupancy above the 98% threshold.
RCR expect further occupancy gains over the next
several years. Our models project gains of about
60 bps by YE12, and 50 more by the end of 2015.
1Q12 Rent Trends
While the labor market in the City that Works has
improved more jobs haven’t yet translated into
strong income growth. Largely for this reason,
metro rent trends remained relatively sluggish.
Although occupancy reached an 11-year high,
average asking and effective rents increased only
$3 (0.2%) and $6 (0.5%) sequentially to $1,088
and $1,019, respectively. At the end of the day,
effective rents were just 2.0% above the 1Q11
level and 3.1% higher over the past four years.
According to Reis, rent trends in the Loop submar-
ket have been among the weakest in the area,
falling –1.5% sequentially in 1Q12 and rising only
0.2% year-over-year. But local sources suggest
otherwise, including respected Appraisal Research
Counselors, who report a 9.2% y-o-y advance.
RCR models are calibrated to the Reis series, so
they share its slow-rent bias. As a result, the forecasts aren’t inspiring: the models suggest that
market improvement will be manifested primarily
in occupancy growth not in effective rents, projecting a 2.7% rise in 2012 and a 3.3% gain in 2013.
1Q12 Property Markets and Total Returns
In the wake of 4Q11’s veritable all-you-can-eat
buffet (when investors dined on 21 $5 million+
Chicago-land properties valued at a total of
$850mm) the first quarter was akin to a starvation diet. Only seven larger properties exchanged
hands for total proceeds of $360mm. Still, sales
ran ahead of the year-earlier period when volume
aggregated only $150 million in seven trades.
The marquis transaction involved a 21-story 221unit River North tower. The two-year old building
was valued at $110mm or $498,000 per unit,
widely believed to be the second highest perapartment price paid in this market. The cap rate
appeared to be in the low-4% area based on inplace income but rapidly evaporating concessions
may propel pro forma returns into the high-4s.
Using 5.0% and 5.7% purchase and sale cap rate
assumptions, respectively, RCR models estimate
expected 5-year unlevered returns of 6.6% for
metro assets; 32nd highest among the R46. Low
historical NOI volatility boosts risk-adjusted returns
considerably, raising Chicago to top 20 status.
MARKET OVERVIEW 1Q12 | CHICAGO, ILLINOIS
Metro Vacancy Rate Trends
Source: Reis, Inc. History, RCR Forecasts
Metro Vacancy Rate
9%
CHICAGO
8%
RED 45
7%
4. 9%
6%
5%
3. 8%
4%
3. 5%
3. 3%
3. 3%
3%
2%
1Q 06
1Q 07
1Q 08
1Q 09
1Q 10
1Q 11
1Q 12
1Q 13
1Q 14
1Q 15
1Q 16
Metro Cap Rate Trends
Source: eFannie.com, RCR Calculations
Average Cap Rate
7.5%
METR O
EA ST NO CENT R EGI ON
7.0%
6.5%
6.0%
6.5%
7.0%
6.5%
6.5%
3Q10
4Q10
6.7%
6.7%
6.9%
2Q11
3Q11
6.2%
6.5%
4Q11
1Q12
5.5%
1Q10
2Q10
1Q11
Metro Payroll History and Forecast
Annual Chg (000)
Source: BLS Data, RCR Forecasts.
60
30
0
-30
-60
-90
-120
-150
-180
-210
CHI CA GO
04
05
06
07
08
09
10
11
12f
13f
14f
15f
(2. 8)
36. 8
52. 8
29. 4
(28. 1)
(200. 9)
(37. 0)
40. 6
40. 9
35. 3
35. 2
42. 1
NOTABLE TRANSACTIONS
Property Name (Submarket)
Property Class/
Type (Constr)
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated
Cap Rate
Parc Huron (River North / Gold Coast)
A+ / HR (2010)
14-Mar-2012
$110.0
$497,738
4.2%
Lincoln Meadow (Schaumburg)
Legacy at Poplar Creek (Schaumburg)
Dunton Tower (Wheeling / Arlington Hts)
B+/GLR (1988)
B+/GLR (1986)
M.I. / HR (1985)
11-Apr-2012
17-Feb-2012
30-Mar-2012
$86.7
$27.2
$39.4
$150,521
$138,776
$174,889
6.0%
5.0%
5.0%
RED CAPITAL Research | May 2012
MARKET OVERVIEW 1Q12 | CHICAGO, ILLINOIS
Metro Effective Rent Trends
Source: Reis, Inc., RCR Forecasts
8%
6%
YoY Rent Trend
4%
2%
2. 7%
3. 3%
3. 0%
0%
3. 0%
-2%
-4%
RED 46 AVG
-6%
CHICAGO
-8%
1Q 06
1Q 07
1Q 08
1Q 09
1Q 10
1Q 11
1Q 12
1Q 13
1Q 14
1Q 15
1Q 16
Metro Home Price Trends
Source: S&P Case Shiller Repeat Sales Index
10%
0%
-5%
-10%
-15%
-20%
C SX - 20 METROS
-25%
2009
2010
Chicago
2011
2012
Metro Payroll Employment Trends
Source: BLS Data, RCR Forecasts
3%
Y-o-y Growth Rate
Y-o-Y % Change
5%
2%
1%
0%
-1%
-2%
CHICAGO
USA
-3%
-4%
2010
2011
2012f
2013f
2014f
The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting or
financial advice, or recommendations to buy or sell currencies or securities or to engage in any specific transactions. Information has been
gathered from third party sources and has not been independently verified or accepted by RED CAPITAL GROUP. RED makes no representations
or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the report. RED cannot
be held responsible for any errors or misrepresentations contained in the report or in the information gathered from third party sources. Under
no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any
particular transaction or strategy. Any reliance upon this information is solely and exclusively at your own risk. Please consult your own counsel,
accountant or other advisor regarding your specific situation. Any views expressed herein are subject to change without notice due to market
conditions and other factors.
RED CAPITAL Research | May 2012
SUBMARKET TRENDS
Effective Rent
Submarket
Physical Vacancy
1Q11
1Q12
Change
1Q11
1Q12
Aurora / Naperville
$999
$1,041
4.2%
4.7%
3.7%
-100 bps
Belmont-Montrose
$1,160
$1,182
1.9%
3.7%
3.2%
-50 bps
$991
$1,012
2.1%
10.4%
8.7%
-170 bps
City West
Change
Downers Grove
$909
$930
2.3%
5.8%
4.9%
-90 bps
East Lake County
$934
$960
2.8%
5.1%
4.0%
-110 bps
Glen Ellyn / Wheaton
$904
$928
2.6%
6.7%
5.2%
-150 bps
Glendale Heights
$1,076
$1,096
1.9%
4.5%
4.0%
-50 bps
Glenview / Evanston
$1,009
$1,022
1.4%
4.6%
3.4%
-120 bps
Gold Coast / Near North
$1,612
$1,649
2.3%
5.3%
4.2%
-110 bps
$763
$776
1.8%
5.3%
4.8%
-50 bps
$959
$1,162
$963
$1,198
0.3%
3.2%
6.0%
2.7%
4.8%
1.9%
-120 bps
-80 bps
McHenry County
$883
$896
1.5%
4.0%
3.5%
-50 bps
Oak Park
$895
$928
3.7%
5.4%
4.7%
-70 bps
O'Hare
$836
$864
3.3%
3.7%
3.4%
-30 bps
Joliet
Kane County
Lincoln Park / Lakeview
Palatine
$1,071
$1,096
2.3%
8.1%
7.3%
-80 bps
Rogers Park / Uptown
$776
$791
2.0%
5.3%
4.3%
-100 bps
Schaumburg / Hoffman
$956
$969
1.3%
4.8%
4.3%
-50 bps
Southeast Cook County
$800
$800
0.0%
5.3%
4.3%
-100 bps
South Shore
$865
$881
1.9%
5.5%
5.1%
-40 bps
Southwest Cook County
$785
$796
1.4%
4.9%
4.1%
-80 bps
The Loop / Printer’s Row
$1,541
$1,545
0.2%
9.0%
4.7%
-430 bps
West Lake County
$880
$893
1.5%
5.0%
4.4%
-60 bps
Wheeling
Woodridge / Lisle
$1,006
$907
$1,024
$937
1.7%
3.4%
4.2%
4.3%
3.7%
3.5%
-50 bps
-80 bps
$999
$1,019
2.0%
5.4%
4.4%
-100 bps
Metro
RED CAPITAL GROUP
For more information about RED’s research capabilities contact:
Daniel J. Hogan, Director of Research
[email protected]
614-857-1416
Kenneth H. Bowen, President, Red Mortgage Capital, LLC
[email protected]
800-837-5100
RED CAPITAL GROUP® | MARKET OVERVIEW
Chicago, Illinois
Multifamily Housing Update 4Q11 March 2012
Payroll Job Summary
4Q11 Payroll Trends and Forecast
Total Payrolls
Following 3Q’s 5-year high 50,600-job year-onyear advance, payroll job growth decelerated to a
32,700 (0.9%) job annual pace. Consumer driven
sectors were largely responsible as collective net
hiring recorded in the construction, retail trade
and hospitality and personal service sectors
slumped to 100 jobs from 15,500 jobs in 3Q. By
contrast, headcounts in the business, health care
and education service sectors grew at a consistently robust rate, rising at a 34,500-job, 2.9%
pace for the second consecutive quarter.
3,690.3m
4Q11 Y-o-y Chg.
+32.7m
FY 2011
+40.6m
2012 Forecast
+23.6m
2013 Forecast
+14.0m
2014 Forecast
+38.0m
Unemployment
9.6% (Jan)
Vacancy Rate Summary
4Q11 Absorption and Vacancy Rate Trends
Vacancy Rate
4.6%
RED 50 Rank
23rd
Renters expressed robust demand for apartment
space in the fall. Tenants net leased a total of
1,202 units October to December, representing
the 5th consecutive quarter in which 1,000 to
1,500 units were absorbed. Supply remained lean
— only 149 units were completed in 4Q, bringing
the 2011 total to 279 — allowing occupancy to
rise another 20 basis points sequentially (100 bps
year-on-year) to 95.4%, a ten-year high.
Annual Change
<1.0%>
YE12 Forecast
4.0%
YE13 Forecast
4.0%
YE14 Forecast
3.7%
YE15 Forecast
3.4%
Only two submarkets — City West, Schaumburg —
suffered net sequential occupancy rate declines,
Effective Rent Summary
4Q11 Rent Trends
Mean Rent
Owners found better fortune filling vacant space
than raising unit rents. Reis report that the average asking and effective rent metrics increased
$3 (0.3%) each sequentially to $1,076 and
$1,013, down from 0.6% and 0.7% gains recorded
during the prior quarter. Expressed on a year-over
-year basis, metro effective rents increased only
1.9%, ranking 36th among the RED 50 markets.
$1,013
Annual Change
1.9%
RED 50 Rank
36th
2012 Forecast
2.6%
2013 Forecast
3.0%
2014 Forecast
2.7%
2015 Forecast
3.2%
Trade & Return Summary
4Q11 $8mm+ Sales
Proceeds
Average Cap Rate
Avg. Price / Unit
14
$764mm
6.3%
$178,110
Expected Total Ret
6.3%
RED 45 ETR Rank
27th
Risk-adjusted Index
2.72/16th
Six submarkets posted sequential quarter effective rent declines, including infill Belmont, Gold
Seasonally-adjusted data were more constructive.
This series showed sequential quarter payroll employment up 8,200 jobs in 4Q, representing the
strongest fall quarter in seven years, and 11,400
jobs month-to-month in January.
RCR models anticipate slower growth in 2012 and
2013, in keeping with our cautious GDP forecast.
Payroll gains of 23,600 and 14,000 jobs are projected, respectively. Hiring should gain momentum
in 2014 with 38,000 workers added to payrolls.
the former due entirely to supply pressures. The
largest gains were observed in the Loop (+1.9%),
where young professionals find it more advantageous to rent than buy condos and suburban Palatine (0.8%) and Downers Grove (0.7%).
RCR models indicate that occupancy is likely to
continue to rise steadily through 2016. The occupancy model projects a 60 bps increase for 2012,
followed by slow but consistent progress for the
duration of the five-year forecast period.
Coast and City West (Loop rents increased 0.5%).
Established suburbs with high-ranking school districts posted the strongest results; namely Glen
Ellyn, Aurora, East Lake County and Oak Park.
The RCR pricing model indicates that rent growth
is likely to remain sluggish in the near term. Our
economic model projects annual personal income
gains of 4.1% or less in 2012 and 2013, limiting
upside rent potential. Reis, by contrast, are quite
bullish, forecasting 5%+ gains through 2015.
Recent Property Market Review and Total Return Estimates
Transaction velocity accelerated during the fourth
quarter as institutional buyers warmed up to infill
Chicago investment opportunities. A total of 14
$8mm trades closed during 4Q11, including six
transactions valued at $50mm or greater, up from
six transactions during 3Q. Proceeds totaled
$764.3mm, up 169% quarter-to-quarter. Boosted
by the sale of two recent construction high-rise
buildings, the price of the average unit was
$178,110, up from 3Q’s $105,083 metric. Cap
rates for institutional quality infill towers fell in the
mid-3% to low-4% range. Suburban garden projects traded at low–4% to high-4% yields.
Employing a 5.2% generic cap rate for class-A&B
metro-wide assets, the RCR total return model
generates a 6.3% expected unlevered IRR for Chicago investments, ranking 27th among the RED
45. Trophy towers purchased at sub-4% yields
must generate rent growth of at least 4.5% per
year to achieve this return over five years, given
an expected 90 bps rise in terminal cap rates.
MARKET OVERVIEW 4Q11 | CHICAGO, ILLINOIS
Metro Vacancy Rate Trends
Source: Reis, Inc.
Metro Vacancy Rate
9%
CHICAGO
8%
RED 46
7%
6%
5.2%
4.9%
5%
3.7%
4.6%
4%
3%
1Q 06
1Q 07
1Q 08
1Q 09
1Q 10
1Q 11
1Q 12
1Q 13
1Q 14
1Q 15
Metro and Region Cap Rate Trends
Sources: Fannie Mae MBS & RCR
East No Ce ntr al R e gi o n
Average Cap Rate
7.5%
Ch i ca go
7.0%
6.5%
7.1%
6.8%
4Q 10
1Q 11
6.9%
6.0%
6.7%
6.3%
7.3%
6.8%
7.1%
6.3%
5.5%
1Q 10
2Q 10
3Q 10
2Q 11
3Q 11
4Q 11
1Q 12
Metro Payroll Employment Trends
Annual Chg (000)
Sources: BLS & RCR Forecasts
75
50
25
0
-25
-50
-75
-100
-125
-150
-175
-200
-225
CHICAGO
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012f
2013f
2014f
(42.2)
(2.8)
36.8
52.8
29.4
(28.1)
(200.9)
(37.0)
40.6
23.6
14.0
38.0
NOTABLE TRANSACTIONS
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated
Cap Rate
A (2008)
A (2010)
2-Feb-2012
29-Dec-2011
$104.5
$125.0
$298,571
$502,008
3.9%
3.0%
Flair Tower (Gold Coast)
A (2009)
2-Dec-2011
$85.0
$426,293
3.4%
Avalon Poplar Creek (Schaumburg)
Aspen Place (Aurora/Naperville)
B (1986)
B (1988)
9-Feb-2012
20-Jan-2012
$27.2
$49.0
$138,776
$117,788
4.3%
4.5%
Property Name (Submarket)
Echelon at K Station (City West)
EN V (The Loop)
RED CAPITAL Research | March 2012
MARKET OVERVIEW 4Q11 | CHICAGO, ILLINOIS
YoY Rent Trend
Metro Effective Rent Trends
Source: Reis, Inc., RCR Forecasts
10%
8%
6%
4%
2%
0%
-2%
-4%
-6%
-8%
3.6%
1.9%
3.4%
2.4%
RED 45 AVG
1Q 06
1Q 07
1Q 08
1Q 09
1Q 10
1Q 11
1Q 12
1Q 13
CHICAGO
1Q 14
1Q 15
Y-o-Y % Change
5%
0%
-5%
-10%
-15%
CSX-20 METRO INDEX
CHICAGO
-20%
2009
2010
2011
2012
Metro Payroll Employment Growth Trends
Sources: BLS data, IEC at UCF and RCR Forecasts
Y-o-y Growth Rate
4%
2%
0%
-2%
-4%
CHICAGO
-6%
USA
-8%
2009
2010
2011f
2012f
2013f
2014f
The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting or
financial advice, or recommendations to buy or sell currencies or securities or to engage in any specific transactions. Information has been
gathered from third party sources and has not been independently verified or accepted by RED CAPITAL GROUP. RED makes no representations
or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the report. RED cannot
be held responsible for any errors or misrepresentations contained in the report or in the information gathered from third party sources. Under
no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any
particular transaction or strategy. Any reliance upon this information is solely and exclusively at your own risk. Please consult your own counsel,
accountant or other advisor regarding your specific situation. Any views expressed herein are subject to change without notice due to market
conditions and other factors.
RED CAPITAL Research | March 2012
SUBMARKET TRENDS
Effective Rent
Submarket
4Q10
4Q11
Physical Vacancy
Change
4Q10
4Q11
Change
Aurora / Naperville
$994
$1,032
3.9%
4.7%
3.6%
-110 bps
Belmont-Montrose
$1,155
$1,182
2.4%
4.1%
3.4%
-70 bps
City West
$993
$994
0.0%
10.4%
9.8%
-60 bps
Downers Grove
$912
$933
2.2%
6.1%
4.8%
-130 bps
East Lake County
$927
$953
2.8%
5.4%
4.3%
-110 bps
Glen Ellyn / Wheaton
$899
$927
3.1%
7.3%
5.5%
-180 bps
Glendale Heights
$1,072
$1,105
3.1%
4.7%
4.1%
-60 bps
Glenview / Evanston
$1,005
$1,018
1.3%
4.6%
3.9%
-70 bps
Gold Coast
$1,596
$1,639
2.7%
5.7%
4.3%
-140 bps
$758
$771
1.7%
5.8%
5.1%
-70 bps
Joliet
Kane County
$947
$966
2.0%
5.9%
5.2%
-70 bps
Lincoln Park
$1,152
$1,177
2.2%
2.9%
2.1%
-80 bps
McHenry County
$886
$892
0.6%
4.5%
3.8%
-70 bps
O'Hare
$840
$856
1.9%
3.5%
3.4%
-10 bps
Oak Park
$896
$912
1.8%
5.8%
5.1%
-70 bps
Palatine
$1,074
$1,094
1.8%
8.2%
6.6%
-160 bps
Rogers Park / Uptown
$774
$785
1.4%
5.2%
4.5%
-70 bps
Schaumburg / Hoffman Estates
$945
$962
1.8%
5.0%
4.6%
-40 bps
South Shore
$860
$870
1.2%
5.7%
5.0%
-70 bps
Southeast Cook County
$788
$801
1.6%
5.8%
4.5%
-130 bps
Southwest Cook County
$785
$795
1.3%
5.2%
4.5%
-70 bps
$1,548
$1,568
1.3%
8.1%
4.4%
-370 bps
$886
$893
0.8%
5.5%
4.5%
-100 bps
$1,008
$1,020
1.2%
4.4%
3.5%
-90 bps
$901
$921
2.2%
4.7%
3.5%
-120 bps
$994
$1,013
1.9%
5.6%
4.6%
-100 bps
The Loop
West Lake County
Wheeling
Woodridge / Lisle
Metro
RED CAPITAL GROUP
For more information about RED’s research and origination capabilities contact:
Kenneth H. Bowen
President, Red Mortgage Capital, LLC.
[email protected]
614-857-1482
Daniel J. Hogan
Director, Research
[email protected]
614-857-1416
RED CAPITAL GROUP® | MARKET OVERVIEW
Chicago, Illinois
Multifamily Housing Update 3Q11 December 2011
Payroll Job Summary
3Q11 Payroll Trends and Forecast
Total Payrolls:
3,652.4 m
Annual Change:
+20.9m
2011 Forecast
+23.0m
2012 Forecast
- 4.1m
2013 Forecast
+17.2m
2014 Forecast
+60.2m
Chicago employment growth continued to decelerate following 1Q11’s vigorous start. Payrolls increased at a 20,900-job, 0.6% year-on-year rate,
down from 42,400– and 23,700-job performances in 1Q and 2Q, respectively. Metro growth was
primarily attributable to improved conditions in the
goods producing industries as construction, manufacturing and wholesale trade accounted for
22,100 new jobs. By contrast, service industries
produced lackluster results as business, health
care, education and hospitality services hemor-
S.A. Unemployment 10.5% Oct.
Vacancy Rate Summary
Vacancy Rate (Reis)
4.9%
RED 50 Rank
22nd
Annual Chg (Reis)
-1.0%
RCR YE11 Forecast
4.8%
RCR YE12 Forecast
4.2%
RCR YE13 Forecast
3.5%
RCR YE14 Forecast
3.0%
Metro apartment owners continued to encounter
healthy space demand as tenants moved into a
net of 1,214 units in 3Q, down only slightly from
2Q’s 1,384 unit level. As supply again was all but
non-existent (Reis: 70 units), occupancy rose
another 20 basis points June to September,
reaching 95.1%, highest in nearly four years.
Infill submarkets remained the stars of the show
as young professionals steered clear of the condo
market, preferring rental tenancy. The Loop absorbed nearly 250 units in 3Q, raising occupancy
3Q11 Rent Trends
Mean Rent (Reis)
$1,010
Annual Change
2.0%
RED 50 Rank
35th
RCR 2011 Forecast
2.1%
RCR 2012 Forecast
2.8%
Despite robust occupancy improvement, rent
growth remained modest. Property managers
pushed effective rent up only 2.0% year-over-year,
ranking 35th among the RED 50. Concessions
continued to trend lower, but at a slow pace. In
the year-ended in September, the size of the average concession package fell from a ratio of 7.0%
to 6.7% of asking rent.
RCR 2013 Forecast
3.6%
RCR 2014 Forecast
4.1%
The fastest rate of effective rent growth was observed in the Glendale Heights (5.0%) submarket.
Trade & Return Summary
3Q11 Property Markets and Total Returns
3Q11 $5mm+ Sales
Loopnet.com identify 11 transactions involving
properties priced at or above $5 million during the
third quarter. Sales proceeds totaled $380 million
and the average price per unit was $116,000.
According to the CBRE cap rate survey published
in August, cap rates for stabilized Class-A Chicago
assets ranged from 4.5% to 5.25%.
Approx. Proceeds
$380mm
Cap Rate (T12 Med)
Aprox Price/Unit
4.8%
$116,000
Expected Total Return 5.9%
RED 44 Rank
RAI 6.58
24th
RAI Rank 19th
The RCR econometric payroll model produces a
cautious near term employment outlook. The underlying GDP forecast foresees slower growth in
2012 before the recovery resumes in earnest in
2013. Consequently, the model projects that Chicago-land payrolls will decrease slightly next year
following 2011’s 23,000-job add. A modest gain
should be recorded in 2013, setting the stage for
near 2% growth during a more robust 2014.
3Q11 Absorption and Vacancy Rate Trends
Effective Rent Summary
11
rhaged positions at a combined 1,700-job rate.
Using an integrated forecast model, RCR expect
unlevered total returns of around 5.9% for Chicago
assets, moderately below the group average. On
a stunning 170 bps. More than 200 tenants
leased units in City West and Gold Coast buildings.
RCR models suggest that demand for Chicago
apartments will remain healthy through 2015.
Absorption rates should remain in the 3,000-unit
or higher annual range while supply will rise only
moderately as rent growth is not likely to be strong
enough to ignite substantial development activity
in the desired infill submarkets, allowing occupancy to climb to the 97% level by 2014.
The submarket was a notable outlier as gains in
the second ranked submarket (O’Hare) were significantly slower (3.9%).
The RCR models project accelerating rent trends
over the forecast period. Specifically, effective
rent is forecast to rise at a 3.6% compound average annual rate through 2015. Reis are more
optimistic, producing 4.3% compound average
annual rent growth forecast.
the other hand, Chicago moderately outperforms
the peer groups with regard to risk-adjusted return.
Cap rates are expected to rise over the forecast
next few years, largely due to expected increases
in interest rates. In our base case forecast, the
yield on the ten-year treasury rises to 4.5% by
December 2015. As a result, Chicago area cap
rates increase by 80 basis point from 4.8% to
5.6%.
MARKET OVERVIEW 3Q11 | CHICAGO, ILLINOIS
Apartment Vacancy Trends
Source: Reis, Inc., RCR Forecasts
Metro Vacancy Rate
9%
8%
7%
6%
5%
4%
CHICAGO
3%
U.S. TOP METRO AVG
2%
1Q 05
1Q 06
1Q 07
1Q 08
1Q 09
1Q 10
1Q 11
1Q 12
1Q 13
1Q 14
1Q 15
3Q 14
2Q 15
Metro Multifamily Cap Rate Trends
Sources: Reis History, RCR Forecast
Average Cap Rate
6.0%
R EI S METR O T12M
RCR FORECA ST
5.5%
5.0%
4.5%
4Q 07
3Q 08
2Q 09
1Q 10
4Q 10
3Q 11
2Q 12
1Q 13
4Q 13
Pa y r o l l Emp l o y me n t Gr o wth
A nn ua l Ch g (000)
So u r ce : B LS Da ta & R CG R e se a r ch F o r e ca st
80
40
0
- 40
- 80
- 120
- 160
- 200
- 240
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010 2011f 2012f 2013f 2014f
Chi ca go (22. 6) (88. 2) (42. 2) (2. 8)
36. 8
52. 8
29. 4
(28. 0) (199. 9) (33. 9) 23. 0
(4. 1)
17. 2
60. 2
NOTABLE TRANSACTIONS
Property Name (Submarket)
City Front Apts (Gold Coast)
Reserves at Evanston (Glenview)
Oak Wood Apts (Gold Coast)
Regents Park (South Shore)
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated
Cap Rate
AA
AB
Jul-2011
Jul-2011
Oct-2011
Oct-2011
$107.0
$55.6
$90.0
$159.0
$222,917
$288,212
$279,503
$153,179
3.6%
3.6%
3.3%
4.5%
RED CAPITAL Research | December 2011
MARKET OVERVIEW 3Q11 | CHICAGO, ILLINOIS
Apartment Effective Rent Trends
Source: Reis, Inc., RCG Forecasts
6%
YoY Rent Trend
4%
2%
0%
-2%
U.S. TOP METRO AVG
CHICAGO
-4%
1Q 05
1Q 06
1Q 07
1Q 08
1Q 09
1Q 10
1Q 11
1Q 12
1Q 13
1Q 14
1Q 15
Metro Home Price Trends
Source: S&P Case-Shiller Repeat Sales Index
10%
Y-o-Y % Change
5%
0%
-5%
-10%
-15%
CSX-20
CHICAGO
-20%
-25%
2007
2008
2009
2010
2011
Year-over-year Payroll Growth Rate
Source: BLS, RCG Research Forecasts
3%
Rate
1%
-1%
-3%
CHICAGO
-5%
USA
-7%
2007
2008
2009
2010
2011f
2012f
2013f
2014f
The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting or
financial advice, or recommendations to buy or sell currencies or securities or to engage in any specific transactions. Information has been
gathered from third party sources and has not been independently verified or accepted by RED CAPITAL GROUP. RED makes no representations
or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the report. RED cannot
be held responsible for any errors or misrepresentations contained in the report or in the information gathered from third party sources. Under
no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any
particular transaction or strategy. Any reliance upon this information is solely and exclusively at your own risk. Please consult your own counsel,
accountant or other advisor regarding your specific situation. Any views expressed herein are subject to change without notice due to market
conditions and other factors.
RED CAPITAL Research | December 2011
SUBMARKET TRENDS
Effective Rent
Submarket
Physical Vacancy
3Q10
3Q11
Change
3Q10
3Q11
Change
Aurora/Naperville
Belmont-Montrose
$995
$1,163
$1,018
$1,189
2.3%
2.2%
5.1%
4.1%
4.0%
3.6%
-110 bps
-50 bps
City West
Downers Grove
East Lake County
Glen Ellyn/Wheaton
Glendale Heights
Glenview/Evanston
$981
$901
$927
$898
$1,039
$1,007
$998
$931
$938
$932
$1,091
$1,019
1.7%
3.4%
1.2%
3.8%
5.0%
1.1%
10.7%
7.4%
5.9%
8.2%
5.3%
4.7%
9.1%
5.5%
4.7%
6.0%
4.1%
4.1%
-160 bps
-190 bps
-120 bps
-220 bps
-120 bps
-60 bps
Gold Coast
Joliet
$1,589
$760
$1,646
$770
3.6%
1.4%
5.5%
6.0%
4.5%
5.3%
-100 bps
-70 bps
Kane County
$962
$963
0.1%
6.4%
5.4%
-100 bps
Lincoln Park
$1,149
$1,175
2.3%
3.0%
2.1%
-90 bps
$881
$888
0.9%
5.9%
4.0%
-190 bps
McHenry County
O'Hare
$823
$855
3.9%
3.8%
3.5%
-30 bps
Oak Park
$895
$902
0.7%
6.4%
5.3%
-110 bps
Palatine
$1,066
$1,085
1.8%
8.2%
7.4%
-80 bps
Rogers Park/Uptown
$771
$785
1.8%
5.1%
4.7%
-40 bps
Schaumburg/Hoffman
$934
$969
3.8%
5.3%
4.5%
-80 bps
SE Cook County
$777
$800
3.0%
6.1%
5.0%
-110 bps
South Shore
$869
$867
-0.2%
5.6%
5.3%
-30 bps
SW Cook County
$772
$795
3.1%
5.3%
4.9%
-40 bps
The Loop
$1,539
$1,561
1.4%
10.2%
6.3%
-390 bps
West Lake County
$888
$890
0.2%
6.0%
4.5%
-150 bps
Wheeling
$993
$1,011
1.8%
4.0%
3.5%
-50 bps
$895
$919
2.7%
5.2%
3.9%
-130 bps
$990
$1,010
2.0%
5.9%
4.9%
-100 bps
Woodridge/Lisle
Metro
RED CAPITAL GROUP
For more information about RED’s research capabilities and Chicago-area coverage contact:
Daniel J. Hogan
Director of Research
[email protected]
614-857-1416
John Powell
Senior Managing Director, Chicago
[email protected]
RED CAPITAL GROUP® | MARKET OVERVIEW
Chicago, Illinois
Multifamily Housing Update 2Q11 September 2011
Payroll Job Summary
2Q11 Payroll Trends and Forecast
Total Payrolls:
4,293m
Annual Change:
+22m
2011 Forecast
+38.6m
2012 Forecast
+36.9m
2013 Forecast
+34.6m
Chicagoland employers created 22,000 (0.5%)
jobs year-over-year in 2Q11, marking the third
consecutive quarterly advance. The pace of job
creation decelerated from 1Q’s 44,000 (1.1%) job
gain, owing to weaker job creation in the business,
education and health service firms. The sectors
added 30,100 jobs year-over-year in 1Q11 and
only 14,600 year-over-year in 2Q11.
Unemployment:
9.5%
On a seasonally-adjusted basis employers shed
–8,900 jobs year-over-year in 2Q11, following a
Vacancy Rate Summary
2Q11 Absorption and Vacancy Rate Trends
Vacancy Rate (Reis)
5.1%
RED 50 Rank
21st
Annual Chg (Reis)
-1.5%
Property managers net leased 1,361 units during
the second quarter, comparing favorably to positive net absorption of 1,159 units in the previous
period. As a result, the metro vacancy rate decreased 30 basis points sequentially to 5.1%.
RCR YE11 Forecast
5.4%
RCR YE12 Forecast
5.4%
Apartment demand was especially robust in The
Loop and the surrounding submarkets. Indeed,
close to 50% of absorbed units were located in the
Lincoln Park, City West, Gold Coast, The Loop and
South Shore submarkets. Only one of the metro’s
25 submarkets experienced negative net absorp-
Effective Rent Summary
2Q11 Rent Trends
Mean Rent (Reis)
$1,003
Annual Change
+1.8%
RED 50 Rank
35th
RCR 2011 Forecast
+3.2%
RCR 2012 Forecast
+2.3%
Despite strong demand fundamentals, effective
rent growth continued to disappoint. After gaining
0.5% sequentially over three consecutive quarters
(3Q10 to 1Q11) the pace of effective rent growth
decelerated to 0.4% in the second quarter. As a
result, the year-over-year growth rate fell from
2.1% in 1Q11 to 1.8%.
All but two metro submarkets posted positive yearover-year effective rent gains. Effective rent in the
South Shore submarket was unchanged and
Trade & Return Summary
2Q11 Property Markets and Total Returns
$5mm+ Sales
30
Approx. Proceeds
$788mm
Median Cap Rate
5.2%
Avg. Price/Unit
179,114
Real Capital Analytics were aware of 30 transactions involving properties priced at or above $5
million in the first six months of 2011. Sales volume totaled $787.9 million and the average price
per unit was $179,114. According to CBRE, cap
rates for stabilized Class-A assets ranged from
4.75% to 5.0% in March.
Expected Total Return 4.1%
RED 50 Rank
41st
Risk-adjusted Index
41st
Employing a 4.5% acquisition cap rate, RCR estimate that the expected five-year un-levered total
return for Chicago assets is 4.1% The metric
robust 19,700-job gain in the first quarter. Based
on preliminary data, the BLS notes that another
–1,900 jobs were eliminated from payrolls in July.
RCR expect metro payroll growth to hover around
1.0% annually as employers add 38,600, 36,900
and 34,600 jobs in 2011, 2012 and 2013, respectively. Economy.com are comparatively optimistic, projecting annual gains in the 1.7% to 2.0%
range over the three-year forecast period.
tion as tenants vacated 14 Woodridge / Lisle submarket units.
Reis expect apartment demand to accelerate to
2,627 units in 2H11 and total 2,710 units in
2012, raising occupancy 50 bps by YE11 and 30
bps in 2012 to 95.7%. The RCR forecast models
expect a modest 30 basis point decrease in occupancy over the next eighteen months, largely because of our more cautious near-term payroll outlook.
McHenry County effective rent decreased –0.3%
to $890.
Reis anticipate significant rent growth acceleration
in the second half of 2011. Specifically, the
source projects year-over-year growth to rise to
3.8%% by year-end and advance by a like amount
in 2012. By contrast, the RCR models predict
moderately slower gains of 3.2% and 2.3% in
2011 and 2012, respectively.
ranks 41st highest among the RED 46.
In regard to risk adjusted returns, Chicago assets
rank 41st overall. The RCR integrated performance and total return model indicates that Chicago investments have a 45.3% probability of
achieving a total return of 5% or higher over five
years. The model projects typical assets will trade
at a 5.7% cap rate (up 120 bps) after 5 years, with
a 15.1% probability of cap rates at or below the
current level.
MARKET OVERVIEW 2Q11 | CHICAGO, IL
Apartment Vacancy Trends
Source: Reis, Inc.
8.5%
Metro Vacancy Rate
8.0%
CHICAGO
7.5%
U.S.A.
7.0%
6.5%
5.9%
6.0%
5.5%
5.0%
5.1%
4.5%
4.0%
1Q 05
1Q 06
1Q 07
1Q 08
1Q 09
1Q 10
1Q 11
Metro Multifamily Cap Rate Trends
Source:s: Fannie, Freddie, RCR, Reis
8.0%
Average Cap Rate
7.5%
7.0%
6.5%
6.0%
5.5%
FNM / FM C US
FNM / FM C EA ST NORTH CENTRA L REGION
REIS CHICA GO (T12 A VG)
5.0%
4.5%
4.0%
2Q 07 3Q 07 4Q 07 1Q 08 2Q 08 3Q 08 4Q 08 1Q 09 2Q 09 3Q 09 4Q 09 1Q 10 2Q 10 3Q 10 4Q 10 1Q 11 2Q 11
Payroll Employment Growth
Source: BLS Data & RCG Research Forecast
Annual Chg (000)
100
38.6
50
0
36.9
34.6
-50
-100
-150
-200
-250
-300
00
01
02
03
04
05
06
07
08
09
10
11f
12f
13f
NOTABLE TRANSACTIONS
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated
Cap Rae
One Superior Place (Gold Coast)
A
May 2011
$320.0
$395,550
3.5%
City Front (Gold Coast)
A
July 2011
$107.0
$222,917
3.7%
533 Barry Ave Apts (Lincoln Park)
A
June 2011
$33.2
$205,130
4.4%
Briarbrook Village (Glen Ellyn)
A
July 2011
$34.2
$100,000
5.5%
Property Name (Submarket)
RED CAPITAL Research | August 2011
MARKET OVERVIEW 2Q11 | CHICAGO, IL
Apartment Effective Rent Trends
Source: Reis, Inc.
6%
YoY Rent Trend
4%
2.4%
2%
1.8%
0%
-2%
CHICAGO
U.S.A.
-4%
1Q 05
1Q 06
1Q 07
1Q 08
1Q 09
1Q 10
1Q 11
Metro Median Single Family Home Prices
Source: S&P Case-Shiller Index
Y-o-Y % Change
20%
15%
10%
5%
0%
-5%
-10%
CHICAGO
-15%
-20%
SPX20
-25%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Year-over-year Payroll Growth Rate
Source: BLS, RCG Research Forecast
4%
2%
Rate
0%
-2%
-4%
-6%
CHICAGO
USA
-8%
03
04
05
06
07
08
09
10
11f
12f
The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting or
financial advice, or recommendations to buy or sell currencies or securities or to engage in any specific transactions. Information has been
gathered from third party sources and has not been independently verified or accepted by RED CAPITAL GROUP. RED makes no representations
or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the report. RED cannot
be held responsible for any errors or misrepresentations contained in the report or in the information gathered from third party sources. Under
no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any
particular transaction or strategy. Any reliance upon this information is solely and exclusively at your own risk. Please consult your own counsel,
accountant or other advisor regarding your specific situation. Any views expressed herein are subject to change without notice due to market
conditions and other factors.
RED CAPITAL Research | August 2011
SUBMARKET TRENDS
Submarket
Effective Rent
Physical Vacancy
2Q10
2Q11
Change
2Q10
$1,162
$1,171
0.8%
$986
$994
0.8%
Gold Coast
$1,581
$1,626
2.8%
The Loop
$1,504
$1,547
2.8%
South Shore
$865
$865
0.0%
Southeast Cook County
$776
$798
2.8%
Southwest Cook County
$773
$791
2.2%
Downers Grove
$894
$919
2.8%
Lincoln Park
Glen Ellyn / Wheaton
$889
$914
2.8%
O'Hare
$813
$842
3.6%
East Lake County
$925
$935
1.1%
West Lake County
$871
$894
2.7%
McHenry County
$893
$890
-0.3%
Kane County
$955
$966
1.2%
$757
$763
0.9%
3.6%
11.0%
6.7%
11.8%
6.7%
5.9%
5.6%
8.6%
5.7%
5.8%
4.9%
6.2%
6.1%
9.1%
5.5%
5.5%
4.1%
7.6%
9.2%
4.2%
6.7%
6.8%
6.8%
7.1%
6.5%
$985
$1,003
1.8%
6.6%
City West
Woodridge / Lisle
$897
$908
1.1%
Aurora/Naperville
$982
$1,008
2.7%
$985
$1,007
2.3%
$1,040
$1,080
3.9%
Wheeling
Glendale Heights
Schaumburg / Hoffman
$933
$963
3.3%
$1,063
$1,081
1.7%
Glenview / Evanston
$999
$1,013
1.4%
Rogers Park / Uptown
$765
$777
1.5%
$1,158
$1,166
0.6%
$897
$901
0.4%
Palatine
Belmont-Montrose
Oak Park
Joliet
Metro
2Q11
2.5%
-110 bps
10.0%
-100 bps
4.7%
-200 bps
8.0%
-380 bps
5.2%
-150 bps
5.0%
-90 bps
4.9%
-70 bps
5.7%
-290 bps
4.4%
-130 bps
4.3%
-150 bps
3.9%
-100 bps
4.2%
-200 bps
4.5%
-160 bps
7.7%
-140 bps
4.3%
-120 bps
5.1%
-40 bps
3.7%
-40 bps
5.2%
-240 bps
6.1%
-310 bps
3.8%
-40 bps
4.7%
-200 bps
4.7%
-210 bps
3.9%
-290 bps
5.6%
-150 bps
5.2%
-130 bps
5.1%
-150 bps
RED CAPITAL GROUP
For more information about RED’s research
capabilities contact:
Daniel J. Hogan
Director of Research
[email protected]
614-857-1416
Change
William T. Hinga
Business Development
[email protected]
614-857-1499
RED CAPITAL GROUP®
Market Overview
Chicago, Illinois
Multifamily Housing Update
February 2011
EXECUTIVE SUMMARY
T
he Chicagoland area economy
improved in recent months.
Indeed, the January purchasing managers survey revealed that
business activity, production, new
orders and employment were up in
January. Specifically, the employment and new orders indices rose to
the highest levels since 1984 and
1983, respectively.
Data from the BLS’s household survey also suggested that labor market
conditions improved. The metro’s
unemployment rate fell to 8.7% in
December 2010, down from 10.6% in
the same month of the previous year,
owing to a robust 139,684 (3.3%) job
increase in total employment.
On the other hand, the BLS’s payroll
survey suggests that employers continued to shed jobs at a –40,500
(-1.0%) job annual rate in December,
in stark contrast to both the household
and purchasing managers surveys.
But RED CAPITAL Research
(RCR) believe that the 2010 payroll
estimates are likely to be revised upward next month. The source’s Quarterly Census of Employment and
Wage series suggest that the payroll
survey significantly overestimated
employment declines.
Based on current payroll estimates
our econometric model predicts modest job growth over the next two year.
Our model produces estimates of
27,800 (0.8%) net new jobs in 2011
and 61,200 (1.7%) net new jobs in
2012. Similarly, Economy.com predict gains of 32,450 (0.9%) and
87,160 (2.4%) jobs in 2011 and 2012,
respectively.
Home prices declined over the past
year. The National Association of
Realtors report that the median price
of a single-family MSA home decreased –4.2% y-o-y to $183,400 in
4Q10. Additionally, Chicago registered a –7.6% decrease in the Case-
SNAP SHOT
Shiller home price index in the yearended in November, the second worst
performance among the 20 markets
tracked by the source.
The improving local economy contributed strong apartment demand in
the fourth quarter. Property managers
net leased 1,475 units and no units
were completed during the four quarter. As a result, occupancy rose from
94.1% in 3Q10 to 94.4% in 4Q10.
On an annual basis, occupancy improved 110 basis points as tenant demand (7,251 units) outpaced supply
(2,505 units).
Higher occupancy fueled falling concessions and strong rent growth in the
fourth quarter. The size of the average concession package fell from
7.6% of asking rent in 4Q09 to 6.9%
in 4Q10. As a result, the average
effective rent advanced at a 2.4% y-oy rate, the fastest increase since 3Q08
(+2.5%).
Reis are optimistic about near-term
rent and occupancy improvement.
The service predicts occupancy to rise
to 94.9% by year-end, the highest rate
since 1Q08. Furthermore, the average
effective rent is forecast to advance at
a 4.8% annual rate this year, on par
with growth observed in 2007.
Apartment sales activity accelerated
in 2010. Real Capital Analytics were
aware of 30 investor-grade transactions totaling $871.4 million in sales
proceeds. By comparison, volume
totaled only $408 million in 2009.
Average prices also soared, rising
126.7% y-o-y to $150,717.
Based on an assumed 5.0% going-in
yield, RCR calculate a 9.7% expected
rate of total return, above the 9.0%
RED 50 average. Additionally, subdued historic rent trend volatility
gives rise to the 17th highest measure
of risk-adjusted return in the peer
group.
Vacancy
(5.6% - 4Q10)
Effective
Rents
Y-o-y
change
Projected
2011
110bps
50bps
2.4%
4.8%
($994 - 4Q10)
Cap Rate
(5.0% - 4Q10)
Employment
(4,213.6m - 4Q10)
130bps
50.5m
27.8m
KEY POINTS
 The
metro vacancy rate decreased 30 basis
points sequentially and 110 basis points
year-over-year to 5.6% in 4Q10. Robust
apartment demand contributed to the
improvement.
Positive net absorption
totaled 1,475 units during the quarter and
7,251 units in the twelve-month period
ended in December.
 The size of the average concession package
fell from 7.6% of asking rent in 4Q09 to
6.9% in 4Q10. As a result, the pace of yearover-year effective rent growth accelerated
to 2.4%.
 Reis
are optimistic about near-term rent
growth.
The service forecasts a 4.8%
increase this year, followed by a moderately
slower 3.8% advance in 2012.
 Home prices trended lower in recent months.
The Case-Shiller home price index showed
that values plunged –7.6% year-over-year in
November, worse than the –1.6% drop in the
20-market composite index.
 Real
Capital Analytics were aware of 30
investor-grade transactions totaling $871.4
million in sales proceeds in 2010. The
average price per unit was $150,717.
Chicago-Naperville-Joliet, IL-IN-WI MSA - Q4 2010
VACANCY TRENDS
Apartment Vacancy Trends
 According to Reis, the metro vacancy rate decreased 30 basis points
 Appraisal
Research Counselors report that a 93.6% fourth quarter
occupancy rate for Class-A rentals downtown, up from the 92.4% rate
recorded in the same period of 2009.
Metro Vacancy Rate
sequentially and 110 basis points year-over-year to 5.6% in 4Q10.
Robust apartment demand was responsible. Positive net absorption
totaled 1,475 units during the quarter. The service expects vacancy to
fall to 5.1% by year-end as demand (2,718 units) outpaces supply (917
units).
Source: Reis, Inc.
10%
 Same-store
8%
6%
6.7%
5.6%
4%
Chicago
U.S.A.
2%
0%
REIT data (covering 5,045 units) show that occupancy
increased 40 basis points sequentially and 230 basis points year-overyear to 97.0% in the fourth quarter.
4Q 4Q 4Q 4Q 4Q 4Q 4Q 4Q 4Q 4Q 4Q 4Q
99 00 01 02 03 04 05 06 07 08 09 10
RANK: 21st out of 50
RENT TRENDS
Metro Rent Trends
Source: Reis, Inc.
 The
 The
Appraisal Research Counselors estimate that effective rent for
Class-A properties downtown rose 7.2% year-over-year to $2.23 per
square foot in the fourth quarter. The source expects effective rent to
advance 7% to 8% again this year.
8%
Asking
Effective
6%
YoY Rent Trend
metro average effective rent increased 2.4% year-over-year to
$994 in 4Q10, partially owing to decreased concessions. The size of
the average concession package fell from 7.6% of asking rent in 4Q09
to 6.9% in 4Q10. Reis predict that effective rent will advance 4.8%
this year.
 According to REIT disclosure data, same-store average rent rose 0.1%
4%
2.4%
1.6%
2%
0%
-2%
-4%
sequentially to $1,113 in 4Q10. Conversely, the fourth quarter metric
was –0.7% below the 4Q09 ($1,121) comparison.
4Q 4Q 4Q 4Q 4Q 4Q 4Q 4Q 4Q 4Q 4Q 4Q
99 00 01 02 03 04 05 06 07 08 09 10
st
RANK: 21 out of 50
Metro Multifamily Cap Rate Trend
PROPERTY MARKET & CAP RATE TRENDS
Source: Reis, Inc.
 Real Capital Analytics report that sales activity surged in 2010.
8%
The
source calculates that sales volume rose 113.6% from $408 million in
2009 to $871.4 million last year. Similarly, the average price per unit
advanced 126.7% year-over-year to $150,171.
& Millichap report that cap rates for suburban properties
ranged from 6.5% to 8.0% at year-end. By comparison, assets in the
city traded at sub-6% first-year yields. But recent trades suggest that
cap rates were even lower in recent months. Indeed, RCR calculate a
3.8% cap rate for the acquisition of 474 rental units at a recently
completed high-rise property in The Loop and a 5.2% cap rate for a
garden-style suburban asset in the East Lake County submarket.
 Based on an assumed 5.0% cap rate, RCR calculate a 9.7% expected
rate of total return, comparing favorably to the 9.0% RED 50 mean.
Cap Rate
 Marcus
7%
6%
5%
4%
3%
4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
08
09
09
09
09
10
10
10
10
NOTABLE TRANSACTIONS
Property Name (Submarket)
Aqua (The Loop)
AMLI at Osprey Lake (E Lake Co)
Astoria Towers (The Loop)
RED CAPITAL Research
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
A
B+
A-
December 2010
December 2010
December 2010
$242.0
$55.5
$44.7
$510,549
$114,907
$218,237
3.8%
5.2%
N/A
Chicago-Naperville-Joliet, IL-IN-WI MSA - Q4 2010
Metro Median Single Family Home Prices
DEMOGRAPHICS & HOUSING MARKET
Source: National Association of Realtors
$300
MSA
 The population of the Chicago-Naperville-Joliet MSA increased 0.7%
US
in 2009. Tactician Corp. predict that the pace of growth will remain
stable (0.7% annually) from 2010 to 2015.
Prices (000)
$250
 Home
prices were weak in the fourth quarter. According to the
National Association of Realtors, the median price of a single-family
MSA home decreased –4.2% year-over-year from $191,500 in 4Q09 to
$183,400 in 4Q10. Likewise, Chicago registered –7.6% year-over-year
decrease in the November Case-Shiller home price index, ranking
second lowest among the 20 markets tracked by the source.
$200
$150
 Appraisal
Research Counselors estimate that approximately 600
downtown condo units traded in 2010, on par with the prior year’s
sales pace. The source also counts seven existing condo buildings with
more than 150 unsold units.
$100
07
08
09
Y
Y
Y
4Q 1Q 2Q 3Q 4Q
09
10
10
10
10
Payroll Employment Growth
EMPLOYMENT TRENDS
Source: BLS Data & RCG Research Forecast
100
61.2
27.8
50
Annual Chg (000)
Non-Seasonally Adjusted
0
-50
–50,500 (-1.2%) positions from payrolls year-over-year. Losses were
particularly severe in the Lake County-Kenosha County portion of the
MSA as headline job counts declined at a –3.5% year-over-year rate.
 Most of the metro area’s lost jobs were in the construction and busi-
-100
ness service sectors. Combined, the sectors cut –32,500 jobs yearover-year in 4Q10.
-150
-200
 Moreover, only education, health care and manufacturing employers
-250
-300
00 01 02 03 04 05 06 07 08 09 10 11f 12f
generated net payroll gains in the fourth quarter. After shedding –
2,100 jobs year-over-year in 3Q10, manufacturers added 2,200 positions to payrolls in the fourth quarter. Education and health service
providers, on the other hand, added 7,500 jobs year-over-year in
3Q10 but only 5,300 jobs year-over-year in 4Q10.
 By contrast job counts from the BLS’s household survey were com-
Year-over-year Payroll Growth Rate
paratively robust as year-over-year job growth surged to 104,252
(2.4%) in the fourth quarter.
Source: BLS
4%
Seasonally-Adjusted
2%
 On a seasonally-adjusted basis, metro headcounts declined –40,000
0%
Rate
 Metro employers continued to shed jobs in the fourth quarter, cutting
from December 2009 to December 2010. Losses in the second half of
the year were to blame. Employment rose 16,200 in the first six
months of 2010 but declined –56,200 in the second half.
-2%
Chicago
USA
-4%
Forecast
-6%
 Based on current payroll estimates, RCR forecast a modest recovery
-8%
00 01 02 03 04 05 06 07 08 09 10 11
this year. Specifically, our econometric model produces point estimates of 27,800 (0.8%) new jobs this year and a strong 61,200 (1.7%)
job add in 2012.
RANK: 41st out of 50
15%
10%
RED Estimated Generic Unlevered Asset Total Return Probabilities
Chicago
6.8%
Minneapolis
8.4%
5.6%
7.7%
9.6%
9.0%
10.7%
10.4%
12.3%
12.3%
5%
0%
90%
70%
50%
30%
10%
RED CAPITAL Research
SUBMARKET TRENDS
Effective Rent
Physical Vacancy
Submarket
Lincoln Park
4Q09
4Q10
Change
4Q09
4Q10
Change
$1,123
$1,152
2.6%
4.2%
2.9%
City West
$933
$993
6.5%
10.2%
10.4%
-130 bps
20 bps
Gold Coast
$1,528
$1,596
4.4%
6.6%
5.7%
-90 bps
The Loop
$1,524
$1,547
1.5%
10.2%
8.1%
-210 bps
South Shore
$859
$860
0.1%
6.2%
5.7%
-50 bps
Southeast Cook County
$757
$788
4.1%
5.8%
5.8%
Unchg
Southwest Cook County
$763
$785
2.8%
5.6%
5.2%
-40 bps
Downers Grove
$904
$912
0.8%
8.5%
6.1%
-240 bps
Woodridge / Lisle
$899
$901
0.2%
6.3%
4.7%
-160 bps
Aurora / Naperville
$962
$994
3.3%
6.7%
4.7%
-200 bps
Wheeling
Glendale Heights
Schaumburg / Hoffman
Palatine
Glenview / Evanston
Rogers Park / Uptown
Belmont-Montrose
Oak Park
$975
$1,008
3.4%
5.9%
4.4%
-150 bps
$1,013
$1,073
5.9%
6.1%
4.7%
-140 bps
$918
$945
2.9%
7.1%
5.0%
-210 bps
$1,063
$1,074
1.0%
8.4%
8.2%
-20 bps
$992
$1,005
1.3%
6.2%
4.6%
-160 bps
$781
$773
-1.0%
5.2%
5.2%
Uncgh
$1,142
$1,154
1.1%
4.4%
4.1%
-30 bps
$882
$896
1.6%
8.4%
5.8%
-260 bps
Glen Ellyn / Wheaton
$882
$900
2.0%
7.9%
7.3%
-60 bps
O'Hare
$825
$840
1.8%
4.8%
3.5%
-130 bps
East Lake County
$916
$927
1.2%
6.9%
5.4%
-150 bps
West Lake County
$870
$886
1.8%
7.9%
5.5%
-240 bps
McHenry County
$893
$886
-0.8%
7.6%
4.5%
-310 bps
Kane County
$952
$947
-0.5%
7.7%
5.9%
-180 bps
Joliet
$750
$758
1.0%
6.5%
5.8%
-70 bps
Metro
$971
$994
2.4%
6.7%
5.6%
-110 bps
SUPPLY TRENDS
Completions and Absorption
 Apartment
Source: Reis, Inc
developers were active last year completing ten assets
totaling 2,505 units, representing a 0.6% increase in the rental stock.
The largest additions to inventory were record in The Loop (980 units)
and the City West (938 units) submarkets. Only one property was
completed outside Cook County. The 84-unit asset opened in the East
Lake County submarket in April.
were aware of seven apartment properties (668 units) under
construction in January. Reis expect that at least six of the properties
(591 units) will open this year.
 Despite
the weak housing market, Reis identify 2,149 condo units
under construction in January. The service believes that two will hit
the market this year, adding 271 units to the City West submarket and
88 units to the Gold Coast submarket. The largest property, located in
the Gold Coast submarket, contains 1,193 units and is not expected to
open until 2014.
Daniel J. Hogan
Director of Research
[email protected]
614-857-1416
William T. Hinga
Business Development
[email protected]
614-857-1499
Absorption
6,000
4,000
Units
 Reis
Completions
8,000
2,000
0
-2,000
-4,000
-6,000
04
05
06
07
08
09
10 11f 12f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
www.redcapitalgroup.com
800.837.5100
©2010 RED CAPITAL GROUP
The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting or financial advice, or recommendations to buy or
sell currencies or securities or to engage in any specific transactions. Information has been gathered from third party sources and has not been independently verified or accepted by RED
CAPITAL GROUP. RED makes no representations or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the report. RED
cannot be held responsible for any errors or misrepresentations contained in the report or in the information gathered from third party sources. Under no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Any reliance upon this information is solely and
exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Any views expressed herein are subject to change without notice
due to market conditions and other factors.
RED CAPITAL GROUP®
Market Overview
Chicago, Illinois
Multifamily Housing Update
November 2010
EXECUTIVE SUMMARY
R
ising exports, perhaps the
lone bright spot early in the
domestic economic recovery, contributed to improved job
trends in the Chicago metropolitan
division. Producers of durable goods
added 1,400 jobs in the twelve-month
period ended in October. By contrast,
the sector eliminated jobs at a
–32,200-job monthly year-over-year
pace in 2009. Increased production
and international trade also contributed to improvement among wholesale trade and transportation / warehousing businesses. Combined, the
sectors were responsible for -10,900
fewer jobs y-o-y in 2Q10 but only a
–4,400-job decrease y-o-y in 3Q10.
State and local budgetary issues —
compounded by the elimination of
temporary Census positions — were a
headwind to growth. Following the
creation of 5,400 jobs y-o-y in 2Q10,
governments were responsible for a
–300-job y-o-y loss in 3Q10.
Skilled service firms, aside from education and health care, continued to
trim staffs, albeit at a slower pace in
the third quarter. Information, financial and business service providers cut
–25,200 jobs y-o-y in 2Q10 but only
–17,100 jobs y-o-y in 3Q10. Private
education employment plunged –500
y-o-y in 3Q10, abnormal for a typically reliable growth sector. And the
pace of health care job growth was
firm as 8,100 positions were added to
payrolls y-o-y in 3Q10.
The RED CAPITAL Research
(RCR) econometric payroll model
produces point estimates of 12,000
(0.3%) net new jobs in 2011 and
77,200 (2.1%) jobs added in 2012.
By contrast, Economy.com are optimistic, projecting gains of 55,550
(1.5%) jobs in 2011 and 116,220
(3.2%) jobs in 2012.
Single-family home prices continued
SNAP SHOT
to trend lower in Chicago in the third
quarter. The National Association of
Realtors calculate that the median
home price fell –6.4% y-o-y to
$196,600. Likewise, Chicago registered a –2.9% decrease in the CaseShiller home price index in the
twelve-month period ended in August, fourth worst among the 20 markets tracked by the source. Condo
prices did not fare any better, plunging –7.3% y-o-y in August, according
to Case-Shiller.
Despite weak employment fundamentals, apartment demand was stout in
the third quarter. Positive net absorption totaled 3,572 units giving rise to
an 80 basis point occupancy improvement from 93.4% in 2Q10 to 94.2%
in 3Q10. By comparison, developers
completed only 339 units during the
quarter, down from 1,038 units completed in the second quarter.
The average effective rent increased
0.5% sequentially, modestly slower
than the 0.7% advance recorded in the
second quarter.
Additionally, the
pace of y-o-y effective rent growth
accelerated from 0.3% to 0.6%.
Class-A asking rent rose 1.2% y-o-y,
comparing favorably to the –0.2% yo-y decrease observed among Class
B/C assets.
Property sales activity picked up in
the third quarter. Real Capital Analytics calculate sales volume of $440
million in the first nine months of
2010. According to Reis, five trades
totaling $220.7 million were consummated in the third quarter.
Based on an assumed 5.5% cap rate,
RCR calculate an 8.3% expected rate
of total return, ranking 29th among the
RED 50. Moreover, low levels of
historic NOI growth volatility produces the 21st highest measure of riskadjusted return.
Vacancy
(5.8% - 3Q10)
Effective
Rents
Y-o-y
change
Projected
2010
80bps
Unchg
0.6%
2.6%
54.8m
66.8m
($989 - 3Q10)
Cap Rate
(5.6% - 3Q10)
Employment
(3,582m - 3Q10)
KEY POINTS
 According
to Reis, the metro vacancy rate
decreased 80 basis points sequentially from
6.6% in 2Q10 to 5.8% in 3Q10 owing to
robust tenant demand. Property managers
net leased 3,572 units, outpacing the delivery
of 339 units. Similarly, same-store REIT
occupancy increased 130 basis points yearover-year to 96.5%.
 The
average effective rent increased 0.6%
year-over-year to $989. But same-store
REIT average rent declined –2.2% from
$1,042 in 3Q09 to $1,019 in 3Q10.
 Reis were aware of ten apartment properties,
totaling 2,505 units, that were completed in
the first ten months of 2010. Additionally,
five apartment assets (514 units) were under
construction in November. The largest
property (329 units) is located in The Loop
submarket.
Properties also were under
construction in the City West, South Shore
and O’Hare submarkets.
 Reis
identified five sales transactions
involving properties priced at or above $30
million in 3Q10. Volume totaled $220.7
million and the average price per unit was
$114,013.
Chicago-Joliet-Naperville, Illinois Metropolitan Division - Q3 2010
VACANCY TRENDS
Apartment Vacancy Trends
 Apartment demand (3,572 units) outpaced supply (339 units), resulting
 Only
three (City West, Southeast Cook County and Glen Ellyn /
Wheaton) of the metro’s 25 submarkets experienced higher vacancy in
3Q10 as compared to 3Q09. By contrast, ten submarkets experienced a
vacancy improvement of 100 basis points or more over-the-year.
Metro Vacancy Rate
in an 80 basis point sequential decrease in vacancy from 6.6% in 2Q10
to 5.8% in 3Q10. Tenants preferred Class-A rentals during the quarter.
Indeed, Class-A net absorption totaled 2,127 units, above the 1,444
Class B/C units absorbed during the period.
Source: Reis, Inc.
10%
 Reis expect vacancy to remain unchanged in the fourth quarter before
8%
6%
6.6%
4%
5.8%
Chicago
U.S.A.
2%
0%
falling 40 basis points in 2011.
3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q
RANK: 19th out of 50
COMMENT: REIT data show that occupancy increased 130 basis points yearover-year to 96.5% in 3Q10.
00 01 02 03 04 05 06 07 08 09 10
Metro Rent Trends
RENT TRENDS
Source: Reis, Inc.
 The
 Class-A property managers pushed effective rent up 1.2% year-overyear from $1,363 in 3Q09 to $1,379 in 3Q10. By contrast, Class B/C
asking rent fell –0.2% year-over-year to $908.
 Ten of the metro’s 25 submarkets posted year-over-year effective rent
8%
Asking
Effective
6%
YoY Rent Trend
average effective rent increased 0.5% sequentially, moderately
slower than the 0.7% advance recorded in the previous quarter. Still,
the pace of year-over-year effective rent growth accelerated from 0.3.%
to 0.6%.
declines year-over-year in 3Q10.
4%
0.6%
0.5%
2%
0%
-2%
-4%
 Reis
predict that the pace of annual effective rent growth will
accelerate to 2.6% by year-end.
3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q
00 01 02 03 04 05 06 07 08 09 10
th
RANK: 35 out of 50
Metro Multifamily Cap Rate Trend
PROPERTY MARKET & CAP RATE TRENDS
Source: Reis, Inc.
 Real
9%
Capital Analytics were aware of 18 transactions involving
properties priced at or above $5 million in the first nine months of
2010. Sales volume totaled $440 million, up 50% from last year.
Additionally, the average price per unit was $115,405.
million during the third quarter. Sales volume totaled $220.7 million
and the average price per unit was $114,013. Based on Reis rent,
occupancy and expense data, RCR calculate a 6.3% weighted average
going-in yield.
 Based on an assumed 5.5% going-in yield, RCR expect an 8.3% total
Cap Rate
 Reis identified five trades involving properties priced at or above $30
8%
7%
6%
5%
4%
3%
th
3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q
rate of return, ranking 29 highest among the RED 50. Due to below
average historic NOI growth trend volatility, Chicago boasts a more
favorable (21st highest) measure of risk-adjusted return.
08
08
09
09
09
09
10
10
10
NOTABLE TRANSACTIONS
Property Name
AMLI at Canterfield (Kane County)
Clover Creek Apartments (Glendale Heights)
The Retreat at Seven Bridges (Woodridge / Lisle)
McDowell Place (Aurora / Naperville)
RED CAPITAL Research
Property
Class
Date of
Transaction
Total Price
(in millions)
Price per
unit
Estimated
Cap Rate
A
A
A
A
Sept. 2010
August 2010
July 2010
July 2010
$59.0
$46.3
$30.8
$37.4
$167,614
$91,865
$122,222
$93,450
6.0%
6.5%
6.2%
6.0%
Chicago-Joliet-Naperville, Illinois Metropolitan Division - Q3 2010
Metro Median Single Family Home Prices
DEMOGRAPHICS & HOUSING MARKET
Source: National Association of Realtors
$300
MSA
 The population of the Chicago-Naperville-Joliet MSA increased 0.7%
US
in 2009, on par with the advance recorded in the previous year.
 Metro
home prices declined in the third quarter. According to the
National Association of Realtors, the median price of a single-family
MSA home decreased –6.4% year-over-year from $210,100 in 3Q09 to
$196,600 in 3Q10. Likewise, Chicago registered a –2.9% annual
decline in the August Case-Shiller home price index, ranking 17th
among the 20 markets tracked by the source.
Prices (000)
$250
$200
$150
 The
market for condos in The Loop remained weak. According to
Appraisal Research Counselors, developers are on pace to sell roughly
600 units this year. By comparison, 3,402 units were still on the
market in September. Conversion of condo units to rental contributed
to the removal of 1,420 condos and townhomes this year.
$100
07
08
09
Y
Y
Y
3Q 4Q 1Q 2Q 3Q
09
09
10
10
10
Payroll Employment Growth
EMPLOYMENT TRENDS
Source: BLS Data & RCG Research Forecast
100
50
Annual Chg (000)
Non-Seasonally Adjusted
77.2
12.0
pace of year-over-year payroll job attrition decelerated from
–65,500 (-1.8%) in 2Q10 to –54,800 (-1.5%) in 3Q10.
 The
0
improvement was largely due to strong demand for durable
manufactured goods. As recently as 1Q10 the sector experienced
year-over-year job losses in excess of –20,000 jobs. By comparison,
500 positions were added to payrolls in the twelve-month period
ended in September.
-50
-100
 The
-66.8
-150
 Construction firms, on the other hand, continued to hinder headline
-200
-250
00 01 02 03 04 05 06 07 08 09 10f 11f 12f
payroll improvement. Construction headcounts fell –25,200 yearover-year in 3Q10, worse than the –23,300-job monthly average decrease observed in 1H10.
 Government
payrolls also were disappointing, partially due to the
elimination of temporary Census positions. Following an 8,100-job
2Q10 gain in federal government employment, only 3,400 jobs were
added year-over-year in 3Q10. Additionally, state and local government employment fell –3,800 year-over-year in 3Q10.
Year-over-year Payroll Growth Rate
Source: BLS
Chicago
USA
4%
2%
Seasonally-Adjusted
 On a seasonally-adjusted basis, metro headcounts fell –40,400 during
Rate
0%
the third quarter. Not only did the loss come after two consecutive
quarters of job growth (13,600 in 1Q10 and 8,700 in 2Q10), but the
loss was the largest recorded since 2Q09 (-57,600 jobs).
-2%
-4%
Forecast
-6%
 RCR expect modest job growth (+12,000, 0.3%) in 2011 to be fol-
-8%
lowed by a robust 77,200 (2.1%) job gain in 2012.
99 00 01 02 03 04 05 06 07 08 09 10
RANK: 44th out of 50
RED Estimated Generic Unlevered Asset Total Return Probabilities
15%
10%
Chicago
5.1%
4.9%
5%
Minneapolis
7.0%
7.1%
8.3%
8.6%
9.5%
10.1%
11.2%
12.2%
0%
90%
70%
50%
30%
10%
RED CAPITAL Research
SUBMARKET TRENDS
Effective Rent
Physical Vacancy
Submarket
Lincoln Park
3Q09
3Q10
Change
3Q09
3Q10
Change
$1,157
$1,147
-0.9%
4.0%
3.0%
City West
$950
$982
3.4%
10.0%
10.7%
-100 bps
70 bps
Gold Coast
$1,547
$1,593
3.0%
5.8%
5.5%
-30 bps
The Loop
$1,523
$1,539
1.0%
11.1%
10.2%
-90 bps
South Shore
$874
$867
-0.8%
6.3%
5.6%
-70 bps
Southeast Cook County
$773
$776
0.3%
5.7%
6.1%
40 bps
Southwest Cook County
$768
$775
0.9%
5.5%
5.3%
-20 bps
Downers Grove
$902
$902
0.0%
8.3%
7.4%
-90 bps
Woodridge / Lisle
$911
$893
-2.0%
6.3%
5.2%
-110 bps
Aurora / Naperville
$971
$997
2.7%
6.7%
5.1%
-160 bps
Wheeling
$983
$992
0.9%
6.0%
4.1%
-190 bps
$1,038
$1,042
0.3%
5.8%
5.4%
-40 bps
$936
$937
0.0%
6.6%
5.3%
-130 bps
Palatine
$1,091
$1,066
-2.3%
8.6%
8.2%
-40 bps
Glenview / Evanston
$1,011
$1,006
-0.5%
6.4%
4.7%
-170 bps
Rogers Park / Uptown
$792
$774
-2.2%
5.4%
5.1%
-30 bps
Belmont to Montrose
$1,140
$1,166
2.3%
4.2%
4.1%
-10 bps
Oak Park
$893
$895
0.2%
8.0%
6.4%
-160 bps
Glen Ellyn / Wheaton
$915
$898
-1.8%
7.4%
8.2%
80 bps
O'Hare
$838
$826
-1.5%
4.8%
3.8%
-100 bps
East Lake County
$919
$925
0.6%
7.1%
5.9%
-120 bps
West Lake County
$861
$887
3.0%
8.1%
6.0%
-210 bps
Glendale Heights / Lombard
Schaumburg / Hoffman
McHenry County
$896
$881
-1.7%
7.9%
5.9%
-200 bps
Kane County
$947
$959
1.3%
7.5%
6.4%
-110 bps
Joliet
$769
$759
-1.3%
6.5%
6.0%
-50 bps
Metro
$983
$898
0.6%
6.6%
5.8%
-80 bps
Completions and Absorption
SUPPLY TRENDS
Source: Reis, Inc
 Developers completed 2,505 apartment units in the first ten months of
8,000
2010. The largest additions to inventory were recorded in The Loop
(980 units) and the City West (938 units) submarkets.
6,000
 As
 Appraisal
Research Counselors report that the shadow inventory of
condos for rent remained stout in recent months. Additionally, the
source warns that two recently completed condo projects, containing a
total of 581 units, may convert to rental. The source cites high
occupancy (94.7%) and rising effective rent (+5.7%, year-over-year)
among Class-A rentals downtown as compelling reasons for
conversion.
Daniel J. Hogan
Director of Research
[email protected]
614-857-1416
William T. Hinga
Business Development
[email protected]
614-857-1499
4,000
2,000
Units
of November, Reis were aware of only five apartment projects
under construction. Moreover, only one of the properties contained
more than 100 rental units.
0
-2,000
-4,000
-6,000
Completions
Absorption
-8,000
02 03 04 05 06 07 08 09 10f 11f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
www.redcapitalgroup.com
800.837.5100
©2010 RED CAPITAL GROUP
The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting or financial advice, or recommendations to buy or
sell currencies or securities or to engage in any specific transactions. Information has been gathered from third party sources and has not been independently verified or accepted by RED
CAPITAL GROUP. RED makes no representations or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the report. RED
cannot be held responsible for any errors or misrepresentations contained in the report or in the information gathered from third party sources. Under no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Any reliance upon this information is solely and
exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Any views expressed herein are subject to change without notice
due to market conditions and other factors.
RED CAPITAL GROUP®
Market Overview
Chicago, Illinois
Multifamily Housing Update
August 2010
EXECUTIVE SUMMARY
E
conomic conditions in the
Chicago - Naperville - Joliet
metropolitan division underperformed other Midwest / Mideast
metros in the second quarter. The
area lost -69,200 jobs year-over-year
in 2Q10, representing a -1.9% annual
decline. On a percentage basis, Chicago ranked ahead of only Milwaukee
and Detroit in the Midwest / Mideast.
Moreover, seasonally-adjusted data
were unfavorable in the second quarter despite positive contributions from
the 2010 Census. In total, the BLS
calculate that payroll headcounts in
Chicago fell -2,400 from April to
June. But the loss totaled -11,400
jobs after accounting for 9,000 temporary Census workers.
Continued job losses among construction and business service firms were
largely to blame. Combined, establishments were responsible for
-39,900 jobs lost y-o-y in 2Q10. On
the other hand, job attrition among
manufacturing, retail, transportation /
utilities, and financial service firms
diminished from -89,700 jobs y-o-y in
4Q09 to only -18,100 jobs.
The RED CAPITAL Research
(RCR) econometric model predicts
that the pace of job loss will decelerate to -0.3% in 4Q10. Furthermore,
the model produces point estimates of
17,700 (0.5%) and 81,200 (2.2%) jobs
created in 2011 and 2012, respectively. Economy.com expect a robust
turnaround in 2H10. Indeed, the service predicts that a net of 57,810
(1.6%) will be created this year, followed by 70,540 (1.9%) in 2011 and
126,190 (3.47%) in 2012.
Home prices trends also were subpar.
According to the National Association
of Realtors the median price of a single-family MSA home decreased
-0.2% y-o-y to $203,800. By contrast, the US median price advanced
1.4% during the period. Likewise,
SNAP SHOT
Chicago registered a -1.5% y-o-y decrease in the Case-Shiller home price
index, ranking 17th among the 20 markets tracked by the source.
Slack job creation notwithstanding,
2Q10 apartment demand was robust
as property managers net leased 1,325
units. As a result, the metro occupancy rate rose 10 basis points from
93.3% in 1Q10 to 93.4% in 2Q10.
According to Marcus & Millichap
suburban properties posted a moderate higher 93.6% occupancy rate, as
compared to the 93.2% rate observed
in the city.
The average effective rent surged in
the second quarter, rising 0.8% sequentially to $985. As a result, the
2Q10 metric was 0.3% above the figure from the comparable period of
2009. Decreased concessions contributed to the gain. The size of the average concession package fell from
7.4% of asking rent in 1Q10 to 7.0%.
Marcus & Millichap report that effective rent in the city advanced 1.9% in
the first six months of 2010, comparing favorably to the 1.0% rent increase among suburban properties.
Reis expect demand (1,006 units) to
outpace supply (433 units) in 2H10 to
produce a 10 basis point increase in
occupancy by year-end. The service
also predicts the pace of y-o-y effective rent growth will accelerate to
1.8% in the fourth quarter.
Real Capital Analytics identify five
transactions involving properties
priced at or above $5 million in the
first six months of 2010, totaling $97
million in sales proceeds. Additionally, RCR were aware of a trade in
July involving a property priced at
$88 million or $295,302 per unit.
Based on a 5.5% generic metro cap
rate, RCR calculate 7.4% expected
rate of total return, equal to the RED
50 average.
Y-o-y
change
Projected
YE 2010
(6.6% - 2Q10)
unchg
10bps
Effective
Rents
0.3%
1.8%
Vacancy
($985 - 2Q10)
Cap Rate
(5.7% - 2Q10)
Employment
(3,597m - 2Q10)
10bps
69.2m
62.5m
KEY POINTS
•
The metro vacancy rate decreased 10 basis
points sequentially, largely owing to robust
tenant demand. Positive net absorption
totaled 1,325 units in 2Q10, exceeding the
1,204 units absorbed during the previous
nine months.
•
At $985, the average effective rent was up
0.8% sequentially and 0.3% year-over-year
in 2Q10. Conversely, REIT disclosure data
show that same store rent declined -3.4%
year-over-year from $1,032 in 2Q09 to $997
in 2Q10.
•
Home prices were largely unchanged in the
second quarter. The National Association of
Realtors estimate that the median price of a
single-family MSA home decreased -0.2%
year-over-year to $203,800.
Similarly,
Chicago posted a -1.5% over-the-year
decrease in the Case-Shiller home price
index in May.
•
At an assumed 5.5% going-in yield, RCR
calculate a 7.4% expected rate of total return,
equal to the RED 50 mean. Moreover, low
levels of historic NOI growth volatility
produce an above average measure of riskadjusted return.
Chicago - Naperville - Joliet, Illinois Metropolitan Division - Q2 2010
VACANCY TRENDS
•
•
•
The apartment vacancy rate declined 10 basis points sequentially from
6.7% in 1Q10 to 6.6% in 2Q10. Developers completed 1,013 units and
460 units were removed from the rental stock during the period. By
comparison, positive net absorption totaled 1,325 units.
Marcus & Millichap, report that vacancy among suburban assets fell 40
basis points from 6.8% in December to 6.4% in June. Likewise, in-fill
apartment vacancy declined 30 basis points to 6.8% in 2Q10.
Vacancy in two of the metro’s 25 submarkets exceeded 10% in 2Q10.
Source: Reis, Inc.
10%
Metro Vacancy Rate
•
Apartment Vacancy Trends
Reis expect vacancy to fall 10 basis points by year-end as development
slows. Moreover, the service predicts that robust tenant demand will
generate a 60 basis point decrease in vacancy next year.
Chicago
U.S.A.
8%
6%
6.6% 6.6%
4%
2%
0%
2Q 2Q 2Q 2Q 2Q 2Q 2Q 2Q 2Q 2Q 2Q
00 01 02 03 04 05 06 07 08 09 10
th
RANK: 20 out of 50
RENT TRENDS
•
•
•
Source: Reis, Inc.
The pace of sequential effective rent growth accelerated from 0.6% in
1Q10 to 0.8% in 2Q10. As a result, year-over-year growth turned
positive (+0.3%) for the first time since 4Q08.
Appraisal Research Counselors note that suburban apartment rents rose
to $1.13 per square foot in 2Q10, near the $1.14 peak recorded in early
2008. The source attributes the turnaround to job market stability and
the weak housing market.
According to Marcus & Millichap, the average effective rent in the city
was $1,081 in 2Q10, up 1.9% from 4Q09. By contrast, suburban
effective rents increased only 1.0% to $894.
8%
Asking
Effective
6%
YoY Rent Trend
•
Metro Rent Trends
4%
2%
0.3%
0%
-2%
-0.2%
-4%
2Q 2Q 2Q 2Q 2Q 2Q 2Q 2Q 2Q 2Q 2Q
The pace of year-over-year effective rent growth is forecast to
accelerate to 1.8% by year-end.
00 01 02 03 04 05 06 07 08 09 10
RANK: 26th out of 50
Metro Multifamily Cap Rate Trend
PROPERTY MARKET & CAP RATE TRENDS
•
•
Real Capital Analytics were aware of five investor-grade property
trades in 1H10, totaling $97 million in sales proceeds. Garden assets
sold for an average price of $78,215 per unit and mid- and high-rise
properties sold for $152,278 per unit.
According to CB Richard Ellis, cap rates for stabilized Class-A assets
ranged from 5.0% to 5.5% in August. By comparison, stabilized
Class-B properties traded at cap rates ranging from 6.5% to 6.75% in
the same period.
Based on a 5.5% going-in yield, RCR calculate a 7.4% expected rate
of total return, equal to the RED 50 mean. But a below average
measure of historic NOI growth volatility gives rise to a 3.08 riskadjusted return index, above the 2.63 RED 50 index average.
8%
Cap Rate
•
Source: Reis, Inc.
9%
7%
6%
5%
4%
3%
2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q
08
08
08
09
09
09
09
10
10
NOTABLE TRANSACTIONS
Property Name
Lakes of Schaumburg (Palatine)
Burnham Pointe
Skyline at Evanston
(Rogers Park / Uptown)
RED CAPITAL Research
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
A
A
July 2010
June 2010
$47.0
$88.0
$109,813
$295,302
A
April 2010
$30.0
$135,747
Estimated Cap
Rate
6.5%
3.8%
5.0%
(pro forma)
Chicago - Naperville - Joliet, Illinois Metropolitan Division - Q2 2010
Metro Median Single Family Home Prices
DEMOGRAPHICS & HOUSING MARKET
Source: National Association of Realtors
$300
MSA
•
US
Prices (000)
$250
•
$200
$150
•
$100
07
08
09
Y
Y
Y
2Q 3Q 4Q 1Q 2Q
09
09
09
10
•
10
Payroll Employment Growth
•
50
Annual Chg (000)
The Case-Shiller home price revealed that home values declined -1.5%
year-over-year in the twelve-month period ended in May, ranking 17th
out of the 20 markets tracked by the source.
DQ News calculate that the median home price in Cook County fell
-2.9% year-over-year to $200,000 in 2Q10.
Non-Seasonally Adjusted
100
17.7
0
-50
•
-62.5
-150
-200
•
-250
99 00 01 02 03 04 05 06 07 08 09 10f 11f
Year-over-year Payroll Growth Rate
The pace of year-over-year job attrition decelerated from -133,800
(-3.7%) to -69,200 (-1.9%) in 2Q10. But despite the improvement,
Chicago ranked 41st highest among the RED 50 with respect to yearover-year job growth in 2Q10.
Construction and business service firms continued to shed jobs at a
rapid pace as a combined net of -39,900 jobs were lost year-over-year
in 2Q10. By contrast, health care employment surged 7,800 yearover-year in the second quarter, up from the 5,000-job increase observed during 1Q10.
Manufacturers trimmed only -9,700 positions from payrolls yearover-year in 2Q10, owing to a turnaround among durable goods producers. For example, fabricated metals producers cut -100 jobs in the
twelve-month period ended in June as compared to -11,800 jobs lost
in the same period of 2009.
Seasonally-Adjusted
Source: BLS
•
4%
2%
0%
Rate
According to the National Association of Realtors, the median price of
a single-family MSA home decreased -0.2% year-over-year from
$204,300 in 2Q09 to $203,800 in 2Q10. Additionally, the source
calculates a $186,300 median condo price in the second quarter, -8.1%
below the 2Q09 figure.
EMPLOYMENT TRENDS
Source: BLS Data & RCG Research Forecast
-100
At 0.7%, the pace of metro population growth was stable in 2009 as
negative net domestic migration moderate slightly from 42,587 to
401,389.
On a seasonally-adjusted basis, employers eliminated -2,400 jobs
during the second quarter, following a steady 13,600-job advance in
1Q10. Furthermore, after accounting for job growth related to the
2010 Census, job declines totaled -11,400 in 2Q10.
Forecast
-2%
•
Chicago
USA
-4%
-6%
-8%
99 00 01 02 03 04 05 06 07 08 09 10
15%
10%
5%
The RCR econometric payroll model predicts that metro job growth
will resume next year. Specifically, the model produces point estimates of -62,500 (-1.7%) jobs lost this year, and gains of 17,700
(0.5%) in 2011 and 81,200 (2.2%) in 2012.
RANK: 41st out of 50
RED Estimated Generic Unlevered Asset Total Return Probabilities
Chicago
4.2%
3.9%
Minneapolis
6.2%
6.1%
7.4%
7.8%
8.6%
9.3%
10.4%
11.5%
0%
90%
70%
50%
30%
10%
RED CAPITAL Research
SUBMARKET TRENDS
Submarket
Lincoln Park
Effective Rent
2Q09
2Q10
Physical Vacancy
Change
2Q09
$1,159
$1,162
0.2%
3.8%
3.6%
-20 bps
$931
$986
5.9%
10.4%
11.0%
60 bps
Gold Coast
$1,555
$1,581
1.7%
6.0%
6.7%
70 bps
The Loop
$1,571
$1,504
-4.2%
13.3%
11.8%
-150 bps
60 bps
South Shore
$872
$865
-0.8%
6.1%
6.7%
Southeast Cook County
$772
$776
0.5%
5.9%
5.9%
unchg
Southwest Cook County
$775
$773
-0.2%
5.3%
5.6%
30 bps
-20 bps
Downers Grove
$876
$894
2.0%
8.8%
8.6%
Woodridge / Lisle
$910
$897
-1.4%
6.3%
5.7%
-60 bps
Aurora / Naperville
$982
$982
0.0%
6.8%
5.8%
-100 bps
-110 bps
Wheeling
$970
$985
1.6%
6.0%
4.9%
$1,016
$1,040
2.3%
5.5%
6.2%
70 bps
$950
$933
-1.8%
6.5%
6.1%
-40 bps
Palatine
$1,086
$1,063
-2.1%
8.4%
9.1%
70 bps
Glenview / Evanston
$1,004
$999
-0.5%
6.5%
5.5%
-100 bps
40 bps
Schaumburg / Hoffman
Rogers Park / Uptown
Belmont-Montrose
Oak Park
$783
$765
-2.3%
5.1%
5.5%
$1,136
$1,158
2.0%
4.0%
4.1%
10 bps
$893
$897
0.4%
8.5%
7.6%
-90 bps
Glen Ellyn / Wheaton
$909
$889
-2.2%
7.8%
9.2%
140 bps
O'Hare
$831
$813
-2.2%
4.5%
4.2%
-30 bps
East Lake County
$925
$925
0.0%
7.1%
6.7%
-40 bps
West Lake County
$861
$871
1.2%
8.2%
6.8%
-140 bps
-100 bps
McHenry County
$882
$893
1.2%
7.8%
6.8%
Kane County
$940
$955
1.6%
7.1%
7.1%
unchg
Joliet
$751
$757
0.8%
6.4%
6.5%
10 bps
Metro
$982
$985
0.3%
6.6%
6.6%
unchg
Completions and Absorption
SUPPLY TRENDS
•
•
Source: Reis, Inc
Apartment developers completed 1,976 units in the first seven and a
half months of 2010. The largest additions to inventory occurred in the
City West (938 units) and The Loop (731 units) submarkets.
Reis also was aware of 742 apartment units under construction in
August. Two of the five properties, totaling 578 units are located in
The Loop submarket.
According to Reis, a 460 unit property converted from apartment to
condos in the second quarter. The asset is located in the Schaumburg/
Hoffman submarket.
There were 2,918 condo units under construction in August. The
largest property, containing 1,193 units is located in the Gold Coast
submarket and is scheduled to open in December 2014.
Daniel J. Hogan
Director of Research
[email protected]
614-857-1416
William T. Hinga
Business Development
[email protected]
614-857-1499
6,000
Completions
Absorption
4,000
2,000
Units
•
Change
City West
Glendale Heights
•
2Q10
0
-2,000
-4,000
-6,000
-8,000
02 03 04 05 06 07 08 09 10f 11f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
www.redcapitalgroup.com
800.837.5100
©2010 RED CAPITAL GROUP
The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting or financial advice, or recommendations to buy or
sell currencies or securities or to engage in any specific transactions. Information has been gathered from third party sources and has not been independently verified or accepted by RED
CAPITAL GROUP. RED makes no representations or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the report. RED
cannot be held responsible for any errors or misrepresentations contained in the report or in the information gathered from third party sources. Under no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Any reliance upon this information is solely and
exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Any views expressed herein are subject to change without notice
due to market conditions and other factors.
RED CAPITAL GROUP®
Chicago, Illinois
Multifamily Housing Update
June 2010
EXECUTIVE SUMMARY
A
fter a two-year slump that
cost Chicago workers a net
of nearly 300,000 payroll
jobs, the local economy finally exhibited signs of recovery in the spring.
The annual pace of attrition slowed
from a peak of 231,700-jobs in 3Q09
to 133,800 jobs in 1Q10, and 84,500
(-2.3%) during the 12 months ended
in April, the smallest year-on-year
decline recorded in 18 months. Seasonally-adjusted data provided concrete evidence that the Great Recession was over as losses in this series
turned to gains during March and
April (7,300 jobs), the first successive
monthly advance posted in two years.
The turnaround principally was propelled by hiring in the trade and
skilled services industries. Year-onyear job losses in the trade and transportation sector declined from 44,700
in December to just 15,800 in April.
The pace of cuts in the financial and
business services declined to 25,600
jobs from 69,400, while hiring at private schools and colleges boosted
growth in health care and education
services to an 11,900-job annual pace
in April, up from 8,100 in December.
Areas of weakness persisted, however; most notably construction and
leisure services. While consumer sentiment has improved, shoppers and
visitors continue to economize on
discretionary expenses, like dining
out and lodging, and residential construction remains at a low ebb. Recovery in these areas is likely to lag
the broader market by several months.
In spite of lingering weakness in certain discretionary accounts, the principal thrust of the Chicago-land economy is up for the first time in over
two years. The City that Works will
start from a deep hole, but it should
begin adding payroll employment
measured on a year-on-year basis by
4Q10. After posting another loss of
SNAP SHOT
about 57,000 jobs in 2010, metro payrolls will rise by roughly 48,500 jobs
next year and 93,400 in 2012.
Even as the for-sale housing market
remained under withering price pressure, the apartment market made further strides toward recovery in 1Q.
Owners enjoyed a third consecutive
quarter of positive net absorption,
recording 226 net tenant move-ins.
While a modest advance in a market
this size, it was a dramatic improvement from the loss of 3,988 tenants
suffered during the first six months of
2009. Benefiting from the absence of
new construction, average occupancy
increased 10 basis points sequentially
to 93.4%, and the year-on-year comparison improved from –130 bps in
December to -60 bps in March.
Rent trends also stabilized and owners
came into a modicum of pricing
power at the margin. Average asking
rents increased $2 (0.2%) sequentially
to $1,053, and the y-o-y decline diminished from $17 (-1.6%) in 4Q09
to $10 (-0.9%). Owners also managed to chisel away at rent concessions levels, giving rise to a $5 (0.5%)
sequential effective rent gain.
Reis forecasting models produce a
constructive outlook for metro rent
and occupancy trends. The service
projects that occupancy will fall 20
bps by year-end but rally thereafter,
reaching 94.7% by 2014. Reis also
expect effective rent to advance $4
(0.4%) to $979 by year-end and subsequently at a 3.0% annual rate
through 2014, materially faster than
the 2.6% U.S. metro market average.
In March, CBRE reported Chicago
stabilized class-A MFH asset cap
rates in the 6%-6.5% range. Using a
6% assumption, we estimate 5-year,
unlevered total returns of 7.3%, 30
bps above the RED 50 average. Below average NOI volatility gives rise
to attractive risk-adjusted returns, too.
Y-o-y
Change
Projected
YE 2010
60 bps
20 bps
0.7%
0.5%
Vacancy
(6.6% - 1Q10)
Effective
Rents
($975 - 1Q10)
Median Cap Rate
(5.5% - 1Q10)
Employment
(3,521.7.m - 1Q10)
1.1%
139m
57m
KEY POINTS
•
The Chicago apartment market recovery
continued in 1Q10 after the sharp downturn
recorded from April 2008 to June 2009 when
tenants vacated a net of about 5,400 units.
Owners enjoyed a third consecutive quarter
of positive absorption, but occupancy gains
were small. Tenants absorbed 226 units,
raising the net since July to 665 units.
•
Occupancy improved 10 basis points
December to March, reaching 93.4%.
•
Following 4Q09’s sharp -1.3% effective rent
retreat, owners found some pricing power in
the first quarter. Rents rose an average of $5
(0.5%) to $975. The advance was led by
infill submarkets, including the Loop, Gold
Coast and South Shore, that saw rents
decline sharply in the second half of 2009.
•
The Chicago economy was among the
weakest in the country in 2008 and 2009, but
recent data suggest that a recovery is
brewing. Metro establishments hired a net of
7,300 workers in March and April,
representing the first consecutive monthly
seasonally-adjusted payroll gains in more
than two years. After suffering a loss of
about 57,000 jobs this year, RED Research
expect Chicago to add 48,500 jobs in 2011.
Chicago - Joliet - Naperville, IL Metropolitan Division - Q1 2010
VACANCY TRENDS
•
•
Chicago-land owners net leased 226 units in the first quarter against no
additions to apartment inventory. As a result, average occupancy
improved 10 basis points to 93.4%. Occupancy was 60 bps below the
year-earlier period, however, as moderate gains recorded since July
were overbalanced by –1,711 net move-outs recorded in 2Q09.
Demand for class-A units slowed to some degree, as newer properties
absorbed 254 units in 1Q10 after filling 1,385 during the previous 6month period. By contrast, conditions in the class-B&C market
improved in the first quarter: lower tier properties lost only -24 net
tenants January to March after recording a -4,559 tenant loss last year.
Source: Reis, Inc.
10%
Metro Vacancy Rate
•
Apartment Vacancy Trends
Two northwest suburban submarkets (Wheeling, Schaumburg) chalked
down the largest 1Q10 tenant gains, absorbing 299 units between them.
8.0%
8%
6%
6.6%
4%
CHICAGO
U.S.A.
CHI CL-A
CHI CL-BC
2%
0%
st
RANK: 21 out of 50
Reis expect occupancy to fall 20 bps by YE10, but rally 50 bps to 93.7% in 2011.
1Q 04 1Q 05 1Q 06 1Q 07 1Q 08 1Q 09 1Q 10
Metro Rent Trends
RENT TRENDS
•
•
•
Source: Reis, Inc.
After posting a sharp $13 (-1.3%) reversal in 4Q09, Chicago-land
effective rents recovered $5 (0.5%) of the setback by March. The
1Q10 advance was the largest posted since 2Q08 when rents rose 1.2%.
Year-over-year effective rent comparisons were negative for the fifth
consecutive quarter. The rate of decline decelerated though as rents in
1Q10 were $7 (-0.7%) lower than the comparable period of 2009,
representing the smallest y-o-y decline recorded in 12 months.
Gold Coast rents surged $31 (2.0%) quarter-to-quarter, the largest
advance observed in three years. Submarket occupancy also increased.
6%
5%
YoY Rent Trend
•
4%
3%
2%
1%
-0.7%
0%
-1%
Asking
Effective
-2%
M/PF Research aver that 1Q10 net absorption totaled 10,700 units,
sending effective rents up 0.5% sequentially, -1.7% year-over-year.
1Q 04 1Q 05 1Q 06 1Q 07 1Q 08 1Q 09 1Q 10
RANK: 25th out of 50
Reis expect rents to rise 0.9% in 2010 and by a 3.0% compound rate from 2011-14.
PROPERTY MARKET & CAP RATE TRENDS
•
•
Activity in the property market was thin in the first quarter. Only five
properties exchanged hands of which only one was an institutional
quality asset. Proceeds totaled $68mm and the average price of a unit
was $107,800. This compares to 10 trades completed in 4Q09 for
aggregate value of $193mm and average unit price of $96,830.
The bellwether trade occurred in January: the sale of a 12-year old
class-A garden project in Wheaton by a public trust. The 295-unit asset
was acquired by a real estate investment company. Buyer paid
$153,068 per unit for the 95% occupied property to achieve an initial
yield estimated at 5.0% - 5.5%. Buyer proposes to reposition the asset
with a substantial capital investment and rebranding campaign.
Metro Multifamily Cap Rate Trend
Source: Reis, Inc.
7.5%
7.0%
6.5%
Cap Rate
•
-0.9%
-3%
6.0%
5.5%
5.0%
4.5%
4.0%
RED Research believe generic institutional quality Chicago assets trade at a
6.0% current yield. At this price, RCR estimate that metro assets will yield a
7.3% unlevered 5-year total return, ranking 20th among the RED 50 markets.
1Q
3Q
1Q
3Q
1Q
3Q
1Q
07
07
08
08
09
09
10
NOTABLE TRANSACTIONS
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated
Cap Rate
Howard Station (Evanston)
A
10-May-2010
$29.0 (est.)
$137,440 (est.)
N/A
Avalon at Danada Farm (Glen
Ellyn/Wheaton)
A
11-Jan-2010
$45.5
$154,068
5.0% est. /
6.0% quoted
Property Name
RED CAPITAL Research
Chicago - Joliet - Naperville, IL Metropolitan Division - Q1 2010
Year-over-year Home Value Change
DEMOGRAPHICS & HOUSING MARKET
Source: S&P Case-Shiller Index, RCR
Appreciation
5%
CHICAGO
•
CSX20
•
0%
-5%
•
-10%
-15%
•
-20%
Mar-
Jul-
08
08
Nov- Mar08
Jul-
09
09
Nov- Mar09
10
Payroll Employment Growth
100
0
•
•
-50
(56.5)
-100
-150
•
-200
-200.7
-250
99 00 01 02 03 04 05 06 07 08 09 10f11f
•
Year-over-year Payroll Growth Rate
•
Source: BLS, Woodley Park Research, RCR
4%
2%
0%
Rate
According to the N.A.R., the median price of a home sold in 1Q10 was
$176,400, down -5.0% from 1Q09 and –34.0% from 1Q07.
HousingTracker.net report that the median listing price of metro homes
during the week of May 31, 2010 was $239,900, down –7.4% y-o-y.
Chicago Metropolitan Division population increased by 56,919 (0.7%)
in 2009, topping the 52,976 advance recorded in 2008.
Non-Seasonally Adjusted
45.5
50
The Chicago Case-Shiller index dropped to an eight-year low (119.71)
in March, down –2.3% year-over-year and -5.8% since December
2009. Comparable data for the top 20 markets were +2.3% and –1.7%.
EMPLOYMENT TRENDS
Source: BLS Data & RCG Research Forecast
Annual Chg (000)
•
The Chicago-area home price freefall persisted during the winter, even
as national average metrics exhibited signs of recovery.
Payroll trends improved during the first four months of 2010, evidencing that the Chicago economy touched bottom in the winter after
a precipitous 2-year slide and entered a recovery phase in the spring.
Total metro payrolls averaged 3.522 million jobs in the first quarter, a
decline of 133,800 (-3.7%) from the comparable period of 2009. By
way of comparison, metro payrolls fell at a 231,700-job, -6.0% rate in
3Q09 and a 208,500-job, -5.4% pace in 4Q09.
First quarter gains were widespread, but the greatest progress was
registered in the business service, manufacturing and retail trade sectors. Payrolls in the foregoing super-sectors fell at a 118,500-job rate
in 4Q09, but declined at materially better 69,600-job pace in 1Q10.
Attrition slowed further to an 84,000-job, -2.3% rate in April, the best
y-o-y comparison reported in 17 months. But Chicago still trailed the
nation, which posted a –1.0% rate of payroll decline in April.
The BLS Household Survey found that 3.69 million Chicago M.D.
residents reported being employed in April, unchanged from the comparable month in 2009 (10.7% of workers were unemployed). The
comparable datum for all U.S. workers was down -0.9% y-o-y.
Seasonally-Adjusted
•
-2%
-4%
CHIC ACTUAL
USA ACTUAL
CHIC FORECAST
USA FORECAST
-6%
-8%
03
04
05
06
5%
08
09
Forecast
10
•
11
RED Research expect Chicago payroll trends to improve steadily
through the fall 2011 before leveling off to a glide path of about 2.5%
year-on-year growth. By the numbers, year-over-year comparisons should
exceed parity by 4Q10, resulting in a 56,500-job loss for the year; annual
hiring should advance to 48,500 jobs in 2011; 93,400 in 2012.
RED Estimated Generic Unlevered Asset Total Return Probabilities
15%
10%
07
Seasonally-adjusted data provided powerful evidence that the metro
economy is on the mend. Expressed on this basis, total payroll employment increased 3,200 jobs in March, 4,100 jobs in April.
CHIC (RAI=2.92)
4.0%
3.8%
STL (RAI=3.33)
5.9%
5.3%
7.3%
8.5%
5.3%
10.4%
7.3%
8.6%
0%
90%
70%
50%
30%
10%
RED CAPITAL Research
SUBMARKET TRENDS
Submarket
Effective Rent
1Q09
1Q10
Change
1Q09
1Q10
Lincoln Park
$1,167
$1,130
-3.2%
2.8%
3.9%
110 bps
City West
Gold Coast
$ 948
$1,558
$ 928
$1,559
-2.2%
0.1%
10.5%
6.0%
10.1%
6.4%
-40 bps
40 bps
The Loop
South Shore
$1,558
$ 861
$1,522
$ 868
-2.3%
0.9%
14.9%
5.7%
10.4%
6.7%
-450 bps
100 bps
Southeast Cook County
$ 763
$ 772
1.2%
5.2%
6.2%
100 bps
Southwest Cook County
$ 786
$ 767
-2.5%
5.6%
5.7%
10 bps
Downers Grove
$ 880
$ 897
2.0%
6.5%
8.8%
230 bps
$ 925
$ 910
-1.6%
5.2%
5.9%
70 bps
Aurora / Naperville
$ 985
$ 959
-2.7%
6.0%
6.3%
30 bps
Wheeling
$ 983
$ 973
-1.0%
5.2%
5.3%
10 bps
Glendale Heights
$1,015
$1,025
1.0%
5.8%
6.6%
80 bps
Schaumburg / Hoffman
$ 956
$ 930
-2.7%
6.4%
6.3%
-10 bps
Palatine
$1,077
$1,050
-2.5%
7.4%
9.4%
200 bps
Glenview / Evanston
$ 997
$ 991
-0.6%
3.9%
5.8%
190 bps
Rogers Park / Uptown
$ 785
$ 778
-0.9%
4.4%
5.3%
90 bps
Belmont-Montrose
$1,119
$1,142
2.1%
4.1%
4.2%
10 bps
Oak Park
$ 880
$ 892
1.4%
4.6%
7.9%
330 bps
Glen Ellyn / Wheaton
$ 914
$ 887
-3.0%
7.6%
8.5%
90 bps
O'Hare
$ 843
$ 819
-2.8%
4.1%
4.4%
30 bps
East Lake County
$ 925
$ 926
0.1%
6.6%
6.8%
20 bps
West Lake County
$ 851
$ 872
2.4%
7.5%
7.0%
-50 bps
McHenry County
$ 887
$ 874
-1.5%
7.3%
7.2%
-10 bps
Kane County
$ 952
$ 943
-1.0%
6.8%
7.3%
50 bps
Joliet
$ 759
$ 762
0.3%
6.7%
6.7%
Unchd
$
$ 975
-0.7%
6.0%
6.6%
60 bps
982
SUPPLY TRENDS
•
•
Change
Woodridge / Lisle
Metro
•
Physical Vacancy
•
Reis report that 10 market-rate projects with 2,864 units were
under construction in late May. This compares to 12 projects with
3,861 units underway nine months earlier.
Four projects are underway in the Loop submarket encompassing
a total of 1,315 units (9.9% of current inventory). City West is the
next most active submarket with two projects under construction
incorporating a total of 948 units (4.4% of current stock).
Condo units under construction in May totaled 3,700. Of these,
2,158 are in the Loop, Gold Coast and City West submarkets.
Daniel J. Hogan
Director of Research
[email protected]
614-857-1416
William T. Hinga
Business Development
[email protected]
614-857-1499
•
•
Two projects were delivered in April and May: an 84unit mixed use retail/apartment project in Vernon Hills
(East Lake County), and a 198-unit, repurposed luxury
condo tower in the Near North at Wells and Erie.
A 480-unit Streeterville tower that began leasing in July
was 65% occupied in March at rents averaging $2,348.
The building’s management company reported an 83%
occupancy rate in a March 31 P.R. bulletin.
A 59-unit repurposed condo in Albany Park (delivered in
May 2009) was 45% occupied in March. Rents averaged
$1,036, according to Reis.
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
www.redcapitalgroup.com
800.837.5100
©2010 RED CAPITAL GROUP
The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting or financial advice, or recommendations to
buy or sell currencies or securities or to engage in any specific transactions. Information has been gathered from third party sources and has not been independently verified or accepted by RED CAPITAL GROUP. RED makes no representations or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented
in the report. RED cannot be held responsible for any errors or misrepresentations contained in the report or in the information gathered from third party sources. Under no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Any reliance upon
this information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Any views expressed herein are
subject to change without notice due to market conditions and other factors.
RED CAPITAL GROUP®
Market Overview
Chicago, Illinois
Multifamily Housing Update
March 2010
EXECUTIVE SUMMARY
D
ata published by the Chicago Chapter of the Institute for Supply Chain Management suggest that underlying economic trends improved in the fourth
quarter, relative to the steep declines
observed in previous periods. The
seasonally-adjusted Business Barometer Index rose from 46.0 in September
to 58.7 in December. Moreover, the
index reached 62.6 in February, marking the fifth consecutive month of
economic expansion.
On the other hand, increased business
activity did not foster net job creation.
On a seasonally-adjusted basis, payroll employment declined -35,300
during 4Q09, similar to the -34,100job decrease reported in 3Q09. Even
worse, non-seasonally adjusted yearover-year losses totaled -208,500
(-5.4%) in the fourth quarter, representing a modest improvement from
the -231,700 (-6.0%) jobs lost y-o-y
in 3Q09.
Positive business sentiment bodes
well for near-term growth. According
to the Manpower Outlook Employment Survey published in March, the
percentage of firms that expect to
increase staff levels surged from 8%
in December (reflecting expectations
for 1Q10) to 18% (regarding 2Q10
hiring plans). Additionally, the share
of businesses that foresaw job attrition plunged from 16% to 3%.
RED CAPITAL Research (RCR)
anticipate that the metro recovery will
not begin until 2011 as the most recent payroll re-benchmark revised
2009 job losses from the initial
-166,100 (-4.3%) job estimate to
-200,700 (-5.2%). As a result, our
econometric payroll model produces
point estimates of -52,300 (-1.4%)
jobs lost this year and a modest gain
of 33,400 (0.9%) new jobs in 2011.
Housing market conditions also improved in recent months. The Illinois
SNAP SHOT
Association of Realtors count 19,864
transactions involving existing singlefamily homes and condos in 4Q09, up
44.3% from the same period of 2008.
With regard to pricing, data from both
the National Association of Realtors
and Case-Shiller suggest that the pace
of home price depreciation decelerated in the fourth quarter. According
to the NAR, the median price of a
single-family MSA home decreased
-12.1% year-over-year in 4Q09, versus the -16.2% annual decline observed in 3Q09. The Case-Shiller
home price index for Chicago fell
-10.6% y-o-y in September and -7.2%
y-o-y in December.
Apartment occupancy declined 10
basis points sequentially to 93.3% in
4Q09 as supply (480 units) outpaced
demand (103 units) from October to
December.
Appraisal Research
Counselors report a 91.4% occupancy
rate for downtown Class-A luxury
properties, lower than the reported
92.2% rate for suburban assets.
According to Reis, effective rents
trended lower as property managers
attempted to boost occupancy. The
average effective rent dropped -1.2%
sequentially and -2.3% y-o-y to $970.
Appraisal Research Counselors estimate a $1.07 median rent per square
foot for suburban properties and a
$2.08 average rent per square foot
among downtown Class-A units.
Asset transaction activity decreased in
2009, largely due to sluggish sales in
the first half of the year. Real Capital
Analytics report a -59% decrease in
sales volume last year, with faster
sales activity in 2H09. Based on an
assumed 6.5% metro average cap rate,
RCR calculate a strong 6.8% expected rate of total return and an
equally impressive 2.64 risk-adjusted
return index. The figures ranked 25th
and 21st highest, respectively, among
the RED 50.
Y-o-y
change
Projected
2010
130bps
30bps
2.3%
0.1%
Vacancy
(6.7% - 4Q09)
Effective
Rents
($970 - 4Q09)
Cap Rate
(6.4% - 4Q09)
Employment
(3,619.8m - 4Q09)
140bps
208.5m
52.3m
KEY POINTS
•
The apartment vacancy rate increased 10
basis points sequentially and 130 basis
points year-over-year to 6.7% in 4Q09.
Despite positive net absorption of 103 units
during the fourth quarter, occupied stock
declined -4,091 units during 2009.
•
Effective rent plunged -1.2% sequentially to
$970 in 4Q09, the largest single-quarter
decrease since 1Q03. As a result, effective
rent was -2.3% below the figure from the
comparable period of 2008.
•
Home prices continued to decline, albeit at a
slower pace. The National Association of
Realtors calculate a $191,500 median singlefamily home price in 4Q09, down -12.1%
from the 4Q08 price. According to the CaseShiller home price index, metro home values
fell -7.2% in the twelve-month period ended
in December.
•
Apartment transaction activity decreased
-59% year-over-year as sales volume totaled
$408 million in 2009.
Real Capital
Analytics estimate an average price per unit
of $66,233 and a 7.0% average cap rate.
Appraisal Research Counselors were aware
of 14 transactions ($297 million in sales
volume) involving suburban assets last year.
Chicago - Naperville - Joliet, Illinois Metropolitan Division - 4Q 2009
VACANCY TRENDS
•
•
The apartment vacancy rate edged up 10 basis points from 6.6% in
3Q09 to 6.7% in 4Q09 as supply (480 units) outpaced demand (103
units). On an annual basis, negative net absorption of 4,091 units
contributed to a 130 basis point increase in vacancy.
According to Appraisal Research Counselors, robust demand (1,739
units) for Class-A downtown apartment units contributed to an 80 basis
point increase in occupancy from 90.6% in 4Q08 to 91.4% in 4Q09.
The source also notes that suburban occupancy rose 10 basis points
year-over-year to 92.2%.
Source: Reis, Inc.
10%
Metro Vacancy Rate
•
Apartment Vacancy Trends
8%
6%
6.7%
5.4%
4%
Chicago
U.S.A.
2%
Reis expect vacancy to rise to 7.0% by year-end, as supply surges to
3,119 units. Likewise, Appraisal Research Counselors believe that
occupancy among downtown Class-A properties will fall to around
90% this year.
0%
4Q 4Q 4Q 4Q 4Q 4Q 4Q 4Q 4Q 4Q 4Q
99 00 01 02 03 04 05 06 07 08 09
RANK: 18th out of 50
Metro Rent Trends
RENT TRENDS
•
•
Effective rent decreased -1.2% sequentially in 4Q09, the sharpest
sequential decline since 1Q03. As a result, average effective rent
plunged -2.3% year-over-year, much worse than the -1.2% annual drop
observed in the previous period.
At $2.08, Appraisal Research Counselors estimate that the 4Q09
average effective rent per square foot among downtown Class-A
properties was $0.03 below the figure from the comparable period of
2008. Likewise, the source calculates a $1.07 median rent per square
foot for suburban assets in 4Q09, down from $1.10 in 4Q08.
Reis foresee a quick turnaround in rent trends. The service forecast a
0.1% increase in effective rent this year, followed by a 1.3% advance
in 2011.
Source: Reis, Inc.
8%
Asking
Effective
6%
YoY Rent Trend
•
4%
2%
-1.7%
0%
-2%
-2.3%
-4%
4Q 4Q 4Q 4Q 4Q 4Q 4Q 4Q 4Q 4Q 4Q
99 00 01 02 03 04 05 06 07 08 09
th
RANK: 34 out of 50
Metro Multifamily Cap Rate Trend
PROPERTY MARKET & CAP RATE TRENDS
•
•
Real Capital Analytics estimate that metro sales volume totaled $408
million in 2009, down 59% from the previous year. The source
calculates a $66,233 average price per unit and a 7.0% average cap
rate.
Appraisal Research Counselors count 14 transactions involving
suburban assets, totaling $297 million in sales proceeds last year.
Although the sales figure was down -37% from 2008, the source report
that activity accelerated near the end of the year and cap rates on some
recent transactions even dropped below 7%.
RCR calculate a 6.8% expected rate of total return, based on an
assumed 6.5% going-in yield. Moreover, below average levels of
historic NOI growth volatility gave rose to the 21st highest measure of
risk-adjusted return in the RED 50.
7.5%
7.0%
Cap Rate
•
Source: Reis, Inc.
8.0%
6.5%
6.0%
5.5%
5.0%
4.5%
4.0%
4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
07 08 08 08 08 09 09 09 09
NOTABLE TRANSACTIONS
Property Name
Avalon at Danada Farms (Glen
Ellyn / Wheaton)
Waterford Place (Wheeling)
Cityfront Place (Gold Coast)
Brook Run (Wheeling)
RED CAPITAL Research
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
A
January 2010
$45.5
$154,068
6.0%
A
A
A
December 2009
December 2009
October 2009
$22.0
$82.0
$15.5
$78,571
$170,478
$85,165
7.3%
4.5%
7.3%
Chicago - Naperville - Joliet, Illinois Metropolitan Division - 4Q 2009
Metro Median Single Family Home Prices
DEMOGRAPHICS & HOUSING MARKET
Source: National Association of Realtors
•
$300
MSA
US
Prices (000)
$250
•
$200
$150
$100
07
08
09
Y
Y
Y
•
4Q 1Q 2Q 3Q 4Q
08
09
09
09
09
Payroll Employment Growth
33.4
Annual Chg (000)
50
-50
-52.3
•
-150
-200
-250
99 00 01 02 03 04 05 06 07 08 09 10f 11f
•
The pace of payroll job attrition decelerated in the fourth quarter.
Establishment headcounts decreased -208,500 (-5.4%) year-over-year
in 4Q09, better than the -231,700 (-6.0%) job decrease in the previous
period. Additionally, annual job loss slowed to -149,900 (-4.1%) in
January.
A turnaround in the administrative support service sector contributed
to the improvement. Sector employment fell -37,100 year-over-year
in 3Q09 and only -27,400 year-over-year in 4Q09. Moreover, only
-15,300 administrative service jobs were lost in the twelve-month
period ended in January.
Likewise, construction and financial service firms lost a combined
-50,800 jobs year-over-year in 3Q09 but only -35,000 jobs year-overyear in January.
Seasonally-Adjusted
Year-over-year Payroll Growth Rate
•
Source: BLS
Chicago
USA
•
0%
Rate
•
0
2%
According to the Illinois Association of Realtors, metro sales velocity
advanced 44.3% year-over-year as 19,864 single-family homes and
condos were sold in the fourth quarter.
Non-Seasonally Adjusted
100
4%
The National Association of Realtors report that the median price of a
single-family MSA home decreased -12.1% year-over-year from
$217,800 in 4Q08 to $191,500 in 4Q09. By comparison, the US
median home price declined -4.1% year-over-year to $172,900 in
4Q09. Likewise, Chicago registered a -7.2% year-over-year drop in
the Case-Shiller home price index in December. The 20 market
composite index fell -3.1% over the period.
EMPLOYMENT TRENDS
Source: BLS Data & RCG Research Forecast
-100
Tactician Corp. forecast that the population of the Chicago
metropolitan division will increase at a 0.2% annual rate from 2009 to
2014.
-2%
-4%
The pace of seasonally-adjusted sequential payroll job loss was stable
in the fourth quarter. A net of -34,100 jobs were lost in 3Q09 and
another -35,300 jobs were lost in 4Q09.
Total employment (as measured by the BLS’s household survey) was
moderately better in the fourth quarter. Indeed, the series decreased
-29,301 sequentially in 3Q09 and -19,701 sequentially in 4Q09. As a
result, the metro unemployment rate was relatively stable, rising only
30 basis points from 10.8% in 3Q09 to 11.1% in 4Q09.
-6%
Forecast
-8%
•
99 00 01 02 03 04 05 06 07 08 09 10
The RCR econometric model produce point estimates of -52,300
(-1.4%) payroll jobs lost this year followed by a 33,400 (0.9%) job
gain in 2011.
RANK: 31st out of 50
15%
10%
5%
RED Estimated Generic Unlevered Asset Total Return Probabilities
Chicago
3.3%
3.3%
Minneapolis
5.8%
5.4%
6.7%
7.4%
8.0%
9.0%
9.9%
11.1%
0%
90%
70%
50%
30%
10%
RED CAPITAL Research
SUBMARKET TRENDS
Submarket
Lincoln Park
Effective Rent
4Q08
4Q09
Physical Vacancy
Change
4Q08
$1,212
$1,122
-7.5%
2.6%
4.2%
160 bps
$957
$935
-2.3%
10.8%
10.2%
-60 bps
Gold Coast
$1,594
$1,524
-4.4%
6.8%
6.6%
-20 bps
The Loop
$1,572
$1,524
-3.1%
12.5%
10.2%
-230 bps
South Shore
$885
$857
-3.1%
5.5%
6.2%
70 bps
Southeast Cook County
$789
$756
-4.2%
4.3%
5.8%
150 bps
Southwest Cook County
$808
$763
-5.5%
5.1%
5.6%
50 bps
Downers Grove
$906
$905
-0.1%
5.2%
8.5%
330 bps
Woodridge / Lisle
$913
$895
-2.0%
5.1%
6.3%
120 bps
Aurora / Naperville
$1,001
$962
-3.9%
5.7%
6.7%
100 bps
Glendale Heights
Schaumburg / Hoffman
$991
$971
-2.0%
3.6%
5.9%
230 bps
$1,029
$1,013
-1.6%
4.3%
6.1%
180 bps
170 bps
$956
$921
-3.7%
5.4%
7.1%
Palatine
$1,029
$1,066
3.7%
8.1%
8.4%
30 bps
Glenview / Evanston
$1,025
$990
-3.4%
3.2%
6.2%
300 bps
200 bps
Rogers Park / Uptown
Belmont-Montrose
Oak Park
$778
$784
0.8%
3.2%
5.2%
$1,125
$1,141
1.4%
3.6%
4.4%
80 bps
$894
$884
-1.2%
4.5%
8.4%
390 bps
-20 bps
Glen Ellyn / Wheaton
$941
$884
-6.1%
8.1%
7.9%
O'Hare
$867
$823
-5.1%
4.1%
4.8%
70 bps
East Lake County
$909
$912
0.3%
5.6%
6.9%
130 bps
200 bps
West Lake County
$871
$870
0.0%
5.9%
7.9%
McHenry County
$871
$892
2.4%
7.4%
7.6%
20 bps
Kane County
$933
$955
2.3%
4.5%
7.7%
320 bps
Joliet
$771
$746
-3.2%
5.9%
6.5%
60 bps
Metro
$993
$970
-2.3%
5.4%
6.7%
130 bps
Completions and Absorption
SUPPLY TRENDS
•
Source: Reis, Inc
Reis were aware of eight apartment properties, containing 1,362 units
that were completed in 2009. The largest property (480 units) was
delivered to the Gold Coast in November. Developers also completed
assets in the Downers Grove (270 units), Oak Park (200 units), City
West (179 units), Glenview / Evanston (152 units), Rogers Park /
Uptown (59 units) and Kane County (22 units) submarkets.
Supply is forecast to accelerate this year. Reis identify 13 properties
totaling 3,634 units that were under construction in March. Most of the
units are located in The Loop (1,803 units) and the City West (948
units) submarkets.
Appraisal Research Counselors predict that 2,234 downtown apartment
units are scheduled to open this year. The source also identifies a large
inventory of unsold and under construction condos and townhomes.
Daniel J. Hogan
Director of Research
[email protected]
614-857-1416
William T. Hinga
Business Development
[email protected]
614-857-1499
6,000
Completions
Absorption
4,000
2,000
Units
•
Change
City West
Wheeling
•
4Q09
0
-2,000
-4,000
-6,000
-8,000
02 03 04 05 06 07 08 09 10f 11f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
www.redcapitalgroup.com
800.837.5100
©2010 RED CAPITAL GROUP
The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting or financial advice, or recommendations to buy or
sell currencies or securities or to engage in any specific transactions. Information has been gathered from third party sources and has not been independently verified or accepted by RED
CAPITAL GROUP. RED makes no representations or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the report. RED
cannot be held responsible for any errors or misrepresentations contained in the report or in the information gathered from third party sources. Under no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Any reliance upon this information is solely and
exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Any views expressed herein are subject to change without notice
due to market conditions and other factors.
RED CAPITAL GROUP®
Market Overview
Chicago, Illinois
Multifamily Housing Update
November 2009
EXECUTIVE SUMMARY
C
hicago employment trends
deteriorated in the third
quarter, furnishing little
evidence that the metro economy was
on the cusp of recovery. Year-overyear attrition accelerated to a
190,000-job, -4.9% pace from 2Q’s
178,800-job loss, and the unemployment rate spiked to 10.0% in September after dropping to a five-month low
9.7% in August. Seasonally-adjusted
payroll trends were moderately
stronger, recording a loss of 34,700
jobs in 3Q, down from 2Q’s 46,100job decline; but the September metric
was disappointing. Chicago posted a
loss of 17,900 jobs, exceeding cuts in
July and August combined and representing the largest employment setback posted since April.
Annual payroll job losses regressed in
nearly every industry, including categories that generally prove recessionproof, including colleges, health care
establishments and government agencies. By the same token, losses continued apace in the goods producing
and consumer-driven sectors, as cuts
proceeded at a 108,000-job annual
pace, down from a loss of 105,000
jobs in 2Q. Only the business and
financial services sectors reported
better numbers as employers trimmed
payrolls at a slower 57,800-job pace,
up from -60,400 jobs lost in 2Q.
The housing market proved a modest
bright spot as consumer demand appeared to warm up and pricing improved. Case-Shiller reported a fourth
consecutive month of rising home
prices in August, pushing the index
6.7% above the April low, while
condo developers encountered unexpected interest at estate auctions designed to move excess inventory.
The RED Research payroll forecast
suggests that the third quarter will be
the recession nadir. Quarterly job
losses will begin to moderate in 4Q,
SNAP SHOT
but net losses will persist through the
spring. Metro payrolls will fall by
another 26,200 jobs in 2010, but recover with a 39,200-job gain in 2011.
Third quarter tenant demand was considerably firmer, mirroring trends
observed in the for-sale housing segment. Absorption was positive for the
first quarter since 3Q08, netting 170
move-ins after the loss of 5,026
leased tenants over the previous nine
months. Only 68 units were completed in the period, holding average
occupancy steady quarter-to-quarter
at a 20-year Reis series low 93.3%.
Leasing agents took advantage of
stabilizing apartment demand and
implemented the first effective rent
hikes recorded since fall 2008. Average face rents still tumbled, slipping
$4 sequentially to $1,060. But concession levels receded $6 to the monthly
equivalent of $74, allowing average
effective rents to rise $2 (0.2%) to
$986. Effective rents were still down
$12 (-1.2%) year-over-year, but the
performance was strong enough to lift
the “City that Works” to 18th position
among the RED 50 from 28th in 2Q.
Reis are dubious that the 3Q09 rally is
sustainable. The service expects occupancy and effective rents to fall 20
basis points and $10 (-1.0%), respectively, by YE09, fueled by tenant
move-outs and completion of 480
units in Gold Coast. Supply is projected to exert further downward pressure on occupancy in 2010, while
improved absorption trends facilitate
a modest $2 (0.2%) real rent advance.
Investors took a renewed interest in
Chicago-land properties in the fall,
sensing the approach of a market
“bottom.” Notably, a large life company entertained multiple bids for a
Naperville garden project and a
Sreeterville high-rise, contracting
sales at prices that produce estimated
going-in yields in the low-6% area.
Y-o-y
change
Projected
YE09 Metric
150 bps
20 bps
1.2%
2.0%
100 bps
Neutral
190m
164m
Vacancy
(6.7% - 3Q09)
Effective
Rents
($986 - 3Q09)
Cap Rate
(7.3% - 3Q09)
Employment
(3,680.4m - 3Q09)
KEY POINTS
•
After a tumultuous nine-month period in
which Chicago-land apartment owners saw
tenants vacate a net of more than 5,000
investor grade units, retail demand firmed in
3Q09. Tenants absorbed a net of 170 units,
holding average occupancy steady at 93.3%.
•
Improved tenant demand allowed leasing
agents to trim the value of rent concession
offers by the equivalent of $6 quarter-toquarter to an average of $74 per month.
•
While average asking rent declined for the
fourth consecutive quarter, lower concession
costs allowed effective rents to rise $2
(0.2%) to $986 regardless. The sequential
quarter advance was the 14th strongest
recorded among the RED 50 markets.
•
While the U.S. recession probably ended in
the third quarter, Chicago-area payroll trends
showed no sign of recovery. Metro payrolls
declined at a record 190,000-job annual
pace, down from a year-on-year loss of
178,800 jobs in the previous quarter.
•
Investor demand for Chicago-land apartment
assets was constructive. Several trophy
properties exchanged hands after August at
cap rates in the low-6% to low-7% range.
Chicago - Naperville - Joliet, IL Metropolitan Division - 3Q 2009
VACANCY TRENDS
•
•
Chicago-land apartment owners added net tenants in 3Q09 for the first
quarter of the last four, net leasing 170 units. Average occupancy was
steady sequentially at 93.3% but down 150 basis points year-over-year.
Occupancy increased in 10 of Chicago’s 25 Reis-defined submarkets.
Notably, demand improved in core urban neighborhoods, including
Gold Coast, Loop and City West. Firmer demand for Downtown
apartments may be a leading indicator of stronger office employment
trends. It also may reflect anxiety among prospective buyers electing to
postpone condo purchase in an uncertain real estate market.
Source: Reis, Inc.
10%
Metro Vacancy Rate
•
Apartment Vacancy Trends
7.8%
8%
6%
6.7%
4%
5.2%
CHICAGO
U.S.A.
2%
Based on optimistic Economy.com employment forecasts, Reis project
a strong occupancy rally in 2011. After slumping to 92.8% by YE10,
the service expects occupancy to rally 70 bps to 93.5% by 2012.
0%
3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q
00
RANK: 18th out of 50, up from 21st in 2Q09.
01 02
RENT TRENDS
•
•
Stabilizing retail demand and weakened competition from the overbuilt and fragile condo market, endowed apartment owners with the
kind of pricing power they haven’t enjoyed in nearly a year. Although
asking rents continued to erode ($4/-0.4%), the value of rent
concessions declined faster (-$6 to $74), pushing effective rents higher
for the first time since 3Q08, in this case by $2 (0.2%) to $986.
•
•
06
07 08
09
Effective rent in 16 of 25 Chicago submarkets increased quarter-to-quarter. The
gains were largely concentrated in suburban submarkets. The largest advances
were recorded in peripheral suburban markets that suffered above average drops
in 2Q, especially McHenry and Kane Counties and Downers Grove.
Is the third quarter rally the beginning of a trend? Reis don’t think so.
The service forecasts a $10 (-1.0%) effective rent decline during 4Q09.
Source: Reis, Inc.
Asking
Effective
6%
4%
2%
0%
-1.1%
-1.2%
-2%
-4%
3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q 3Q
00
A large life company is in contract to sell a 1989-vintage, 281-unit
Naperville garden project for $32mm ($133,979/unit). RCR estimate a
high-5%-to-low-6% cap rate. The same insurance company
subsequently contracted to sell an 18-year old 480-unit Streeterville
high-rise for $83mm ($173,000/unit). RCR estimate a mid-5% cap.
A class-B+, 2001-vintage garden apartment in Waukegan traded at a
materially lower price point. The buyer acquired the 96%+ occupied
asset for $22mm / $60,606 per unit to yield an estimated 7.4%.
02
03
04
05
06
07
08
09
Source: Reis, Inc. (Trade Median)
7.5%
7.0%
Cap Rate
Investor demand improved after August. Several institutional-quality
trophy assets went on the block and received warm welcomes and
multiple bids from prospective buyers. Cap rate levels firmed and
perhaps tightened moderately.
01
Metro Multifamily Cap Rate Trend
PROPERTY MARKET & CAP RATE TRENDS
•
05
8%
RANK: 18th out of 50, up from 28th in 2Q09.
•
04
Metro Rent Trends
YoY Rent Trend
•
03
6.5%
6.0%
5.5%
5.0%
4.5%
1Q
3Q
1Q
3Q
1Q
3Q
07
07
08
08
09
09
RCR estimate 5.6% unlevered 5-year total returns using a 6.8% cap rate.
NOTABLE TRANSACTIONS
Property Name (Submarket)
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
Arbors Brookdale (Naperville)
Northgate (East Lake County)
Brook Run (Wheeling/Arling)
Autumn Run (Naperville)
A
B+
B
B
11-Nov-2009
29-Oct-2009
20-Oct-2009
30-Sep-2009
$32.0 (in contr.)
$22.0
$15.5
$24.6
$113,879
$60,606
$85,164
$76,859
N/A
8.4%
7.3%
7.3%
RED CAPITAL Research
Chicago - Naperville - Joliet, IL Metropolitan Division - 3Q 2009
DEMOGRAPHICS & HOUSING MARKET
Year-over-year Home Value Change
Source: S&P Case-Shiller Index, RCR
5%
CHICAGO
-12.7%
0%
Appreciation
•
CSX20
-5%
•
-10%
-15%
-11.3%
-20%
Feb08
May- Aug- Nov- Feb08
08
08
09
May- Aug09
•
09
Source: BLS Data, RCG Research Forecast
39.2
50
•
0
-26.2
•
-100
-150
-164.3
-200
00 01 02 03 04 05 06 07 08 09f 10f 11f
•
Year-over-year Payroll Growth Rate
Source: BLS
•
Rate
2%
1%
-4.2%
-2%
-3%
-4%
-5%
CHICAGO
USA
-6%
-4.9%
99 00 01 02 03 04 05 06 07 08 09
The semi-official end of the Great Recession did not translate to improved employment trends in the City with Broad Shoulders. Establishments reduced payrolls at a 190,000-job, -4.9% annual rate, comparing unfavorably to the Nation’s -4.2% 3Q09 decline and Chicago’s
178,800-job, -4.6% second quarter pace.
Goods producing and consumer-driven sectors remained the weak
links, accounting for 57% of the job losses recorded over the past
year. Conditions deteriorated in typically recession-proof industries,
however, especially health care and education services (-1,400 jobs/0.3%); government (-7,800 jobs/-1.7%) and computer system design
shops (-1,700 jobs/-3.5%).
After declining 70 basis points in August following three consecutive
10.5% prints, the seasonally-adjusted unemployment rate returned to
the 10.5% level in September. A 22,326-job month-on-month decrease in total employment was largely responsible.
•
After posting a worst ever –193,700-job, -5.0% year-over-year comparison in August, Chicago payroll trends improved moderately in
September. Headcounts fell 188,200 (-4.9%) workers in the period,
aided by firming conditions in government and business services.
Seasonally-adjusted data show that Chicago establishments trimmed a
net of 17,900 jobs in September, down from 6,400 and 10,400 net job
cuts during August and July, respectively.
Forecast: The RCR payroll model suggests that history will view 3Q09
as the darkest hour of the recession. But job trends won’t snap back
immediately. The model indicates that y-o-y job creation isn’t likely to
evolve before 3Q10, and that metro payrolls will decline by 26,200 jobs
during the year. Net job growth will have to wait until 2011, when a
point estimate of 39,200 (1.1%) jobs will likely be created.
RED Estimated Generic Unlevered Asset Total Return Probabilities
10%
CHICAGO (RAI=2.37)
5%
Two auctions of condo units located in the South Loop were well
received by buyers. Allotments were fully subscribed but local media
report that bids averaged 27% to 45% below original asking prices.
Twelve Months ended September 2009
3%
0%
-1%
Only 25 apartment units were converted to condominiums from
January to September, down from 3,000 conversions recorded in 2005.
Third Quarter 2009
100
-50
Likewise, the N.A.R. reported a 3Q09 median home sales price of
$210,100, representing a -16.3% y-o-y decline. The 2Q09 median
price and y-o-y comparison were $204,300 and –20.7%, respectively.
EMPLOYMENT TRENDS
Payroll Employment Growth
Annual Chg (000)
•
Case-Shiller data suggest that prices in the for-sale sector firmed
during the summer. The Chicago index increased for the fourth
consecutive month in August to 130.55, up 6.7% from April. The
metric was -12.7% below the year-earlier index, representing the best
12-month price comparison posted since October 2008.
2.4%
M/SP (RAI=2.14)
4.4%
4.2%
5.5%
5.9%
6.7%
7.3%
8.5%
9.3%
2.2%
0%
90%
70%
50%
30%
10%
RED CAPITAL Research
SUBMARKET TRENDS
Submarket
Lincoln Park
City West
Gold Coast
The Loop
South Shore
Southeast Cook County
Southwest Cook County
Downers Grove
Woodridge / Lisle
Aurora / Naperville
Wheeling
Glendale Heights
Schaumburg / Hoffman Estates
Palatine
Glenview / Evanston
Rogers Park / Uptown
Belmont-Montrose
Oak Park
Glen Ellyn / Wheaton
O'Hare
East Lake County
West Lake County
McHenry County
Kane County
Joliet
Metro
Effective Rent
Physical Vacancy
3Q08
3Q09
Change
3Q08
3Q08
Change
$1,210
$941
$1,580
$1,592
$879
$801
$793
$901
$909
$990
$994
$1,016
$985
$1,038
$1,059
$797
$1,121
$883
$940
$885
$905
$894
$881
$928
$1,156
$949
$1,570
$1,511
$872
$770
$766
$904
$914
$973
$982
$1,034
$938
$1,089
$1,009
$786
$1,139
$892
$911
$839
$920
$861
$897
$946
-4.5%
0.9%
-0.6%
-5.1%
-0.8%
-3.9%
-3.4%
0.3%
0.5%
-1.7%
-1.2%
1.7%
-4.7%
4.9%
-4.8%
-1.5%
1.6%
1.0%
-3.0%
-5.1%
1.7%
-3.7%
1.9%
2.0%
2.8%
10.3%
7.2%
7.6%
5.9%
4.0%
6.0%
5.3%
5.0%
5.4%
4.3%
4.3%
4.6%
7.3%
3.7%
3.1%
3.3%
4.2%
5.5%
4.0%
5.7%
7.2%
5.7%
4.4%
4.0%
10.0%
7.2%
12.0%
6.3%
5.7%
5.5%
8.3%
6.3%
6.7%
6.0%
5.8%
6.6%
8.6%
6.4%
5.4%
4.2%
8.0%
7.4%
4.8%
7.1%
8.1%
7.9%
7.5%
120 bps
-30 bps
Unchd
440 bps
40 bps
170 bps
-50 bps
300 bps
130 bps
130 bps
170 bps
150 bps
200 bps
130 bps
270 bps
230 bps
90 bps
380 bps
190 bps
80 bps
140 bps
90 bps
220 bps
310 bps
$781
$766
-1.8%
5.6%
6.5%
90 bps
$998
$986
-1.2%
5.2%
6.7%
150 bps
SUPPLY TRENDS
•
•
Completions and Absorption
The 480-unit Streeter Place II high-rise was added to the Reis Gold
Coast inventory in November. Asking rents average about $2.50 per
square foot / $2,400 per month. In mid-November, a one-month free
concession was advertised for a 14-month lease.
Reis identify 12 projects underway in November, including one
addition during the last three months: an 84-unit Vernon Hills project.
Nine projects (2,271 units) are expected to receive final C.O. during
2010. Five (1,666 units) are located in the Gold Coast and Loop
submarkets. The largest is a 488-unit phase of an 87-story condo/
rental building in the East Lakeshore area. Units up to the 52nd floor
of this high-rise are on the market, renting at about $2.70/sf. No
occupancy data were available at the time of this report.
Daniel J. Hogan
Director of Research
[email protected]
614-857-1416
William T. Hinga
Business Development
[email protected]
614-857-1499
Source: Reis, Inc
6,000
4,000
2,000
Units
•
0
-2,000
-4,000
-6,000
-8,000
Completions
02
03
04
05
Absorption
06 07
08 09f 10f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
www.redcapitalgroup.com
800.837.5100
©2009 RED CAPITAL GROUP
The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting or financial advice, or recommendations to buy or
sell currencies or securities or to engage in any specific transactions. Information has been gathered from third party sources and has not been independently verified or accepted by RED
CAPITAL GROUP. RED makes no representations or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the report. RED
cannot be held responsible for any errors or misrepresentations contained in the report or in the information gathered from third party sources. Under no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Any reliance upon this information is solely and
exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Any views expressed herein are subject to change without notice
due to market conditions and other factors.
RED CAPITAL GROUP®
Market Overview
Chicago, Illinois
Multifamily Housing Update
August 2009
EXECUTIVE SUMMARY
G
ood news was in short supply when summer arrived.
Commercial real estate woes
mounted: Michigan Avenue retail
space vacancy more than tripled since
the beginning of the recession to 9.8%
at mid-year; all commercial mortgage
loan delinquencies rose to 5.6% in
March (third highest among the top
100 U.S. metro markets); slow convention and tourism business forced
McCormick Center and Navy Pier to
borrow $18 million from the state to
avoid bond default; and office availability hit a two-year high 14%. Residential market conditions were hardly
better, as the median price of a metro
home dropped -20.2% year-over-year
in 2Q09 (considerably weaker than the
national and regional comparisons);
home sales fell 47% from depressed
2008 levels; the weight of a 5-year
supply of unsold units sent Loop condo
prices tumbling and the Chicagoland
foreclosure rate rose to the 39th highest
among the 203 largest U.S. metros, one
place behind beleaguered Detroit.
Many of the foregoing problems were
directly attributable to Chicago’s weak
employment market. Payroll job losses
mounted in the second quarter, rising
to a 179,400-job, -4.6% y-o-y pace
(down from 125,900 cuts in 1Q09),
representing the fastest job losses recorded in the metro’s 20-year BLS
series. Together, construction, manufacturing and the related temporary
employment service sub-sector were
responsible for nearly half the total,
with the retail trade, transportation and
leisure and hospitality industries accounting for the bulk of the rest.
While the economy probably touched
bottom at mid-year, Chicago employment trends are likely to remain weak
for some time. In June, payrolls fell
184,300 (-4.7%) jobs y-o-y, the weakest comparison to date, and seasonallyadjusted headcounts declined more
than 12,000, raising year-to-date attri-
SNAP SHOT
tion to 103,900 jobs. Moreover, the
unemployment rate surged to 11.3%, a
record. RED CAPITAL Research
expect six-digit y-o-y losses to persist
through 1Q10, and net gains unlikely
to return before 4Q2010. Annually, job
losses are expected to reach -165,800
this year, slowing to –34,600 in 2010.
Conditions in the apartment market
were commensurate, as a net of 2,329
tenants vacated units in 2Q, bringing
first half 2009 negative absorption to
4,849 units. Accounting for 644 completed units, metro occupancy fell 70
basis points from March to 93.3%, the
lowest rate recorded by Reis in its 20year data series. Only six of Chicago’s
25 submarkets chalked down sequential quarter occupancy gains, led by the
Loop’s 120 bps advance to 86.8%.
Effective rent trends were firm, falling
only $1 (-0.1%) to an average of $984,
materially stronger than the –0.6%
mean U.S. metro market setback. Rents
rose in nine submarkets March to June,
including solid gains in the South
Shore (1.5%), Loop (0.9%) and Southeast Cook Co. (1.6%) areas. By contrast, weakness was concentrated in
peripheral suburban areas, like Wheeling, Kane County and Woodridge,
where rents receded -1.6% or more.
Reis expect soft conditions to persist
through 2011. Average effective rent is
projected to fall another $20 by yearend 2009 and will not recapture current
levels before 2012. Occupancy will be
hampered by supply pressures, including repurposing of several condo buildings to rental tenancy, holding steady
in the low-93% range through the end
of 2010. Occupancy is forecast to rebound to about 94% by 2013.
Six trades were closed in 1H09 for
proceeds of $99.9mm and owners offered 25 assets ($512mm) for sale at
mid-year. Purchase cap rates were in
the 7% area, but trophy properties may
still command mid-6% going-in yields.
Y-o-y
change
Projected
YE09
150 bps
Unchd
1.4%
3.2%
0.8%
0.4%
179m
166m
Vacancy
(6.7% - 2Q09)
Effective
Rents
($984 - 2Q09)
Cap Rate
(6.1%- 2Q09)
Employment
(3,699.1m - 2Q09)
KEY POINTS
•
Not-seasonally adjusted payroll aggregates
tumbled at a record setting 179,400 (-4.5%)
job pace in 2Q09. On a seasonally-adjusted
basis, however, job losses receded slightly in
2Q09, falling from 56,000 in 1Q to 48,000.
•
Job losses contributed to weaker apartment
demand. After posting negative absorption of
-2,520 units in 1Q09, metro owners gained
little traction in 2Q as 2,329 units were
vacated. After accounting for 644 unit
completions, vacancy popped 70 bps quarterto-quarter to 6.7%, highest rate since 1990.
•
Face rents fell $2 (-0.2%) in 2Q99 to an
average $1,064. Conversely, concession
levels receded $1, holding effective rent
attrition to $1 (-0.1%) to $984.
•
Reis expect occupancy levels to stabilize
near recent lows but the service anticipates
sharp declines ($20/-2.2%) in effective rents
by year-end. Reis believe owners will not
regain revenues lost in 2H09 before 2012.
•
In spite of the foregoing tales of woe, RCR
expect Chicago assets to produce 5-year
unlevered total returns of 4.0%, 30 bps
above the RED 50 mean, as well as
constructive risk-adjusted returns.
Chicago-Naperville-Joliet, IL Metropolitan Division - 2Q 2009
VACANCY TRENDS
•
•
Apartment Vacancy Trends
A net of 4,816 tenants vacated Chicago-land units during the 12-month
period ended in June. Combined with the addition of 1,862 units to
inventory in the same period, occupancy plunged 150 basis points. At
6.7%, average vacancy established a new Reis data series record high.
Nearly one-half of the aforementioned occupancy regression (70 bps)
was incurred in the normally robust spring leasing season. Owners lost
2,329 leased tenants in 2Q09, compared to a ten-year second quarter
average of 1,082 net move-ins. Supply (644 units) exacerbated the dip.
The Loop was one of six submarkets to record an occupancy advance
in 2Q. The gain may be short-lived, however, as 638 units currently
are under construction, a 342-unit condo recently announced that it was
repurposing to rental and other condo developers in the crowded South
Loop neighborhood may be compelled to follow the same path.
Source: Reis, Inc.
8%
Metro Vacancy Rate
•
5.2%
6%
4%
CHICAGO
2%
U.S.A.
0%
2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q
00 01 01 02 03 04 04 05 06 07 07 08 09
st
RANK: 21 out of 50
RENT TRENDS
•
•
•
Metro Rent Trends
After tumbling $11 (-1.1%) to $985 in 1Q09, effective rent trends were
more stable in the spring. Owners managed to tighten average
concession levels $1 to $88, limiting the decline in effective rents to
only $1 (-0.1%) to $984. The performance ranked as the 11th strongest
quarter-to-quarter trend recorded by the RED 50 markets.
Effective rents fell $14 (-1.4%) from June 2008 to June 2009, ranking
Chicago 28th among the RED 50 markets.
Reis report that effective rents in the Loop rebounded $14 (0.9%) to
$1,562 average in 2Q09 after a $24 (-1.5%) decline in the first quarter.
High-end properties may be weaker, however; Appraisal Research
report that effective rents in luxury Loop buildings fell -7.8% in 1Q.
Source: Reis, Inc.
8%
ASKING
EFFECTIVE
6%
YoY Rent Trend
•
4%
2%
0%
-2%
-0.3%
-1.4%
-4%
Reis expect effective rents to plunge $20 or -2.2% in 2H09 to $964.
2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q
RANK: 28th out of 50
00 01 01 02 03 04 04 05 06 07 07 08
PROPERTY MARKET & CAP RATE TRENDS
•
•
•
Metro Multifamily Cap Rate Trend
Source: Reis, Inc.
Real Capital Analytics report that nine apartment sales were
consummated in the second quarter 2009 for a total of $104 million.
The largest transaction was the sale of a 596-unit property in Buffalo
Grove by a publicly-held real estate trust. The class-B, 1988-vintage
property was acquired for $58.5mm by a New Jersey-based investment
and management firm. The seller originally listed the property for
$85mm, according to Crain’s Chicago Business.
Loopnet.com listed twelve arguably investment grade properties for
sale on August 17 at prices ranging from $5 million to $12 million.
Offered cap rates ranged from roughly 6% to 9%.
Cap Rate
•
6.7%
7.5%
7.0%
6.5%
6.0%
5.5%
5.0%
4.5%
4.0%
3.5%
3.0%
RCA identified 56 distressed Chicagoland apartments in July valued at
$639mm. Scaled for size, this was the 20th highest level recorded
among the 56 primary and secondary markets covered by the service.
4Q
2Q
4Q
2Q
4Q
2Q
06
07
07
08
08
09
NOTABLE TRANSACTIONS
Property Name
Crossroads (Southeast Cook Co)
Chevy Chase (East Lake County)
Landings Lake Zurich (W.L.C.)
RED CAPITAL Research
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
B
A
A
28-May-2009
16-Jun-2009
24-Jun-2009
$8.5
$58.5
$19.0
$47,222
$98,818
$92,233
7.6%
7.0%
7.0%
Chicago-Naperville-Joliet, IL Metropolitan Division - 2Q 2009
DEMOGRAPHICS & HOUSING MARKET
Metro Median Single Family Home Prices
Source: National Association of Realtors
•
$330
CHICAGO
US
Prices (000)
$280
$230
•
$180
$130
•
$80
05
06
07
Y
Y
Y
1Q 2Q 3Q 4Q 1Q 2Q
08
08
08
08
09
09
•
Annual Chg (000)
100
50
•
0
-50
-34.6
-100
•
-150
-165.8
99 00 01 02 03 04 05 06 07 08 09f 10f
•
Year-over-year Payroll Growth Rate
Source: BLS
CHICAGO
USA
2%
Rate
RealtyTrac.com revealed in July that 1.69% of metro households were
involved in a mortgage foreclosure action during the first six months of
2009, ranking 39th highest among the 203 U.S. metros included in the
survey and 2nd highest in the Midwest after Detroit, Michigan.
Second Quarter 2009
Source: BLS Data & RCG Research Forecast
4%
The N.A.R. released median home price data for 2Q09 in August. The
group found that the typical Chicago-land home sold for $204,300, a
decrease of -20.7% from the same period of 2009. The trend compared
unfavorably to both the U.S. (-16.5%) and Midwest (-8.6%) averages.
EMPLOYMENT TRENDS
Payroll Employment Growth
-200
New home sales velocity picked up in the second quarter, giving rise to
hope that the residential market was stabilizing after a steep decline.
Tracy Cross & Associates report that sales in 2Q09 reached an
annualized pace of 4,164 units per year, up 13% from the previous
quarter but still down 47% from 2008.
Mirroring national trends, the pace of Chicago metro area payroll job
losses accelerated, rising from 125,900 (-3.3%) in 1Q09 to 179,400 (4.7%) in 2Q.
By contrast, seasonally-adjusted payroll figures indicate that losses
slowed in second quarter. According to these data, a net of 47,900
payroll jobs were eliminated in 2Q09, down from a loss of 56,000
positions in the previous three-month period..
Year-over-year trends suggest that workers in the goods-producing
industries bore the brunt of the job losses. Payrolls in the construction, manufacturing and wholesale trade super-sectors declined at a
72,800-job, -9.6% rate in the second quarter, down from aggregate
cuts of 50,400 (-6.8%) jobs in 1Q09.
Conditions were weak in the Windy City’s bedrock professional services sector. Finance and insurance sub-sector payrolls fell at a
12,500, -5.6% rate, and computer system design shops and law and
consulting firms trimmed an aggregate of 3,000 (-2.6%) employees.
The tourism sector also suffered heavy blows. Arts, entertainment
and recreation and lodging establishments laid-off 7,900 (-6.8%)
workers, while eating and drinking establishments cut 8,700 (-3.4%).
Twelve Months Ended June 2009
0%
•
-2%
-4.2%
-4%
-4.7%
-6%
99 00 01 02 03 04 05 06 07 08 09
The unemployment rate rose 60 bps in June to a record high 11.3%.
Forecast: The RED CAPITAL Research econometric payroll model
generates point estimates of 2009 and 2010 average monthly payroll job
losses of 165,800 (-4.3%) jobs in 2009, and 34,600 (-0.9%) jobs in 2010.
The model foresees quarterly y-o-y losses running through 3Q10.
RED Estimated Generic Unlevered Asset Total Return Probabilities
8%
CHICAGO (RAI=1.68)
6%
2.8%
4%
2%
•
Year-over-year comparisons continued to deteriorate through June.
Total payrolls dropped 184,300 (-4.7%) jobs from the year-earlier
period after a record 183,500-job loss in May. The June job aggregate (3.714 million) was the lowest June total posted since 1995.
0.8%
2.6%
MINNEAPOLIS RAI=1.47) 5.3%
4.1%
4.0%
7.5%
7.0%
5.4%
0.3%
0%
90%
70%
50%
30%
10%
RED CAPITAL Research
SUBMARKET TRENDS
Effective Rent
Submarket
Lincoln Park
City West
Gold Coast
The Loop
South Shore
Southeast Cook County
Southwest Cook County
Downers Grove
Woodridge / Lisle
Aurora / Naperville
Wheeling
Glendale Heights
Schaumburg / Hoffman Estates
Palatine
Glenview / Evanston
Rogers Park / Uptown
Belmont-Montrose
Oak Park
Glen Ellyn / Wheaton
O'Hare
East Lake County
West Lake County
McHenry County
Kane County
Joliet
Metro
Physical Vacancy
2Q08
2Q09
Change
2Q08
2Q08
Change
$1,204
$945
$1,591
$1,597
$885
$806
$803
$885
$915
$985
$983
$1,010
$1,001
$1,039
$1,074
$793
$1,126
$893
$944
$859
$1,159
$933
$1,581
$1,562
$870
$773
$773
$872
$910
$981
$966
$1,018
$948
$1,088
$1,004
$776
$1,136
$893
$909
$828
-3.7%
-1.2%
-0.6%
-2.2%
-1.7%
-4.1%
-3.7%
-1.5%
-0.5%
-0.4%
-1.8%
0.8%
-5.3%
4.7%
-6.6%
-2.2%
0.9%
0.0%
-3.7%
-3.6%
2.9%
9.6%
7.8%
6.6%
5.5%
3.3%
5.1%
5.4%
5.7%
5.4%
4.6%
4.4%
4.9%
7.7%
3.6%
3.0%
3.3%
4.4%
5.6%
3.7%
3.8%
10.4%
7.4%
13.2%
6.1%
5.9%
5.3%
8.8%
6.3%
6.8%
6.0%
5.5%
6.5%
8.4%
6.5%
5.1%
4.0%
8.5%
7.8%
4.5%
90 bps
80 bps
-40 bps
660 bps
60 bps
260 bps
20 bps
340 bps
60 bps
140 bps
140 bps
110 bps
160 bps
70 bps
290 bps
210 bps
70 bps
410 bps
220 bps
80 bps
$886
$928
4.7%
6.1%
7.1%
100 bps
$911
$869
$913
$860
$885
$936
-5.6%
1.9%
2.5%
6.5%
5.5%
4.9%
8.2%
7.8%
7.1%
170 bps
230 bps
220 bps
$782
$754
-3.6%
5.6%
6.4%
80 bps
$998
$984
-1.4%
5.2%
6.7%
150 bps
SUPPLY TRENDS
Completions and Absorption
•
•
•
On August 14, Reis identified 12 large apartment projects containing
4,131 units under construction. A total of 410 units were completed in
July and 876 units are projected to receive final C.O. before year-end.
Three projects are under way in the Loop submarket, including a 342unit loft project that recently was repurposed to rental after slow sales.
The roster includes a retro-fit of an iconic Randolph Street office highrise to a mixed-use building including 310 apartment units.
Another 2,571 units are under construction in the Gold Coast and City
West submarkets. A total of 1,436 are expected to debut by YE2010.
A 51-story tower located near the mouth of the Chicago River debuted
in June 2008. One year later, it was 83% occupied at rents averaging
$2,194. Within one mile, towers built since 2001 were 89.5% occupied.
Daniel J. Hogan
Director of Research
[email protected]
614-857-1416
William T. Hinga
Business Development
[email protected]
614-857-1499
Source: Reis, Inc
4,000
2,000
Units
•
6,000
0
-2,000
-4,000
-6,000
Completions
Absorption
-8,000
02
03
04 05
06
07 08 09f 10f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
www.redcapitalgroup.com
800.837.5100
©2008 RED CAPITAL GROUP (11/08)
The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting or financial advice, or recommendations to buy or
sell currencies or securities or to engage in any specific transactions. Information has been gathered from third party sources and has not been independently verified or accepted by RED
CAPITAL GROUP. RED makes no representations or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the
report. RED cannot be held responsible for any errors or misrepresentations contained in the report or in the information gathered from third party sources. Under no circumstances should
any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Any reliance upon this information is
solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Any views expressed herein are subject to change without notice due to market conditions and other factors.
RED CAPITAL GROUP®
Market Overview
Chicago, Illinois
Multifamily Housing Update
May 2009
EXECUTIVE SUMMARY
T
he term “freefall” became a
popular buzzword to describe
domestic economic conditions, and is likewise applicable to the
Windy City. During the six-month
period from October to March, the
metro economy lost a seasonallyadjusted, -114,300 payroll jobs, or
-3.0% of the total headcount. By
comparison, during the most recent
growth cycle (March 2004 to December 2007), the economy required 46
months to create 142,000 payroll jobs.
Although the overall economic landscape remains dim, some economic
data provide support for a less pessimistic outlook. Seasonal adjustments
are imperfect, but the modest slowdown in seasonally-adjusted job attrition from -59,100 jobs in 4Q08 to
-55,200 suggest that the pace of decline moderated in the first quarter.
Also, the Chicago Purchasing Managers Index, also known as the Business
Barometer, reached a low value (31.4)
in March but rebounded in April
(40.1). The recovery was partially
attributable to an uptick in both the
production and new orders indices as
well as shrinking inventory levels.
Even if the local economy begins to
recover by the end of the year, any
significant job growth is likely to lag
by several months. Moreover, yearover-year job trends are slow to adapt
to inflection points. This phenomena
is evident in the surge in y-o-y job
attrition from -79,600 (-2.0%) in
4Q08 to -125,400 (-3.3%) in 1Q09.
For this reason, the RED CAPITAL
Research (RCR) econometric model
produces a point estimate of -152,000
(-3.9%) jobs lost this year, optimistic
compared to the -173,500 (-4.6%) job
Economy.com forecast. Next year,
we expect continued losses as employers cut 50,600 (1.4%) positions.
Apartment demand weakened in the
first quarter, owing to continued job
SNAP SHOT
losses and the weak housing market.
As a result, owners were unable to
capitalize on the development lull in
the first quarter as negative net absorption of -2,520 units produced a 60
basis point sequential decline in occupancy to 94.0%. On a y-o-y basis,
tenants vacated 3,961 units and developers completed 2,176 units. Consequently, the occupancy rate fell 130
basis points from the 1Q08 level.
Owners lost rent traction in the fourth
quarter and fell further behind in
1Q09. Average asking rent decreased
for the second consecutive quarter,
falling -0.5% in 1Q09. The simultaneous rise in concessions yielded a 1.2% sequential decline in the average
effective rent from $997 in 4Q08 to
$985 in 1Q09. Asking rent trends
suggest that pricing pressure was
greater among Class-B/C rentals as
the average rent fell -0.7% to $911.
Class-A average rent fell at a more
modest -0.3% rate to $1,381.
After incorporating the latest property
performance data as well as updated
Economy.com metro economic forecasts, Reis downwardly revised their
rent growth forecasts for Chicago
apartment assets. As of 4Q08, the
service projected a five-year compound average annual effective rent
growth rate of 1.7%. In 1Q09, the
forecast was adjusted to 1.3%.
Property market participants maintained a cautious approach to metro
investment, buying only five assets
totaling $40.2 million in sales proceeds in 1Q09. RCR calculate a
7.5% weighted-average cap rate, inflated due to the mix of traded assets.
Based on the CBRE-proposed stabilized Class-A cap rate of 6.5%, we
calculate a 3.9% expected rate of total
return, slightly lower than the 4.2%
comparable figure for Minneapolis.
As a result, we maintain our opportunistic ranking for metro assets.
Y-o-y
change
Projected
2009
130bps
30bps
0.0%
2.4%
Vacancy
(6.0% - 1Q09)
Effective
Rents
($985 - 1Q09)
Cap Rate
(6.4% - 1Q09)
Employment
(3,684.1m - 1Q09)
100bps
125.7m
152m
KEY POINTS
•
The Chicago economy shed jobs at an
alarming rate in the past several months. On
a seasonally-adjusted basis, metro payrolls
fell -114,300 from October to March. Nonseasonally adjusted year-over-year job
attrition rose from a modest -28,500 (-0.7%)
in 3Q08 to -79,600 (-2.0%) and -125,700
(-3.3%) in 4Q08 and 1Q09, respectively.
•
Occupancy fell sharply as job losses curbed
household formation and, therefore leasing
activity. Negative net absorption totaled
2,520 units in 1Q09 and 3,961 units in the
twelve-month period ended in March.
Consequently the average occupancy rate
fell 60 basis points sequentially to 94.0% in
1Q09, and was 130 basis points below the
metric from the comparable period of 2008.
•
After falling -1.2% in the first quarter, the
average effective rent was equal to the 1Q08
comparison of $985. The size of the average
concession package rose from 6.5% in 1Q08
to 7.6% in 1Q09 as property owners and
managers combated weak leasing trends.
•
Based on a 6.5% going-in yield, RCR
calculate a 3.9% expected rate of total return
and a 1.66 risk-adjusted return index. The
latter exceeds the M/SP comparison (1.50).
Chicago - Naperville - Joliet, Illinois Metropolitan Division - 1Q 2009
VACANCY TRENDS
•
•
The metro vacancy rate increased 60 basis points sequentially to 6.0%
in 1Q09. Negative net absorption of 2,520 units was responsible as no
supply was delivered. Vacancy rose 130 basis points year-over-year
due to 2,176 unit completions and 3,961 net move-outs in the twelvemonth period ended in March.
Class A vacancy rose 30 basis points from 6.7% in 4Q08 to 7.0% in
1Q09. The vacancy rate among Class B/C assets increased 70 basis
points sequentially to 5.5%, attributable to negative net absorption of
2,062 units.
Source: Reis, Inc.
8%
Metro Vacancy Rate
•
Apartment Vacancy Trends
6%
6.0%
4%
Chicago
U.S.A.
2%
0%
Reis expect vacancy to rise 30 basis points to 6.3% in 2009 and 6.8%
in 2010.
1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
00 00 01 02 03 03 04 05 06 06 07 08 09
RANK: 17th out of 50
RENT TRENDS
•
•
•
Metro Rent Trends
Apartment owners continued to cut face rents and increase concessions
in the first quarter. The average asking rent declined -0.1%
sequentially in 4Q08 and -0.5% in 1Q09. In addition, the size of the
average concession package rose from a cyclical low of 6.2% in 4Q07
to 6.9% in 4Q08 and 7.6% in 1Q09.
As a result, the average effective rent decreased -1.2% sequentially to
$985 in 1Q09. The average effective rent was unchanged year-overyear.
The East Lake County (5.2%) and City West (4.0%) submarkets
generated the fastest over-the-year gains in effective rent among
suburban and city submarkets, respectively.
Source: Reis, Inc.
8%
Asking
Effective
6%
YoY Rent Trend
•
4%
1.1%
2%
0%
0.0%
-2%
-4%
1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
Reis forecast a -2.4% decrease in the metro effective rent this year.
00 00 01 02 03 03 04 05 06 06 07 08 09
rd
RANK: 33 out of 50
Metro Multifamily Cap Rate Trend
PROPERTY MARKET & CAP RATE TRENDS
•
•
Source: Reis, Inc.
Real Capital Analytics identify five investor-grade trades in 1Q09,
totaling $40.2 million in sales proceeds. The average price was
$63,639 per unit. RCR calculate a weighted average cap rate of 7.5%.
8.0%
CBRE brokers calculate a cap rate range of 6.5% to 6.75% for
stabilized Class-A Chicagoland assets in March. The source estimate
that the range was up about 40 basis points from November.
6.5%
Based on an assumed 6.5% going-in yield, RCR calculate a 3.9%
expected rate of total return in Chicago. Historic revenue growth
volatility produces a 1.66 measure of risk-adjusted return. By
comparison, Minneapolis exhibits a higher expected return (4.2%) but
a lower risk-adjusted return (1.50).
7.5%
7.0%
Cap Rate
•
4.7%
6.0%
5.5%
5.0%
4.5%
4.0%
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q
07 07 07 07 08 08 08 08 09
NOTABLE TRANSACTIONS
Property Name
Northshore Estates
Ridgeland Court
Farcroft
Westwood
RED CAPITAL Research
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
A
B/C
B/C
B/C
February 2009
January 2009
January 2009
January 2009
$12.6
$6.5
$8.1
$7.4
$50,079
$77,381
$93,605
$55,682
9.5%
7.0%
5.6%
7.1%
Chicago - Naperville - Joliet, Illinois Metropolitan Division - 1Q 2009
Metro Median Single Family Home Prices
DEMOGRAPHICS & HOUSING MARKET
Source: National Association of Realtors
Prices (000)
$300
MSA
•
US
$250
•
$200
•
$150
$100
05
06
07
Y
Y
Y
1Q 2Q 3Q 4Q 1Q
08
08
08
08
09
Payroll Employment Growth
•
50
0
-50
-50.6
-100
At 0.94%, the metro foreclosure rate ranked 40th among 203 markets
tracked by RealtyTrac.com. The US average rate was 0.63%.
-152
•
Year-over-year Payroll Growth Rate
Source: BLS
•
3%
2%
1%
A net of -55,200 jobs were eliminated from January to March, slightly
better than the -59,100-job decline in the previous quarter. In addition, the unemployment rate rose sharply from 6.9% in December to
9.3% in March, as total employment (reported in the BLS’s household
survey) fell -15,058 (-0.3%) from October to December and another
-136,858 (-3.6%) from January to March.
Non-Seasonally Adjusted
•
-150
99 00 01 02 03 04 05 06 07 08 09f 10f
The pace of year-over-year job decline surged in the first quarter.
Employers trimmed workers at a -125,400 (-3.3%) rate in 1Q09,
worse than the -79,600 (-2.0%) decrease recorded in 4Q08.
Attrition among manufacturing, retail and business service firms was
partially to blame. Production employers trimmed a monthly average
of -12,000 positions from payrolls in 2008 and -27,700 year-over-year
in 1Q09. Likewise, retail and business service firms eliminated a
combined -53,100 positions year-over-year in 1Q09.
The financial service and construction sectors continued to shed jobs
at a steady rate. The sectors lost a combined -26,100 jobs year-overyear in 4Q08 and at a -27,300 job rate in 1Q09.
Forecast
0%
Rate
According to the Illinois Association of Realtors, the median Chicago
home price fell -21.8% year-over-year to $194,000 in March. Sales
also declined from 5,759 in March 2008 to 4,260 in the same month
this year. Chicago registered a -17.6% year-over-year decline in the
Case-Shiller home price index, better than the -18.6% drop in the
composite index of the top 20 housing markets.
Seasonally-Adjusted
100
-200
The National Association of Realtors report a first quarter median
single-family home price of $185,600, down -25.6% year-over-year.
EMPLOYMENT TRENDS
Source: BLS Data & RCG Research Forecast
Annual Chg (000)
•
Chicago MSA population growth accelerated from 0.6% in 2007 to
0.8% in 2008, owing to slower negative net domestic migration.
•
-1%
-2%
Chicago
USA
-3%
-4%
-5%
99 00 01 02 03 04 05 06 07 08 09
8%
6%
4%
2%
RCR predict that metro employers will shed -152,000 (-3.9%) jobs
this year and lose another -50,600 positions from payrolls in 2010.
By comparison, Economy.com predict a -173,500 (-4.6%) job decline
in 2009 but a 55,420 (1.5%) increase next year.
RANK: 31st out of 50
RED Estimated Generic Unlevered Asset Total Return Probabilities
Chicago (RAI=1.66)
Minneapolis (RAI=1.50)
0.8%
2.6%
2.6%
4.1%
3.9%
5.6%
5.0%
7.5%
6.8%
0.4%
0%
90%
70%
50%
30%
10%
RED CAPITAL Research
SUBMARKET TRENDS
Submarket
Lincoln Park
City West
Gold Coast
The Loop
South Shore
Southeast Cook County
Southwest Cook County
Downers Grove
Woodridge / Lisle
Aurora / Naperville
Wheeling
Glendale Heights
Schaumburg / Hoffman
Palatine
Glenview / Evanston
Rogers Park / Uptown
Belmont-Montrose
Oak Park
Glen Ellyn / Wheaton
O'Hare
East Lake County
West Lake County
McHenry County
Kane County
Joliet
Metro
Effective Rent
Physical Vacancy
1Q08
1Q09
Change
1Q08
1Q09
$1,202
$909
$1,535
$1,577
$879
$808
$794
$886
$896
$973
$975
$996
$988
$1,035
$1,065
$785
$1,120
$874
$938
$862
$882
$888
$861
$921
$769
$985
$1,164
$945
$1,580
$1,548
$857
$761
$786
$879
$929
$984
$984
$1,019
$952
$1,074
$1,000
$776
$1,121
$876
$914
$840
$928
$853
$888
$954
$759
$985
-3.2%
4.0%
2.9%
-1.8%
-2.5%
-5.8%
-1.1%
-0.8%
3.6%
1.1%
0.9%
2.3%
-3.6%
3.7%
-6.1%
-1.2%
0.1%
0.2%
-2.6%
-2.5%
5.2%
-4.0%
3.1%
3.6%
-1.4%
0.0%
2.4%
6.3%
5.3%
5.9%
4.8%
3.2%
5.5%
5.6%
5.7%
5.4%
3.6%
4.4%
5.2%
8.7%
3.7%
2.5%
3.1%
4.1%
4.8%
3.7%
6.1%
5.0%
4.3%
3.9%
4.5%
4.7%
2.8%
10.5%
7.4%
14.4%
5.7%
5.2%
5.6%
6.5%
5.2%
6.0%
5.2%
5.8%
6.4%
7.4%
3.9%
4.4%
4.1%
4.6%
7.6%
4.1%
6.6%
7.5%
7.3%
6.8%
6.7%
6.0%
•
Source: Reis, Inc
For the second consecutive year, no units were completed in the first
quarter. In 2008, the pace of development accelerated thereafter, as
developers delivered 2,176 units in the final nine months of the year.
Reis expect comparatively modest supply of 1,108 units this year.
Development in areas around The Loop remained popular. As of May,
1,383 apartment units were under construction in the Gold Coast
submarket. In addition, 4,814 condo units were under construction in
The Loop and Gold Coast submarkets, combined.
Reis expect apartment supply to average 1,432 units per year from
2010 to 2013, on pace with the 1,450-unit average observed from 2003
to 2008.
6,000
4,000
2,000
Units
•
0
-2,000
-4,000
Completions
William T. Hinga
Business Development
[email protected]
614-857-1499
Absorption
-6,000
-8,000
02
Daniel J. Hogan
Director of Research
[email protected]
614-857-1416
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160 bps
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Completions and Absorption
SUPPLY TRENDS
•
Change
03
04
05
06
07
08 09f 10f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
www.redcapitalgroup.com
800.837.5100
©2008 RED CAPITAL GROUP (11/08)
The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting or financial advice, or recommendations to buy or
sell currencies or securities or to engage in any specific transactions. Information has been gathered from third party sources and has not been independently verified or accepted by
RED CAPITAL GROUP. RED makes no representations or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the
report. RED cannot be held responsible for any errors or misrepresentations contained in the report or in the information gathered from third party sources. Under no circumstances should
any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Any reliance upon this information is
solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Any views expressed herein are subject to change without notice due to market conditions and other factors.
RED CAPITAL GROUP®
Market Overview
Chicago, Illinois
Multifamily Housing Update
April 2009
EXECUTIVE SUMMARY
W
indy City economic
trends deteriorated in the
fourth quarter. Employers eliminated -79,600 (-2.0%) positions from payrolls year-over-year, in
line with national trends but worse
than the -28,500 (-0.7%) job decline
in the previous period. Staff reductions were particularly severe among
construction and administrative support firms, which cut -15,900 and
-22,700 jobs y-o-y, respectively.
Temporary agencies were responsible
for a majority (20,600) of the losses.
Trade related employers trimmed
staffs in 4Q08 after a moderate payroll loss in the previous quarter. The
wholesale, retail and transportation /
warehousing sectors cut a combined
-10,700 jobs y-o-y in 3Q08 but eliminated -24,700 y-o-y in 4Q08.
Conversely, health care and education
service providers continued to add
workers.
The health care sector
added 8,600 jobs and education service firms hired a net of 6,700 workers year-over-year in the fourth quarter.
The December job metric was dismal
as employers cut -102,100 workers yo-y.
RED CAPITAL Research
(RCR) expect payroll trends to continue to deteriorate in 2009, consistent
with the weak economic outlook. Our
econometric model generates a point
estimate of -79,900 (-2.1%) job cuts
this year. Economy.com are comparatively pessimistic, projecting an 86,050 (-2.2%) job decline.
Chicago home prices continued to
plummet in 4Q08. The National Association of Realtors report that the
median single-family home price fell
-16.6% y-o-y in 4Q08 to $217,800.
Data from the Case-Shiller and OFHEO home price indices lend support.
A -14.3% y-o-y decrease was reported
in the former, while the OFHEO metric suggested a more modest -4.3%
SNAP SHOT
annual price decline. An uptick in
foreclosure activity was partially to
blame for price weakness. RealtyTrac.com estimate that 77,226 homes
(2.49% of the metro housing stock)
were in foreclosure in 2008, up 53.4%
from 2007.
Increased apartment supply and soft
demand contributed to falling occupancy in 4Q08. Developers completed 738 units during the period and
tenants vacated 79 units. Consequently, the average occupancy rate
decreased from 94.8% in 3Q08 to
94.6%. Data from the Appraisal Research Counselors provide additional
insight into Downtown Class A property trends. The source reports that
slow leasing at new properties and
steady competition from condos forrent gave rise to a 220 basis points
sequential decline in occupancy.
The supply and demand imbalance
exerted downward pressure on rents.
The average effective rent decreased
-0.1% sequentially in 4Q08, the first
drop since the same period of 2005.
On an annual basis, the average asking rent increased 2.4% to $1,071 in
4Q08. Effective rents advanced at a
slower 1.6% y-o-y pace as concessions edged higher.
Multifamily asset trade activity was
relatively subdued in 2008. Real
Capital Analytics count 43 investor
grade transactions, totaling $970 million in sales proceeds. By comparison, sales volume totaled more than
$2.9 billion in 2007. The average
price per unit decreased -17% to
$119,524.
Based on Reis fundamental forecasts
and an assumed going-in yield of
6.2%, total (5.9%) and risk-adjusted
returns for Chicago are below the
RED 50 averages. Consequently,
RCR assign an “Opportunistic” rating for metro assets.
Y-o-y
change
Projected
2009
(5.4% - 4Q08)
60bps
90bps
Effective
Rents
1.6%
2.5%
260bps
unch
79.6m
79.9m
Vacancy
($997 - 4Q08)
Cap Rate
(7.5% - 4Q08)
Employment
(3,828.7m - 4Q08)
KEY POINTS
•
A surge in supply and weak tenant demand
produced a 20 basis point increase in
vacancy from 5.2% in 3Q08 to 5.4% in
4Q08. A net of 79 units were vacated and
738 units were completed during the period.
On a year-over-year basis, vacancy increased
60 basis points due to negative net
absorption of 874 units.
•
The average asking rent decreased -0.1%
sequentially to $1,071 in 4Q08. Effective
rent declined at a commensurate pace to
$997.
Annual effective rent growth
decelerated from a cyclical high of 5.4% in
3Q07 to 1.6% in 4Q08.
•
Reis expect fundamentals to deteriorate in
2009. The service forecasts a 90 basis point
increase in vacancy and a -2.5% decline in
the average effective rent.
•
According to the National Association of
Realtors the median price of a single-family
home decreased -16.6% year-over-year from
$261,000 in 4Q07 to $217,800. Chicago
registered a -14.3% annual decrease in the
Case-Shiller home price index in December.
•
Total return metrics do not support an active
buying program. Invest Opportunistically.
Chicago - Naperville - Joliet, Illinois Metropolitan Division - 4Q 2008
VACANCY TRENDS
•
•
Apartment demand was weak in the fourth quarter. A net of 79 units
were vacated during the period and developers completed 738,
contributing to a 20 basis point increase in the metro vacancy rate. The
vacancy rate increased 60 basis points year-over-year, owing to
negative net absorption of 874 units and the completion of 2,176 units.
According to the Appraisal Research Counselors, the Class A
downtown occupancy rate fell from 92.8% in 3Q08 to 90.6% in 4Q08.
Apartment fundamentals are expected to soften this year. Reis forecast
negative net absorption of 2,574 units and supply of 1,246 units in
2009. As a result the vacancy rate is expected to rise to 6.3% by yearend.
Source: Reis, Inc.
8%
Metro Vacancy Rate
•
Apartment Vacancy Trends
4.8%
6%
4%
Chicago
U.S.A.
2%
0%
4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q
RANK: 15th out of 50
COMMENT: Reis report that 1Q09 vacancy rose to 6.0%.
99 00 01 02 02 03 04 05 05 06 07 08 08
RENT TRENDS
•
•
•
Metro Rent Trends
Source: Reis, Inc.
Rent growth was subdued in 2008. The average effective rent declined
-0.1% sequentially to $997 in 4Q08. On an annual basis, effective
rents increased 1.6%. The pace of asking rent growth also decelerated
from 3.5% in 3Q08 to 2.4% in 4Q08.
The Glenview / Evanston (-2.4%) and Rogers Park / Uptown (-2.5%)
submarkets experienced the sharpest sequential asking rent declines.
Data from the Appraisal Research Counselors show that increased
concessions produced a -6.2% year-over-year decline in the average
effective rent among downtown Class A properties. The average
effective rent per square foot fell from $2.25 in 4Q07 to $2.11.
Reis forecast effective rent to decline -2.5% in 2009. The service
projects a modest increase of 0.3% in 2010.
8%
Asking
Effective
6%
YoY Rent Trend
•
2%
1.6%
0%
-2%
-4%
4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q
99 00 01 02 02 03 04 05 05 06 07 08 08
RANK: 36 out of 50
Metro Multifamily Cap Rate Trend
PROPERTY MARKET & CAP RATE TRENDS
•
•
Source: Reis, Inc.
Real Capital Analytics report that 20 mid/high rise Chicago assets
traded in 2008, totaling $459 million in sales proceeds. Garden
property trade volume fell -50% to $511 million.
8.0%
The metro average price per unit decreased -17% to $119,524. The
average cap rate was essentially unchanged at 6.1%.
6.5%
Loopnet.com report seven transactions involving properties priced at or
above $5 million in 4Q08. The average price was about $73,500 per
unit.
Generic Chicago asset net operating income fell -0.6% from 4Q07 to
4Q08, ranking 32nd among the RED 50. Based on an assumed goingin yield of 6.2%, RCR calculate a 5.9% expected rate of total return.
7.5%
7.0%
Cap Rate
•
2.4%
4%
th
•
5.4%
6.0%
5.5%
5.0%
4.5%
4.0%
4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
06 07 07 07 07 08 08 08 08
NOTABLE TRANSACTIONS
Property Name
Yorktree
Fox Run
Northshore Estates
Farcroft Apartments
RED CAPITAL Research
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
A
BC
A
BC
October 2008
November 2008
January 2009
January 2009
$23.0
$12.3
$14.0
$8.1
$78,498
$55,705
$55,556
$93,605
6.0%
8.4%
10.5%
5.6%
Chicago - Naperville - Joliet, Illinois Metropolitan Division - 4Q 2008
Metro Median Single Family Home Prices
DEMOGRAPHICS & HOUSING MARKET
Source: National Association of Realtors
$300
MSA
•
US
•
Prices (000)
$250
$200
•
$150
$100
05
06
07
Y
Y
Y
•
4Q 1Q 2Q 3Q 4Q
07
08
08
08
08
Payroll Employment Growth
Chicago registered a -17.6% year-over-year decline in the Case-Shiller
home price index in February. By comparison, the composite index of
the top 20 markets fell -18.6% over-the-period.
The Illinois Association of Realtors estimate that Chicago-area home
sales decreased -24.5% year-over-year in January. Home prices in the
city of Chicago fell about -29% from $290,000 in January 2008 to
$206,250 in the same month this year.
Past 12 Months
•
60
40
Annual Chg (000)
According to the National Association of Realtors, the median price of
a single-family home decreased -16.6% year-over-year to $217,800 in
4Q08. The source calculates a $209,400 fourth quarter median condo
price, down -11.4% from the same period of last year.
EMPLOYMENT TRENDS
Source: BLS Data & RCG Research Forecast
13.1
20
0
-20
Metro employment fell sharply in March as a net of -142,700 (-3.7%)
positions were trimmed from payrolls year-over-year. The decline
compares to the monthly average annual loss of -27,000 jobs during
the full year 2008. On a seasonally-adjusted basis, the unemployment
rate increased 250 basis points from 6.6% in December to 9.1% in
March.
-40
Fourth Quarter 2008
-60
•
-80
-79.9
-100
99 00 01 02 03 04 05 06 07 08 09f 10f
Year-over-year Payroll Growth Rate
3%
Chicago
USA
2%
•
•
Source: BLS
•
1%
0%
Rate
The Census Bureau report that the homeownership rate in Chicago fell
10 basis points year-over-year to 67.9% in 4Q08.
-1%
-2%
Job attrition accelerated from -28,500 (-0.7%) year-over-year in 3Q08
to -79,600 (-2.0%) in the fourth quarter. The reduction was the largest since 3Q01.
Weak retail trends were partially to blame. Following a -5,700-job
year-over-year loss in 3Q08, the sector trimmed -13,500 workers
year-over-year in 4Q08.
The administrative support subsector was also responsible. Layoffs
spiked from -12,000 year-over-year in 3Q08 to -22,700 in 4Q08. The
rest of the business service sector also contracted, shrinking by a net
of -1,300 workers year-over-year.
Job creation among health care and education service establishments
remained relatively firm. Combined the sectors added 15,400 workers year-over-year in 4Q08, down from a 16,200 job advance in the
previous period.
Forecast
-3%
•
-4%
-5%
RCR forecast a net loss of -79,900 (-2.1%) jobs in 2009, but a 13,100
(-0.3%) job gain next year.
99 00 01 02 03 04 05 06 07 08 09
RANK: 29th out of 50
RED Estimated Generic Unlevered Asset Total Return Probabilities
10%
Chicago
5%
2.9%
Minneapolis
4.7%
2.4%
4.6%
5.9%
6.0%
7.1%
7.4%
8.9%
9.4%
0%
90%
70%
50%
30%
10%
RED CAPITAL Research
SUBMARKET TRENDS
Submarket
Lincoln Park
City West
Gold Coast
The Loop
South Shore
Southeast Cook County
Southwest Cook County
Downers Grove
Woodridge / Lisle
Aurora / Naperville
Wheeling
Glendale Heights
Schaumburg / Hoffman
Palatine
Glenview / Evanston
Rogers Park / Uptown
Belmont-Montrose
Oak Park
Glen Ellyn / Wheaton
O'Hare
East Lake County
West Lake County
McHenry County
Kane County
Joliet
Metro
Effective Rent
Physical Vacancy
4Q07
4Q08
Change
4Q07
4Q08
$1,194
$920
$1,534
$1,576
$871
$803
$797
$878
$892
$960
$987
$988
$978
$1,022
$1,042
$779
$1,120
$894
$921
$873
$881
$883
$846
$899
$767
$981
$1,212
$957
$1,594
$1,572
$885
$789
$808
$906
$913
$1,001
$991
$1,029
$956
$1,029
$1,025
$778
$1,125
$894
$941
$867
$909
$871
$871
$933
$771
$997
1.5%
4.1%
3.9%
-0.3%
1.6%
-1.8%
1.3%
3.2%
2.4%
4.3%
0.4%
4.2%
-2.2%
0.6%
-1.7%
-0.2%
0.4%
0.1%
2.1%
-0.7%
3.2%
-1.4%
3.0%
3.8%
0.5%
1.6%
2.0%
6.3%
5.7%
5.7%
5.1%
3.3%
5.5%
6.2%
5.3%
5.2%
3.6%
4.8%
5.9%
9.2%
4.2%
2.4%
2.7%
5.0%
4.9%
3.2%
5.7%
4.7%
4.2%
4.4%
3.8%
4.8%
2.6%
10.8%
6.8%
12.5%
5.5%
4.3%
5.1%
5.2%
5.1%
5.7%
3.6%
4.3%
5.4%
8.1%
3.2%
3.2%
3.6%
4.5%
8.1%
4.1%
5.6%
5.9%
7.4%
4.5%
5.9%
5.4%
SUPPLY TRENDS
•
•
•
Source: Reis, Inc
6,000
rd
4,000
According to a construction report dated February 23 , 2,924
apartment units were under construction in the Windy City. Nearly
half of the units (1,383) were located in the Gold Coast submarket.
The condo development pipeline was robust as 7,944 units were under
construction in February. More than 5,100 units were located in the
Gold Coast and Loop submarkets. Another 1,868 units were under
construction in the City West and South Shore submarkets.
Data from the Appraisal Research Counselors show that Downtown
condo sales were negative in the fourth quarter as the number of
canceled contracts exceeded sales. For the year, condo sales fell -84%
to 592.
Daniel J. Hogan
Director of Research
[email protected]
614-857-1416
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-50 bps
320 bps
90 bps
-10 bps
120 bps
320 bps
10 bps
210 bps
60 bps
Completions and Absorption
Two apartment assets totaling 738 units were completed in 4Q08.
Both properties are located in the Loop submarket. Developers added
2,176 units to the metro apartment stock in calendar 2008.
William T. Hinga
Business Development
[email protected]
614-857-1499
2,000
Units
•
Change
0
-2,000
-4,000
Completions
-6,000
Absorption
-8,000
02
03
04
05
06
07
08 09f 10f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
www.redcapitalgroup.com
800.837.5100
©2008 RED CAPITAL GROUP (11/08)
The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting or financial advice, or recommendations to buy or
sell currencies or securities or to engage in any specific transactions. Information has been gathered from third party sources and has not been independently verified or accepted by RED
CAPITAL GROUP. RED makes no representations or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the
report. RED cannot be held responsible for any errors or misrepresentations contained in the report or in the information gathered from third party sources. Under no circumstances should
any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Any reliance upon this information is
solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Any views expressed herein are subject to change without notice due to market conditions and other factors.
RED CAPITAL GROUP®
Market Overview
Chicago, Illinois
Multifamily Housing Update
December 2008
EXECUTIVE SUMMARY
T
o paraphrase Herman Melville’s
character Ishmael, it was a
damp, drizzly November in the
soul of Chicago’s real estate markets.
At press time, shopping mall owner
General Growth Trust verged on a $900
million debt default; a construction
lender threatened to declare the 92-story
River North Trump International condo
tower in default; and sales of all types of
residential properties were virtually
non-existent. Indeed, Chicagoland home
sales and prices fell -17% and -10%,
respectively in October, while 3Q08
institutional-quality apartment sales
plummeted more than 80% from the
comparable period of 2007.
Tight credit was a factor in each of the
foregoing situations, but Chicago’s sputtering economy also played a role. After
producing 31,000 payroll jobs in
FY2007, and continuing at a 20,500-job,
0.5% pace in 1Q08, the metro economy
stalled in the spring and begin to hemorrhage in the fall. Chicago establishments
reduced payrolls at 5,700-job, -0.1%
year-over-year pace in 3Q08, and accelerated attrition to a 15,600-job, -0.4%
pace in October.
Manufacturing, construction and telecom industry cuts were largely responsible, as these sectors trimmed headcounts
by 14,200 (-2.4%) in 3Q08, up from
5,000 (-0.9%) cuts during 1Q08.
Weaker trends also were evident in
some high-skilled service industries,
especially finance, business consulting,
advertising and corporate management.
RED CAPITAL Research expect Chicago job trends to continue to deteriorate. The group’s econometric payroll
model generates a 4Q08 forecast of
8,800 net job cuts, followed by a loss of
28,000 (-0.7%) jobs in 2009. The forecast confidence interval ranges from
18,000 to 39,000 job cuts. By contrast,
US payrolls are forecast to fall by 1.0%.
Apartment owners retreated from illtimed second quarter rent hikes that
SNAP SHOT
contributed to a net loss of 1,473 tenants
and a 50 basis point average occupancy
rate decrease. Absorption recovered in
3Q to a net gain of 71 units, allowing
average market occupancy to hold
steady at 94.8%. Gold Coast properties
experienced strong demand, chipping 60
bps from 2Q’s supply-elevated 7.8%
vacancy rate. Conversely, the Loop and
City West submarkets suffered setbacks,
losing 237 combined tenants, producing
100 and 70 bps vacancy rate increases
respectively, to 10.3% and 7.6%.
As noted above, owners reversed course
on pricing, holding effective rents unchanged following 2Q’s stiff $13, 1.3%
sequential rent hike. Fourteen of Reis’s
25 submarkets saw effective rents fall
quarter-to-quarter, and rents in four submarket dipped below year-earlier levels.
Concession levels were sharply higher,
rising an average of $5 to the equivalent
of 6.9% of gross rent revenue. Six
months earlier, lease discounts consumed only 6.2% of face rent.
Reis expect market fundaments to continue to deteriorate at the margins
through 2009. The service forecasts a
10 bps average occupancy rate decline
by year-end, and a 40 bps drop to 94.3%
by the end of 2009. Flat effective rent
growth is projected for 4Q09, with average gains of only $17 (1.7%) anticipated
for the calendar year 2009.
Third quarter property sales were down,
reflecting tougher credit conditions and
a widening gap between buyer and
seller price expectations. Loopnet.com
logged six 3Q08 $5mm trades for $134
mm of proceeds, compared to 16 sales
for $775mm in the same period of 2007.
Using a 5.2% cap rate, perhaps too low
for the current market, RCR estimate
6.0% generic Chicago total returns,
20bps above the RED 50 mean. Riskadjusted returns also are above the R50
average, elevating Chicago above the
primary market pack: buy with caution.
Y-o-y
change
Projected
YE2008
60bps
bps
10 bps
2.7%
1.8%
Vacancy
(5.2% - 3Q08)
Effective
Rents
($998 - 3Q08)
Cap Rate
(6.3% - 3Q08)
Employment
(3,899.0m - 3Q08)
130 bps
5.7m
2.1m
KEY POINTS
•
Demand for Chicagoland apartments
stabilized following a disappointing spring
leasing season. After vacating a net of 1,473
units in 2Q, tenants leased a net of 71 units
in 3Q, holding occupancy steady at 94.8%.
•
Owners retooled pricing strategy, holding
average effective rent steady in 3Q08 after
2Q’s aggressive $13, 1.3% hike.
•
Tenant interest in neighborhoods near the
Loop shifted toward the Gold Coast, where
owners net leased 174 units during 3Q08. By
contrast, City West and Loop properties,
experienced 237 net move-outs, causing
vacancy to rise 70 to 100 bps.
•
Property market prices and trade velocity
deteriorated in the fall. Home values fell
2.74% in 3Q08, moderately worse than the
2.68% U.S. average, according to OFHEO.
Large apartment sales activity declined 82%
from 2007, while cap rates increased 50 to
100 bps, according to studies published by
Marcus & Millichap CB Richard Ellis.
•
Weaker rent and occupancy outlooks lead
RCR to estimate lower Chicago MFH total
returns. They remain better than the RED 50
average though: accumulate with caution.
Chicago-Naperville-Joliet, IL Metropolitan Division - 3Q 2008
VACANCY TRENDS
•
•
According to data published by Reis, Chicago-area apartment owners
rebounded from a disappointing 2Q08, when owners lost a historical
second quarter worst –1,734 unit leases, with a better 71-unit net
positive absorption performance, holding vacancy steady at 5.2%.
An alternative data source mining an inventory 42% larger than Reis’s
recorded negative net absorption of -154 units in 3Q08. This service
reported a 4.0% average vacancy rate for the period, 10 basis point
sequential quarter and 35 bps year-over-year rate increases.
Source: Reis, Inc.
8%
Metro Vacancy Rate
•
Apartment Vacancy Trends
Vacancy rates in 17 of Chicago’s 24 submarkets increased during the
12 months ended in September, 3 by more than 300 bps. The Loop
and Loop collar markets exhibited the largest vacancy rate increases.
6%
4.6%
4%
CHICAGO REIS
U.S.A. REIS
U.S.A. OTH
CHICAGO OTH
2%
0%
2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q
00 01 01 02 03 04 04 05 06 07 07 08
RANK: 18th out of 50
RENT TRENDS
•
•
•
Metro Rent Trends
Effective rent trends came to an abrupt halt in the third quarter.
Property owners pushed asking rents $5 (0.5%) higher to $1,072, but
concessions over-balanced the advance, leaving average effective rent
unchanged at $998. This was the weakest quarter-on-quarter trend
recorded since 4Q05.
Reis posted a $26, 2.7% year-over-year effective rent growth estimate.
Sequential quarter effective rents fell in 14 submarkets; five by more
than -1.0%. Notably, the Loop submarket - where rents average a
metro high $1,589 — experienced a $6 (-0.4%) average rent decline.
An alternative data source that reports only face rents, recorded a $5, 0.5% sequential quarter decline, leaving metro rents $14 (1.3%) higher
year-over-year. This source sees negative growth through 2Q09.
Source: Reis, Inc.
8%
Asking
Effective
6%
YoY Rent Trend
•
2%
2.7%
0%
-2%
-4%
2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q
00 01 01 02 03 04 04 05 06 07 07 08
RANK: 36 out of 50
PROPERTY MARKET & CAP RATE TRENDS
•
•
Metro Multifamily Cap Rate Trend
Source: Reis, Inc., NCREIF
Slower transaction velocity was the order of the day. RCR identified
only six 3Q08 transactions involving apartment assets valued at $5mm
or more totaling $134mm of proceeds. These data compare to 15
trades for $776mm in the comparable period of 2007.
The median cap rate of 3Q trades identified by Reis was 6.3%; but
assets acquired in urban infill locations were priced at considerably
lower yields. Properties in Lincoln Park and Rogers Park traded in
September at cap rates in the low-5% range.
A survey of local market experts by CB Richard Ellis found that cap
rates of stabilized class-A assets increased by about 100 bps to the
6.0% to 6.5% range from May to November 2008.
7.0%
Reis Composite
NCREIF
6.5%
Cap Rate
•
3.5%
4%
th
•
5.2%
6.0%
5.5%
5.0%
4.5%
4.0%
3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q
Among primary markets Chicago offers above average total and riskadjusted returns, supporting a cautious accumulate ranking.
06 06 07 07 07 07 08 08 08
NOTABLE TRANSACTIONS
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
Yorktree Apts (Glen Ellyn)
Hunter’s Ridge (Kane County)
B
B
Aug-2008
Jul-2008
$21.1
$35.3
$72,014
$86,541
6.7%
6.3%
428 W. Belden (Lincoln Park)
A-
Sep-2008
$11.6
$180,625
5.2%
Lakehaven (Gln Ellyn Crl Strm)
B
Jul-2008
$52.3
$106,199
4.8%
Property Name
RED CAPITAL Research
Chicago-Naperville-Joliet, IL Metropolitan Division - 3Q 2008
DEMOGRAPHICS & HOUSING MARKET
Metro Median Single Family Home Prices
Source: National Association of Realtors
$300
CHICAGO
US
•
Prices (000)
$275
•
$250
$225
$200
•
$175
05
06
Y
Y
1Q 2Q 3Q 4Q 1Q 2Q 3Q
07 07
07
07 08
08
08
Payroll Employment Growth
Shadow market supply could negatively impact Loop apartment
occupancy over the next several quarters. The delivery of thousands of
unsold condo units combined with job cuts at professional and
financial services firms located in the Loop will exacerbate the trend.
Past 12 Months
•
60
40
Annual Chg (000)
Sales of condominiums in the city of Chicago plunged in 3Q08 and
October, falling 30.1% and 35.6% from the same periods of 2007.
Only 54 new and resale Loop condos sold in 3Q08, down more than
50% from last year. More than 25 condo properties located in and
around the Loop will be delivered by the end of 2009.
EMPLOYMENT TRENDS
Source: BLS Data & RCG Research Forecast
20
2
•
0
-20
-40
-28
-60
Chicago establishments created a net of 6,400 jobs in the 12-month
period ended in October, down from a 34,600 (0.9%) gain recorded in
the comparable period one year earlier.
Skilled service industries were the principal source of the slowdown.
Financial, business, health care and education services combined to
form 7,900 jobs in the latest period, down sharply from the 27,900
jobs created in the 12-month period ended in October 2007.
Third Quarter 2008
-80
•
-100
99 00 01 02 03 04 05 06 07 08f 09f
•
Year-over-year Payroll Growth Rate
Source: BLS
3%
CHI
USA
•
2%
1%
Rate
The National Association of Realtors report that the median price of a
metro home sold in 3Q08 was $250,800, a decrease of 12.0% from the
comparable period of 2007. The Illinois Realtors Association released
data showing metro sales down 22% from last year during the period.
•
0%
-1%
-2%
Economic condition deteriorated in the third quarter, mirroring trends
observed in the broader national economy. Metro establishments
trimmed a net of 5,700 (-0.1%) jobs in the period, measured on a
year-over-year basis. This compares to a –0.3% loss for the nation.
Continued weakness in construction, manufacturing and telecommunications was exacerbated by deteriorating trends in the skilled services and some decay in the tourism industry, giving rise to weaker
Windy City payroll trends.
The unemployment rate in October was 6.4%, up 180 bps over-theyear. The U.S. not-seasonally adjusted rate was 6.1% in October.
Trends in the professional, scientific and technical services sub-sector
were moderately stronger in 3Q08, bucking the larger business service sector trend. Firms expanded at a 4,100-job, 1.4% pace, including a 2.3% advance in the computer system design segment.
Forecast
-3%
•
-4%
99 00 01 02 03 04 05 06 07 08
10%
8%
RED Estimated Generic Unlevered Asset Total Return Probabilities
CHI (RAI=2.80)
4.9%
6%
4%
RCR forecast further deterioration of metro payroll trends. The
econometric model foresees a loss of 8,800 (-0.2%) jobs in 4Q08,
followed by cuts totaling 28,000-jobs or -0.7% in 2009. By way of
comparison, ‘09 US payrolls are forecast to fall approximately -1.0%.
3.2%
M/SP (RAI=2.28)
6.0%
4.6%
6.0%
7.1%
8.7%
9.2%
7.3%
2.4%
2%
90%
70%
50%
30%
10%
RED CAPITAL Research
SUBMARKET TRENDS
Effective Rent
Submarket
Lincoln Park
City West
Gold Coast
The Loop
South Shore
Southeast Cook County
Southwest Cook County
Downers Grove
Woodridge / Lisle
Aurora / Naperville
Wheeling
Glendale Heights
Schaumburg / Hoffman Estates
Palatine
Glenview / Evanston
Rogers Park / Uptown
Belmont-Montrose
Oak Park
Glen Ellyn / Wheaton
O'Hare
East Lake County
West Lake County
McHenry County
Kane County
Joliet
Metro
Physical Vacancy
3Q07
3Q08
Change
3Q07
3Q08
$1,179
$922
$1,544
$1,542
$863
$803
$798
$858
$879
$951
$988
$972
$964
$1,024
$1,036
$759
$1,109
$890
$911
$851
$867
$894
$828
$886
$754
$1,207
$943
$1,586
$1,589
$880
$799
$795
$901
$913
$993
$995
$1,013
$987
$1,036
$1,057
$799
$1,124
$885
$943
$882
$905
$892
$881
$926
$782
2.4%
2.3%
2.7%
3.0%
2.0%
-0.5%
-0.4%
5.0%
3.9%
4.4%
0.7%
4.2%
2.4%
1.2%
2.0%
5.3%
1.4%
-0.6%
3.5%
3.6%
4.4%
-0.2%
6.4%
4.5%
3.7%
2.3%
7.3%
4.0%
4.6%
5.3%
3.6%
4.9%
6.7%
5.8%
4.2%
2.7%
4.3%
5.2%
6.2%
5.3%
2.8%
3.2%
4.7%
5.5%
4.1%
4.8%
5.8%
5.3%
5.3%
3.5%
2.8%
10.3%
7.2%
7.6%
5.9%
4.0%
6.0%
5.3%
5.0%
5.4%
4.3%
4.3%
4.6%
7.3%
3.7%
3.1%
3.3%
4.2%
5.5%
4.0%
5.7%
7.2%
5.7%
4.4%
5.6%
50 bps
300 bps
320 bps
300 bsp
60 bps
40 bps
110 bps
-140 bps
-80 bps
120 bps
160 bps
Unchd
-60 bps
110 bps
-160 bps
30 bps
10 bps
-50 bps
Unchd
-10 bps
90 bps
140 bps
40 bps
-90 bps
210 bps
$972
$998
2.7%
4.6%
5.2%
60 bps
SUPPLY TRENDS
•
•
Completions and Absorption
5,000
Supply promises to be heavy in urban submarkets. The Loop, Gold Coast
and City West neighborhoods will add a total of 1,197 units in 2009, an
increase of 1.9%. The figures will rise to 1,604 units and 2.6% in 2010.
With shadow condo supply crowding the market, vacancy in core
Chicago markets is likely to undergo a sharp increase.
Change
3,000
1,000
-1,000
Completions
Absorption
-3,000
03
Reis project a 1.15% increase of metro apartment stock by 2010.
04
05
06
07
08f
09f
10f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
Daniel J. Hogan
Director of Research
[email protected]
614-857-1416
William T. Hinga
Business Development
[email protected]
614-857-1499
www.redcapitalgroup.com
800.837.5100
Columbus, OH_Boston, MA_Charlotte, NC_Chicago, IL
Denver, CO_Fredericksburg, TX_Irving, TX_Jupiter, FL_Linwood, NJ_Nashville, TN
Newport Beach,CA_Reston, VA_San Diego, CA_Syracuse, NY
©2008 RED CAPITAL GROUP (11/08)
Market Overview is a publication of RED CAPITAL GROUP. If you are interested in other metro areas we cover or would like to
read about the research methodology we apply in our reports, please visit us at www.redcapitalgroup.com/research.
RED CAPITAL GROUP®
Market Overview
Chicago, Illinois
Multifamily Housing Update
August 2008
EXECUTIVE SUMMARY
M
etro economic conditions
continued to deteriorate in
2Q08.
Area establishments hired a net of 2,600 (0.1%)
workers year-over-year in 2Q08,
down sharply from the 20,500 (0.5%)
advance recorded in the previous
quarter. The slowdown was partially
attributable to weakness in housingrelated employment sectors. Construction and finance firms cut 12,300
positions from payrolls y-o-y in 2Q08
as compared to the 5,600 jobs lost in
the previous period.
Business service providers adopted a
more tentative approach to staffing.
Specifically, professional service
firms (that provide architectural, engineering, accounting, legal services,
etc.) reduced hiring from a monthly yo-y average of 6,500 in 2007 to 3,400
in 2Q08. The other main component
of business services is a conglomerate
of temporary staff agencies and administrative oriented firms. This contingent lost 2,600 worker y-o-y in
2Q08, reversing the 2,100-job gain
posted in 1Q08.
Sluggish payroll trends combined
with steady labor force growth resulted in a sharp increase in the metro
unemployment rate. The seasonallyadjusted ratio rose from 4.9% in December 2007 to 7.3% in July. On a
non seasonally-adjusted basis, July’s
7.5% rate was 210 basis points above
the metric from the same month of
2007.
RED CAPITAL Research expect
metro job formation rates to hover
around zero through 2009.
Our
econometric model generates point
estimates of 1,000 (0.0%) new jobs
this year but a -3,000 (-0.1%) job loss
in 2009.
National Association of Realtors data
show that the median price of a single-family MSA home fell -9.0% y-oy to $257,600 in 2Q08. The source
SNAP SHOT
notes that price trends were positive
on the condo side as the median
condo price rose 5.1% to $244,300.
But the price increase belies the weak
demand for downtown Chicago condo
units. A total of 6,817 Cook County
condos were sold in 2Q08, down
48.8% from 2Q07.
The metro apartment occupancy rate
fell 50 basis points sequentially as a
net of 1,473 move-outs were recorded. In addition, developers added
958 units to the rental stock, surpassing the number of annual apartment
units delivered in 2006 and 2007.
The pace of effective rent growth improved in 2Q08 after a dismal performance in the first quarter. The
average effective rent increased 1.3%
sequentially to $998. Asking rents
rose at a modestly slower 1.2% sequential pace. Owing to poor effective rent growth in 1Q08, the annual
rate of asking rent growth (4.6%) outpaced the advance in effective rents
(4.4%). Consequently, the size of the
average concession package rose from
6.3% of asking rent in 2Q07 to 6.5%.
Chicago apartment asset sales slowed
in 1H08. According to Real Capital
Analytics, 34 investor grade trades
totaling $810.2 million in proceeds
closed in the first half. By comparison, sales volume topped $2.8 billion
in calendar 2007. Asset price results
were mixed. The average price per
unit applicable to garden-style properties rose 12.1% from $89,363 to
$100,220.
Conversely, mid- and
high-rise unit prices fell nearly 30%
to $153,570.
Based on a going-in yield of 5.0%,
RED estimate generic metro asset
five-year holding period total returns
of 7.3%, ranking 20th among the RED
50. We assign an “Accumulate”
ranking but recommend that buyers
proceed cautiously due to condo supply and economic growth concerns.
Y-o-y
change
Vacancy
Projected
2008
10bps
(5.2% - 2Q08)
40bps
Effective
Rents
4.4%
3.1%
30bps
unch
2.6k
1k
($998 - 2Q08)
Cap Rate
(6.3% - 2Q08)
Employment
(3,889.5k - 2Q08)
KEY POINTS
•
•
•
•
•
The metro vacancy rate rose 50 basis points
sequentially to 5.2% in 2Q08. The increase
was partially attributable to negative net
absorption of 1,473 units. Supply of 958
units also contributed.
The annual pace of asking rent growth
exceeded the gain in effective rent for the
second consecutive quarter in 2Q08. Asking
and effective rents increased 4.6% and 4.4%
year-over-year, respectively.
Reis expect the vacancy rate to fall to 5.1%
in 2H08 but rise to 5.4% next year. The
service forecasts supply of over 3,500 units
from July 2008 to December 2009.
Investor interest for mid- and high-rise
apartment assets waned this year. Real
Capital Analytics count 14 trades totaling
$344.6 million in sales proceeds. Reis
estimate that sales volume fell 80% from
1H07 to 1H08. Conversely, the trend of
suburban garden-style asset sales was mostly
unchanged from a year-ago.
The 7.3% expected rate of total return from
generic metro asset investment ranks 20th
among the RED 50. On this basis, assign an
“Accumulate” rating.
Chicago - Naperville - Joliet, Illinois Metropolitan Division - 2Q 2008
VACANCY TRENDS
•
•
The metro vacancy rate increased 50 basis points sequentially to 5.2%
in 2Q08. The increase was attributable to negative net absorption of
1,473 units and the completion of 958 units.
On an annual basis, the vacancy rate rose 40 basis points despite
constructive supply trends. Apartment stock rose 0.2% from 2Q07 to
2Q08 as construction of 1,490 apartment units was partially balanced
by 714 net condo conversions.
Reis expect only modest supply and stronger demand in 2H08 to
produce a 10 basis point decrease in the metro vacancy rate. But rapid
supply in 2009 is forecast to give rise to a 30 basis points increase in
vacancy to 5.4%.
Source: Reis, Inc.
8%
Metro Vacancy Rate
•
Apartment Vacancy Trends
6%
4.8%
4%
2%
Chicago
U.S.A.
0%
1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q
00 00 01 02 03 03 04 05 06 06 07 08
RANK: 18th out of 50
RENT TRENDS
•
•
Metro Rent Trends
The pace of sequential effective rent growth rebounded in 2Q08. After
posting a meager 0.4% advance in 1Q08, owners pushed the average
effective rent up 1.3% in 2Q08. On an annual basis effective rent
growth continued to decelerate, however, falling from a cyclical peak
of 5.4% in 3Q07 to 4.4% in 2Q08.
Asking rents increased 4.6% year-over-year, outpacing the advance in
effective rent for the second consecutive quarter. This reflected an
increase in the average concession package from 6.3% of asking rent in
2Q07 to 6.5% in 2Q08.
Reis forecast year-over-year effective rent growth to decelerate to 3.1%
this year but rebound to 3.6% in 2009.
Source: Reis, Inc.
8%
Asking
Effective
6%
YoY Rent Trend
•
5.2%
4.6%
4%
4.4%
2%
0%
-2%
-4%
1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q
RANK: 21st out of 50
00 00 01 02 03 03 04 05 06 06 07 08
Metro Multifamily Cap Rate Trend
PROPERTY MARKET & CAP RATE TRENDS
•
•
According to Real Capital Analytics 34 investor grade properties
traded in 1H08, totaling $810.2 million in sales proceeds. Garden
property trade activity ($465.6 million) was virtually on-pace to match
last year’s total ($997.8 million) but high-rise sales decelerated
sharply. Mid- to high-rise asset trade volume totaled $344.6 million in
1H08, compared to $1,811.7 million in full-year 2007.
Based on Reis trade data mid- to high-rise trade activity was down
about 80% from $402.1 million in 1H07 to $222.7 million in 1H08. It
is important to note that the previous year’s tally included a trade
priced at $300 million.
6.0%
Cap Rate
•
Source: Reis, Inc.
6.5%
5.5%
5.0%
4.5%
4.0%
2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q
RED calculate a 7.3% expected rate of total return from generic metro
asset investment, ranking 20th among the RED 50. Owing to relatively
low historic volatility, Chicago boasts the 16th highest measure of riskadjusted returns.
06 06 06 07 07 07 07 08 08
NOTABLE TRANSACTIONS
Property Name
Lakehaven Apartments
Avalon at West Grove
Woodlake Apts
RED CAPITAL Research
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
B
B
A
July 2008
June 2008
May 2008
$52.3
$38.7
$34.3
$106,199
$96,625
$131,731
4.8%
5.5%
5.3%
Chicago - Naperville - Joliet, Illinois Metropolitan Division - 2Q 2008
Metro Median Single Family Home Prices
DEMOGRAPHICS & HOUSING MARKET
Source: National Association of Realtors
$300
MSA
•
US
•
Prices (000)
$250
$200
•
$150
$100
•
04
05
06
Y
Y
Y
2Q 3Q 4Q 1Q 2Q
07
07
07
08
08
Payroll Employment Growth
Population growth in the Chicago metropolitan division accelerated
from 0.5% in 2006 to 0.7% last year.
The median price of a single-family MSA home fell 9.0% year-overyear to $257,600 in 2Q08. Condo prices rose 5.1% over-the-year to
$244,300 in 2Q08.
The Illinois Association of Realtors report that home sales velocity fell
28.9% year-over-year as 20,679 condos and single-family homes were
sold. The source estimates that the median price was $250,000, down
-2.3% from $256,000 in 2Q07.
The metro registered a -9.5% year-over-year decrease in the CaseShiller home price index and a -1.1% decline in the OFHEO home
price index.
EMPLOYMENT TRENDS
Source: BLS Data & RCG Research Forecast
Second Quarter 2008
60
•
Annual Chg (000)
40
20
1
0
•
-3
-20
-40
-60
-80
•
-100
99 00 01 02 03 04 05 06 07 08f 09f
•
Year-over-year Payroll Growth Rate
Source: BLS
3%
•
1%
Rate
Faster attrition among construction firms contributed to the slowdown. Sector payrolls fell 7,300 year-over-year in 2Q08, following a
1,900-job loss in 1Q08. Similarly, manufacturers cut 3,500 positions
from payrolls in 1Q08 and 5,300 in 2Q08.
Business service hiring was dismal in 2Q08 as 900 workers were
hired year-over-year. By comparison, the sector posted average
monthly gains of 23,100 in 2006 and 13,800 in 2007. The weakness
was largely due to contraction among administrative support service
providers.
Leisure service firms unexpectedly reduced payrolls in 2Q08. Sector
establishments cut 600 jobs, following a 2,400-job advance in 1Q08.
Forecast
Chicago
USA
2%
Metro payroll growth decelerated sharply, slowing from 20,500
(0.5%) in 1Q08 to 2,600 (0.1%) in 2Q08. Job trends turned negative
as 3,900 positions were lost in the twelve-month period ended in
June.
0%
-1%
•
-2%
-3%
Our econometric model generates a point estimate of 1,000 (0.0%)
payroll jobs in 2008. The confidence interval ranges from a -3,000
(-0.1%) job loss to a 5,000-job gain. RED expect conditions to deteriorate further as 3,000 jobs are cut in 2009.
By contrast, Economy.com project job losses to total -17,810 (-0.5%)
in 2008. The service expects growth to rebound to 44,060 (1.1%)
next year.
-4%
99 00
01 02 03
5%
07 08
RANK: 31st out of 50
RED Estimated Generic Unlevered Asset Total Return Probabilities
15%
10%
04 05 06
Chicago
Minneapolis
6.2%
4.5%
5.7%
3.7%
7.3%
7.1%
8.4%
8.4%
10.0%
10.3%
0%
90%
70%
50%
30%
10%
RED CAPITAL Research
SUBMARKET TRENDS
Submarket
Lincoln Park
City West
Effective Rent
Physical Vacancy
2Q07
2Q08
Change
2Q07
$1,168
$1,204
3.1%
2.1%
2.9%
80 bps
$917
$945
3.0%
7.4%
9.6%
220 bps
Gold Coast
$1,518
$1,591
4.9%
4.2%
7.8%
360 bps
$1,541
$1,597
3.7%
5.1%
6.6%
150 bps
South Shore
$854
$885
3.6%
5.7%
5.5%
-20 bps
Southeast Cook County
$781
$806
3.2%
3.9%
3.3%
-60 bps
-40 bps
Southwest Cook County
$785
$803
2.3%
5.5%
5.1%
Downers Grove
$857
$885
3.2%
5.3%
5.4%
10 bps
Woodridge / Lisle
$855
$915
7.0%
7.1%
5.7%
-140 bps
Aurora / Naperville
$937
$985
5.1%
4.8%
5.4%
60 bps
Wheeling
$961
$983
2.3%
3.1%
4.6%
150 bps
Glendale Heights
$946
$1,010
6.7%
4.4%
4.4%
0 bps
Schaumburg / Hoffman
$954
$1,001
4.9%
4.8%
4.9%
10 bps
Palatine
Rogers Park / Uptown
Belmont-Montrose
$989
$1,039
5.0%
7.0%
7.7%
70 bps
$1,015
$1,074
5.8%
5.0%
3.6%
-140 bps
$740
$793
7.1%
3.1%
3.0%
-10 bps
$1,096
$1,126
2.7%
3.6%
3.3%
-30 bps
Oak Park
$872
$893
2.4%
4.2%
4.4%
20 bps
Glen Ellyn / Wheaton
$904
$944
4.4%
5.1%
5.6%
50 bps
O'Hare
$846
$859
1.5%
3.1%
3.7%
60 bps
East Lake County
$847
$886
4.6%
5.3%
6.1%
80 bps
West Lake County
$882
$911
3.3%
7.3%
6.5%
-80 bps
McHenry County
$810
$869
7.3%
5.4%
5.5%
10 bps
Kane County
$875
$913
4.4%
4.8%
4.9%
10 bps
Joliet
$735
$782
6.5%
4.3%
5.6%
130 bps
Metro
$956
$998
4.4%
4.8%
5.2%
40 bps
SUPPLY TRENDS
•
Completions and Absorption
Source: Reis, Inc
Developers completed two projects consisting of 958 units in June.
One asset containing 608 units was completed in the Gold Coast
submarket and the other 350 units were delivered to City West.
Reis expect supply to slow to 679 units in 2H08 but surge to 2,883
units in 2009. Recent construction reportage reveals that 2,572
apartment units were under construction as of August 25th. According
to the report, 4,577 apartment units were in the planning stage.
Condo development remains relatively active. More than 2,700 condo
units came on-line in the first eight months of 2008 and about 8,500
more condo units were under construction.
6,000
4,000
2,000
Units
•
Change
The Loop
Glenview / Evanston
•
2Q08
0
-2,000
Completions
-4,000
Absorption
-6,000
COMMENT: Apartment supply trends remain constructive for future
fundamentals. But weak sales activity raises the risk that condo units will bleed
into the rental pool, a process that would hinder revenue growth in the innercity submarkets.
-8,000
02
03
04
05
06
07
08f
09f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
Daniel J. Hogan
Director of Research
[email protected]
614-857-1416
William T. Hinga
Business Development
[email protected]
614-857-1499
www.redcapitalgroup.com
800_837_5100
Columbus, OH_Boston, MA_Bozeman, MT_Charlotte, NC_Chicago, IL
Denver, CO_Fredericksburg, TX_Irving, TX_Jupiter, FL_Linwood, NJ_Nashville, TN
Newport Beach,CA_Reston, VA_San Diego, CA_Syracuse, NY_Voorhees, NJ
©2006 RED CAPITAL GROUP (8/9/06)
Market Overview is a publication of RED CAPITAL GROUP. If you are interested in other metro areas we cover or would like to read about the
research methodology we apply in our reports, please visit us at www.redcapitalgroup.com/research.
RED CAPITAL GROUP®
Market Overview
Chicago, Illinois
Multifamily Housing Update
May 2008
EXECUTIVE SUMMARY
L
abor market conditions were
less robust last year as compared to 2006. Chicagoland
establishments added 31,000 (0.8%)
positions to payrolls last year, down
from the 52,800 (1.4%) growth metric
in the previous year. Housing market
weakness was partially responsible
for the slowdown. Builders scaled
back projects and eliminated 4,100
jobs last year. Also, slower mortgage
origination volume resulted in a 2,500
job reduction in the banking sector.
The sluggish job market was more
widespread so far this year, leading to
even slower headline growth. Total
payrolls rose 20,500 (0.5%) yearover-year in 1Q08 but just 8,500
(0.2%) in April. Highly-skilled business service providers such as architectural, engineering and computer
systems design firms reduced hiring
from a monthly average of 3,500 in
2007 to 1,100 in April. After adding
5,900 workers last year, administrative support establishments cut 3,200
positions in April. Growth deceleration was also noted in the education,
health and hospitality sectors.
We expect metro job trends to approach recession-like conditions by
mid-year but rebound in 2009. On the
whole, RED forecast job growth to
slow to 2,000 (0.1%) in 2008. The
confidence interval ranges from a
-4,000 job loss to an 8,000 job gain.
Payroll growth should accelerate to
15,000 (0.4%) next year as domestic
trends improve.
According to the Illinois Association
of Realtors, the median price of a
single-family home in the Chicago
metropolitan division fell 5.7% y-o-y
to $250,000 in 1Q08. Sales velocity
decreased 29.5% as 7,678 sales were
recorded. By contrast, condos posted
a 6.6% price increase from $219,000
in 1Q07 to $233,500 in 1Q08. Velocity, on the other hand, plunged 30.3%
SNAP SHOT
as 6,311 units sold. According to
Reis, approximately 4,500 condo
units are slated for completion this
year and 5,600 additional units are
scheduled for delivery in 2009. The
supply / demand imbalance does not
bode well for the rental market.
The metro occupancy rate rose 10
basis points sequentially to 95.3% in
1Q08 due to positive net absorption of
411 units. No apartment units were
delivered. The first quarter occupancy rate compares favorably to the
94.7% metric recorded in 1Q07.
Twelve months of solid demand and
limited supply were responsible.
Despite the relatively tight occupancy
rate, owners achieved only a 0.4%
rate of sequential effective rent
growth, the slowest since 4Q05. On
an annual basis, effective rents advanced 4.7%, just shy of the 4.8%
pace of asking rent growth.
Reis are of the mind that occupancy
rates are likely to fall over the next
few years. The service forecasts positive net absorption of 1,580 units
from 2Q08 to 4Q10. Supply over the
period is expected to total 7,060 units.
Consistent with the occupancy forecast, Reis project effective rent
growth to decelerate to 3.6% in 2008,
3.7% in 2009 and 3.5% in 2010.
Based on the Reis forecast for rent
and occupancy trends, RED generate
a 6.5% expected rate of total return
for generic metro asset investment at
a 4.4% purchase cap rate. Using historic volatility as a proxy for risk,
Chicago exhibits the 15th highest
measure of risk-adjusted return
among the RED 50. Consequently,
we assign an “Accumulate” rating to
Chicago assets. We suggest that buyers proceed with caution, however,
due to the potential for condo reversion and repurposing activity. This
unanticipated supply would adversely
effect NOI growth and total returns.
Y-o-y
change
Vacancy
(4.7% - 1Q08)
Effective
Rents
60bps
Projected
2008
30bps
4.7%
3.6%
10bps
unch
20.5k
2k
($985 - 1Q08)
Cap Rate
(5.8% - 1Q08)
Employment
(3,819.7k - 1Q08)
KEY POINTS
•
The metro vacancy rate fell 10 basis points
sequentially and 60 basis points year-overyear to 4.7% in 1Q08. The vacancy rate was
190 basis points below the cyclical peak of
6.6% reported in 1Q04.
•
Asking and effective rents increased 4.8%
and 4.7% year-over-year, respectively in
1Q08. Sequentially, asking rents rose 0.8%
while effective rents advanced 0.4%.
•
Property trade activity slowed in the sixmonth period ended in March. Real Capital
Analytics report that trade volume averaged
$162.8 million per month in the period,
down from the $242.5 million per month
average recorded in 2007. According to
NCREIF, the metro average cap rate fell 50
basis points year-over-year to 4.4% in 1Q08.
•
Apartment development remained limited
last year, contributing to the healthy
occupancy gains. Apartment construction
activity is forecast to accelerate over the next
several quarters. Reis expect about 1,800
apartment unit completions this year and
approximately 3,300 in 2009. Additional
units may enter the rental pool as newly
constructed condo projects are repurposed as
rentals.
Chicago - Naperville - Joliet, Illinois Metropolitan Division - 1Q 2008
VACANCY TRENDS
•
•
Tenant demand was solid in 1Q08 as 411 units were absorbed. This
compared favorably to the same period of 2007 when negative net
absorption totaled 621 units.
The metro vacancy rate fell 10 basis points sequentially and 60 basis
points year-over-year to 4.7% in 1Q08. Save for the 4.6% vacancy rate
recorded in 3Q07, the first quarter ratio was the lowest reported since
4Q01.
Reis anticipate active development and weak demand to lead to a
higher vacancy rate (5.0%) by year-end. The service forecasts 1,759
unit completions but only 374 unit absorptions from April to
December. Similar conditions are expected to take hold in 2009 as
vacancy rises to 5.4%.
Source: Reis, Inc.
8%
Metro Vacancy Rate
•
Apartment Vacancy Trends
6%
5.3%
4%
2%
Chicago
U.S.A.
0%
3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
00 01 02 02 03 04 05 05 06 07 08
RANK: 16th out of 50
RENT TRENDS
•
•
•
Metro Rent Trends
Source: Reis, Inc.
The pace of rent growth moderated to a degree in 1Q08. Average
effective rents advanced 0.4% sequentially and 4.7% year-over-year to
$985. The sequential growth rate was down from 0.9% in the previous
quarter and 0.6% in 1Q07.
Asking rents increased at a modestly faster 4.8% annual rate to $1,054.
The size of the average concession package rose from 6.2% of asking
rent in 4Q07 to 6.5% in 1Q08.
West suburban submarkets (Kane County and McHenry County)
reported the fastest rates of annual effective rent growth in 1Q08.
Reis forecast year-over-year effective rent growth to decelerate to 3.6%
in 2008. The service expect moderately faster growth of 3.7% next
year.
8%
Asking
Effective
6%
YoY Rent Trend
•
4.7%
2%
0%
-2%
-4%
3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
00 01 02 02 03 04 05 05 06 07 08
RANK: 17 out of 50
Metro Multifamily Cap Rate Trend
PROPERTY MARKET & CAP RATE TREND
•
Real Capital Analytics report 38 investor grade property trades totaling
$977 million in sales proceeds in the six-months ended in March. The
average price per unit was $115,027 and the average cap rate was
6.3%. By comparison, 76 trades and $2.91 billion in volume were
recorded in calendar 2007. The average cap rate was 6.1%.
The average cap rate among high-rise apartment buildings in Chicago
fell 60 basis points from 4.7% in 4Q07 to 4.1% in 1Q08. The average
going-in yield for garden properties fell from 5.6% to 4.8%.
RED estimate generic metro asset five-year holding period total
returns of 6.5%, assuming a 4.4% initial cap rate. Below average rent
trend and occupancy volatility produces the 15th highest measure of
risk adjusted returns.
Source: Reis, Inc.
6.2%
6.0%
5.8%
Cap Rate
•
4.8%
4%
th
•
4.7%
5.6%
5.4%
5.2%
5.0%
4.8%
4.6%
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q
06 06 06 06 07 07 07 07 08
NOTABLE TRANSACTIONS
Property Name
The Park Evanston
Park Place
Belmont House
Thornberry Woods
RED CAPITAL Research
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
A
BC
A
A
January 2008
January 2008
January 2008
January 2008
$100.0
$66.0
$56.0
$39.2
$353,357
$102,801
$208,178
$140,000
N/A
4.7%
4.5%
4.8%
Chicago - Naperville - Joliet, Illinois Metropolitan Division - 1Q 2008
Metro Median Single Family Home Prices
DEMOGRAPHICS & HOUSING MARKET
Source: National Association of Realtors
$300
MSA
•
US
Prices (000)
$250
•
$200
$150
•
$100
04
05
06
Y
Y
Y
1Q 2Q 3Q 4Q 1Q
07
07
07
07
Past 12 Months
•
60
40
Annual Chg (000)
Chicago registered an 8.5% year-over-year decrease in the Case-Shiller
home price index in February. Middle-tier priced homes (priced from
$216,473 to $333,858) performed the worst, losing 10.2% of value
year-over-year.
EMPLOYMENT TRENDS
Source: BLS Data & RCG Research Forecast
15
2
0
Job growth decelerated sharply in 2007, slowing from 52,800 (1.4%)
in 2006 to 31,000 (0.8%). Deteriorating housing market conditions
were largely to blame. Construction firms cut 4,100 positions from
payrolls and banks eliminated 2,500 jobs.
First Quarter 2008
-20
•
-40
-60
-80
•
-100
99 00 01 02 03 04 05 06 07 08f 09f
Year-over-year Payroll Growth Rate
Source: BLS
3%
Chicago
2%
USA
1%
Rate
The National Association of Realtors report a median home price of
$249,600 in 1Q08, down 6.6% year-over-year. By comparison, the
median condo price increased 7.0% year-over-year to $239,400 in
1Q08.
08
Payroll Employment Growth
20
Population growth in the Chicago metropolitan division accelerated
from 0.5% in 2006 to 0.7% last year. Negative net domestic migration
totaled -54,695 residents, outweighing positive international migration
patterns.
Employment growth continued to cool year-to-date. Total payrolls
increased 20,500 (0.5%) year-over-year in 1Q08 and only 8,500
(0.2%) year-over-year in April.
Weaker trends were particularly acute among business, education and
hospitality service providers. Headline business service job growth
decelerated from a year-over-year monthly average of 13,800 in 2007
to 5,100 in 1Q08. Reduced hiring by architectural and engineering
firms as well as computer system design oriented establishments was
partially responsible. In addition, job losses were reported in the
administrative service sector. With respect to education services,
fewer new workers were hired among primary, secondary and post
secondary schools. Job losses among amusement and recreational
facilities were responsible for slower headcount growth in the hospitality sector.
Forecast
0%
•
-1%
-2%
-3%
Job growth will remain sluggish this year but rebound somewhat next
year. Our econometric model generates point estimates of 2,000
(0.1%) new jobs in 2008 and 15,000 (0.4%) addition jobs in 2009.
By comparison, Economy.com project job losses to total -6,260
(-0.2%) this year but forecast a 38,090 (1.0%) job gain in 2009.
-4%
99
00
01
02
03
Chicago
7%
5%
05 06
07
08
RANK: 29th out of 50
RED Estimated Generic Unlevered Asset Total Return Probabilities
11%
9%
04
5.5%
Milw aukee
6.7%
5.4%
6.5%
7.4%
7.6%
8.2%
9.1%
9.3%
3.8%
3%
90%
70%
50%
30%
10%
RED CAPITAL Research
SUBMARKET TRENDS
Submarket
Lincoln Park
City West
Effective Rent
Physical Vacancy
1Q07
1Q08
Change
1Q07
$1,161
$1,203
3.6%
2.0%
2.4%
40 bps
$886
$909
2.6%
8.2%
6.3%
-190 bps
Gold Coast
$1,475
$1,537
4.2%
4.4%
5.3%
90 bps
$1,508
$1,583
5.0%
8.2%
5.9%
-230 bps
South Shore
$832
$877
5.4%
6.3%
4.8%
-150 bps
Southeast Cook County
$767
$808
5.4%
4.3%
3.2%
-110 bps
Southwest Cook County
$771
$791
2.6%
6.4%
5.5%
-90 bps
Downers Grove
$854
$887
3.8%
6.0%
5.6%
-40 bps
Woodridge / Lisle
$852
$899
5.6%
7.8%
5.7%
-210 bps
Aurora / Naperville
$934
$971
4.0%
4.4%
5.4%
100 bps
Wheeling
$944
$973
3.0%
3.8%
3.6%
-20 bps
Glendale Heights
$932
$999
7.2%
4.9%
4.4%
-50 bps
Schaumburg / Hoffman
$939
$985
4.9%
5.4%
5.2%
-20 bps
Palatine
$985
$1,031
4.7%
6.9%
8.7%
180 bps
Glenview / Evanston
$998
$1,061
6.3%
5.2%
3.7%
-150 bps
Rogers Park / Uptown
$730
$785
7.5%
3.5%
2.5%
-100 bps
$1,082
$1,122
3.7%
3.5%
3.1%
-40 bps
$854
$872
2.2%
4.4%
4.1%
-30 bps
Belmont-Montrose
Glen Ellyn / Wheaton
$878
$935
6.5%
5.4%
4.8%
-60 bps
O'Hare
$832
$863
3.7%
4.6%
3.7%
-90 bps
East Lake County
$829
$882
6.4%
6.1%
6.1%
0 bps
West Lake County
$870
$887
1.9%
10.0%
5.0%
-500 bps
McHenry County
$801
$863
7.7%
6.7%
4.3%
-240 bps
Kane County
$853
$923
8.2%
5.1%
3.9%
-120 bps
Joliet
$733
$769
5.0%
4.6%
4.5%
-10 bps
Metro
$941
$985
4.7%
5.3%
4.7%
-60 bps
Completions and Absorption
SUPPLY TRENDS
•
Source: Reis, Inc
No apartment units were completed in 1Q08 but Reis expect about
1,800 unit completions in the remainder of the year. About one-third
of the units are contained in one property located in the Gold Coast
submarket. The 608-unit development is scheduled to open in June.
Reis count 34 condo projects that are slated for delivery this year. The
projects contain a total of 4,048 units. About 1,400 condo units are
located in the Gold Coast submarket.
6,000
Completions
Absorption
4,000
2,000
Units
•
Change
The Loop
Oak Park
•
1Q08
Recent reportage suggests that condo repurpose and reversion activity
will add additional units to the rental stock. Sluggish condo sales are
largely to blame as one property plans to cancel purchase contracts and
sell the entire 298-unit property to an apartment investor. In another
instance, only 74% of the property will be sold and potentially operated
as rentals while the remaining 26% remain owner-occupied.
0
-2,000
-4,000
-6,000
-8,000
02
03
04
05
06
07
08f
09f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
Daniel J. Hogan
Director of Research
[email protected]
614-857-1416
William T. Hinga
Business Development
[email protected]
614-857-1499
www.redcapitalgroup.com
800_837_5100
Columbus, OH_Boston, MA_Bozeman, MT_Charlotte, NC_Chicago, IL
Fredericksburg, TX_Irving, TX_Jupiter, FL_Linwood, NJ_Nashville, TN
Newport Beach,CA_Reston, VA_San Diego, CA_Syracuse, NY_Voorhees, NJ
©2006 RED CAPITAL GROUP (8/9/06)
Market Overview is a publication of RED CAPITAL GROUP. If you are interested in other metro areas we cover or would like to
read about the research methodology we apply in our reports, please visit us at www.redcapitalgroup.com/research.
RED CAPITAL GROUP®
Market Overview
Chicago, Illinois
Multifamily Housing Update
March 2008
EXECUTIVE SUMMARY
T
he payroll series rebenchmarking exercise conducted by the Bureau of Labor
Statistics wasn’t especially kind to Chicago MSA The BLS made minor adjustments to first half 2007 data, slicing
just 1,900 jobs from the 37,300-job initial year-over-year growth estimate.
But cuts from 2H07 payroll estimates
were deeper, particularly in the fourth
quarter when the bureau cleaved a
monthly average of 8,000 jobs from its
previous growth estimates, including a
14,400-job reduction in 4Q07.
Indeed, 4Q07’s 22,200-job add was the
slowest growth recorded since 3Q04,
when the metro posted its 12th and last
consecutive quarter of y-o-y job losses
following the 2001 recession. The primary sources of the slowdown were the
goods producing industries and finance,
which together hemorrhaged 15,800
jobs y-o-y. Decelerating job creation
also was evident in the business services industry, where payroll growth
slid from 12,500-jobs in 3Q07 to a
slower 8,600 (1.3%) job rate in 4Q07.
January data were more encouraging, as
metro headcounts increased by 24,200
(0.6%) jobs y-o-y, up from 20,500
(0.5%) in December. Nonetheless, the
Chicago economy faces an uphill battle
in 2008. The key tourism and convention business, which prospered last year,
trended weaker in January and February
and could decline further should the
U.S. slip into recession. Moreover, the
commercial and residential real estate
markets began to look moderately overbuilt, with negative implications for
construction and finance employment.
The RED CAP econometric payroll
model paints a reassuring picture of
metro job growth through 2009. The
model forecasts creation of a net 30,000
(0.8%) jobs in 2008 and 24,000 (0.6%)
jobs in 2009. RCR are keeping a wary
eye on economic developments, however, and maintain a low-end bias.
SNAP SHOT
After experiencing encouraging tenant
interest in 3Q07, apartment demand
weakened in 4Q. Properties experienced
negative absorption, losing a net of 237
leased tenants, causing occupancy to
fall 20 basis points sequentially to
95.2%.
Nevertheless, vacancy remained 40 bps below the level recorded
in 4Q06 and stood at the lowest rate
recorded in a fourth quarter since 2001.
Effective rent growth cooled in the fall
following a hot spring and summer.
Revenue rose $9 (0.9%) to $981, following robust $15 and $16 advances in
2Q and 3Q, respectively. As a result,
3Q’s six-year high 5.4% y-o-y advance
dropped 60 bps in the December quarter
to 4.8%. The mean concession fell $1 to
$65, however, just as it stood in 4Q06.
Reis expect supply pressure to weigh
heavily on the market through 2010.
The service forecasts occupancy to fall
80 bps by YE2009, and another 30 bps
the following year. Rent levels are projected to rise faster than the U.S. averages, but gains are expected to diminish
to 3.9% in 2008 and 3.5% in 2009.
Investors exhibited an enormous appetite for Chicago properties in 2007, acquiring $2.9 billion of assets, including
at least 13 properties valued at $50mm
or more. Sales were moderately slower
in 2H07. Class-A cap rates gravitated in
the 4.4% to 4.8% range toward the end
of the year, prompting NCREIF to raise
its metro cap rate index 40 bps from
3Q07’s 4.6% to 5.0%.
Using a 4.6% indicative cap rate, RCR
calculate an un-levered 5-year holding
period total return of 6.7% for Chicago
assets. The risk-adjusted index is 2.27,
lower than the RED 50 mean but relatively generous for a primary market.
Trade and NCREIF data suggest asset
prices cheapened slightly near the end
of the year. This leads RED to affirm
its “Accumulate” rating, but put Chicago on the watch list, due to concern
over the economy and shadow supply.
Y-o-y
change
Vacancy
(4.8% - 4Q07)
Effective
Rents
40 bps
Projected
2008
40 bps
4.8%
3.9%
50 bps
unch
22.2m
30m
($981 - 4Q07)
Cap Rate
(5.6% - 4Q07)
Employment
(3,908.0mk - 4Q07)
KEY POINTS
•
The BLS initially reported creation of 36,000
metro area jobs in 2007, but revised the
figure down 5,000 jobs pursuant to its rebenchmarking exercise. The revised data
evidenced more significant slowing toward
year-end than was previously reported.
Fourth quarter payrolls were revised down
11,000 jobs, and 4Q year-over-year payroll
growth was trimmed from 35,300 to 22,200.
•
The unemployment rate spiked 100 bps y-oy to 4.9% in December, followed by a 70 bps
sequential increase to 5.6% in January. This
datum was the highest recorded since 3Q05.
•
RCR expect Chicago to create roughly
20,000 to 40,000 jobs per year in 2008 and
2009. Recent events and housing market
trends lead us to express a low-end bias.
•
Tenant demand softened in 4Q07, causing
vacancy to rise 20 bps to 4.8%. Heavier
supply is expected to put upward pressure on
the vacancy rate through decade’s end.
•
Rent growth trends turned over in 4Q07,
slowing to 4.8% after 5 years of acceleration.
•
Chicago offers attractive yield for a liquid,
primary market. Accumulate with caution.
Chicago-Naperville-Joliet, IL Metropolitan Division - 4Q 2007
VACANCY TRENDS
•
•
Following a six-month period of robust tenant demand during which
owners absorbed 3,300 vacant units, leasing activity decelerated.
Metro properties experienced a net loss of 237 leased tenants after
taking into consideration a 119-unit condominium conversion.
Developers completed 420 units in 4Q07, putting additional pressure
on average occupancy. Reis report that metro occupancy declined 20
bps sequentially to 95.2%. Fourth quarter weakness notwithstanding,
occupancy at year end was 40 bps higher year-over-year.
There was no evidence that over-supplied condo properties in urban
neighborhoods affected apartment occupancy. Vacancy rates fell
materially in the Lincoln Park, the Loop and City West submarkets.
Source: Reis, Inc.
8%
Metro Vacancy Rate
•
Apartment Vacancy Trends
6%
5.2%
4%
4.8%
2%
CHICAGO
U.S.A.
0%
2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q
RANK: 19th out of 50
COMMENT: Heavy condo supply and weak demand pose shadow supply risks.
00 01 01 02 03 04 04 05 06 07 07
RENT TRENDS
•
•
Effective rent trends turned over after a five-year bull market move.
Rents increased only $9 (1.0%) sequentially and $45 (4.8%) year-overyear. These data compared to $16 (1.6%) sequential and $50 (5.4%)
year-over-year advances recorded in the previous quarter.
Reis believe that rent growth deceleration will persist. The service
projects growth to fall to $39 (3.9%) in 2008 and $36 (3.5%) in 2009.
Lincoln Park, Gold Coast and Loop rents continued to rise at above
average rates, evincing no negative impact from competition from
unsold condominium units. Sources indicate that 10,000 condo units
will be delivered into a weak property market by mid-year 2009,
raising the question of whether these rent trends are sustainable.
Source: Reis, Inc.
8%
Asking
Effective
6%
YoY Rent Trend
•
Metro Rent Trends
4.5%
2%
0%
-2%
-4%
th
RANK: 15 out of 50
COMMENT: Chicago-land properties are expected to moderately outperform
the RED 50 average in 2008 and 2009.
2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q
00 01 01 02 03 04 04 05 06 07 07
Metro Multifamily Cap Rate Trend
PROPERTY MARKET & CAP RATE TREND
•
•
(Mean of $10mm Trades)
7.0%
The sale of high-cost urban high-rise properties pushed total proceeds
to a record $2.9 billion last year, despite a 1% drop in institutional
quality asset sales velocity, according to Real Capital Analytics.
The cap rate used to value Chicago assets in the NCREIF portfolio
plummeted 90 bps in 1Q07 to 5.0% and continued to decline to 4.7%
by 3Q07. Slower sales and weaker pricing observed in 4Q led
NCREIF participants to raise the applicable cap rate back to 5.0%.
RCR view the retrograde (relative to the national apartment index and
especially the barrier-protected primary market norm) cap rate
movement as a buying opportunity. Chicago assets now appear to
offer premium returns and risk adjusted returns relative to the coastal
barrier protected markets. Accumulate with Caution.
Source: Reis, Inc.
6.5%
Cap Rate
•
4.8%
4%
6.0%
5.5%
5.0%
4.5%
4.0%
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q
06 06 06 06 07 07 07 07 08
NOTABLE TRANSACTIONS
Property Name
Park Evanston (Glenview)
Lakes @ F’ntain Sq (Waukeegan)
Thornberry Wood (Naperville)
Alara Genmuir Apts (Naperville)
RED CAPITAL Research
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
A
B
A
A
Feb-2008
Jan-2008
Jan-2008
Nov-2007
$100.0
$30.6
$39.2
$55.4
$353,357
$79,710
$140,000
$172,659
4.4%
6.9%
4.8%
4.9%
Chicago-Naperville-Joliet, IL Metropolitan Division - 4Q 2007
Metro Median Single Family Home Prices
DEMOGRAPHICS & HOUSING MARKET
Source: National Association of Realtors
$300
CHICAGO
•
US
Prices (000)
$250
•
$200
$150
•
$100
03
04
05
Y
Y
Y
4Q 1Q 2Q 3Q 4Q
06
07
07
07
07
Payroll Employment Growth
30
•
Annual Chg (000)
24
20
0
-20
-40
-60
•
-80
-100
99 00 01 02 03 04 05 06 07 08f 09f
Year-over-year Payroll Growth Rate
•
1%
Rate
Chicago Metropolitan Division establishments created 31,000 jobs in
2007, a 0.8% advance. This compares to a 52,800-job crop in 2006.
Goods producing industries were largely responsible for the yearover-year slowdown. Builders trimmed payrolls by 4,100 workers
compared to a 5,100-job add in 2006. Manufacturers let another
5,700 workers go in 2007, while the related wholesale trade sector
hired only 700 employees, a sharp downturn relative to the 2,700 jobs
created in 2006 and 3,200 added in 2005.
Finance and professional services also contributed to the slowdown of
job creation in 2007. Financial services headcounts fell –1,600 jobs
after posting a 2,900-job advance in 2006. Business services growth
slowed from 23,100 jobs in 2006 to 13,800 last year. The 9,300-job
net reduction in growth was the largest among industry super-sectors.
Decreased usage of contract labor accounted for more than one-half
of the change.
Fourth Quarter 2007
Source: BLS
CHICAGO
USA
2%
County population data reported by the Census Bureau indicate that
metro demographic trends were healthy in 2007. The eight county area
added 53,500 residents, representing 0.7% growth. This compares to a
population advance totaling 37,508 (0.5%) persons in 2006 and 26,365
(0.3%) in 2005.
Past 12 Months
60
3%
HousingTracker.com report that the median priced home listed for sale
in mid-March was offered for $289,000, down -5.2% from the year
earlier period. The same source found that the inventory of homes for
sale increased 4.3% since February and 4.8% since March 2007.
EMPLOYMENT TRENDS
Source: BLS Data & RCG Research Forecast
40
Prices of Chicago MSA homes dropped materially in 4Q07. According
to the N.A.R., the median price of a home sold was $261,000, down 2.6% year-over-year and -8.9% from the cycle peak in the prior
quarter.
0%
-1%
Employment growth slowed significantly in 4Q07. Payrolls expanded at a 22,200 job y-o-y pace, down from 31,000 in the prior
period. The deceleration was broad-based, as virtually every industry
super-sector exhibited slowing tendencies. Air transportation was an
exception, reflecting improved conditions at one of Chicago-land’s
largest employers, United Airlines.
Forecast
-2%
•
-3%
-4%
99
15%
10%
5%
00
01
02
03
04
05
06
07
08
•
RCR remain relatively optimistic for the future. The group’s econometric payroll model yields a forecast of 30,000 jobs in 2008. The
model generates a 24,000-job projection for 2009.
Because of recent adverse trends, RCR maintain a low-end bias. By
our way of thinking the model does not capture some of the adverse
dynamics developing in the U.S. credit markets.
RED Estimated Generic Unlevered Asset Total Return Probabilities
CHICAGO (RAI=3.27)
RED 50 (RAI-2.76)
5.7%
4.0%
2.6%
4.8%
6.7%
6.2%
7.8%
7.6%
9.3%
9.6%
0%
90%
70%
50%
30%
10%
RED CAPITAL Research
SUBMARKET TRENDS
Effective Rent
Submarket
Lincoln Park
City West
Gold Coast
The Loop
South Shore
Southeast Cook County
Southwest Cook County
Downers Grove
Woodridge / Lisle
Aurora / Naperville
Wheeling
Glendale Heights
Schaumburg / Hoffman Estates
Palatine
Glenview / Evanston
Rogers Park / Uptown
Belmont-Montrose
Oak Park
Glen Ellyn / Wheaton
O'Hare
East Lake County
West Lake County
Metro
4Q06
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
4Q07
1,140
887
1,454
1,505
831
757
775
846
843
927
950
932
940
974
994
717
1,076
862
869
838
823
872
936
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Physical Vacancy
Change
4Q06
4Q07
5.1%
3.9%
5.1%
4.5%
5.0%
6.0%
2.7%
3.8%
5.6%
3.2%
4.0%
5.7%
3.8%
4.9%
5.1%
8.2%
4.3%
3.8%
5.9%
4.1%
7.2%
1.1%
4.8%
2.1%
7.2%
4.8%
6.1%
6.7%
5.0%
5.1%
5.8%
8.0%
4.5%
4.0%
5.0%
4.7%
7.0%
4.0%
3.6%
2.7%
4.7%
5.8%
3.9%
6.4%
10.5%
5.2%
2.0%
6.3%
5.7%
5.7%
5.1%
3.3%
5.5%
6.2%
5.3%
5.2%
3.6%
4.8%
5.9%
9.2%
4.2%
2.4%
2.7%
5.0%
4.9%
3.2%
5.7%
4.7%
4.8%
1,199
921
1,528
1,573
872
802
796
878
890
956
988
985
975
1,022
1,045
776
1,122
895
920
872
883
882
981
Change
-10 bps
-90 bps
90 bps
-40 bps
-160 bps
-170 bps
40 bps
40 bps
-270 bps
70 bps
-40 bps
-20 bps
120 bps
220 bps
20 bps
-120 bps
Unchd
30 bps
-90 bps
-70 bps
-70 bps
-580 bps
-40 bps
SUPPLY TRENDS
Completions and Absorption
•
•
Reis report that 3,745 units of investor grade apartment supply was
under construction in March. Of this amount, 2,255 units are scheduled
for delivery during the balance of 2008.
Urban submarkets will receive the lion’s share of supply this year. A
massive 607-unit project in the Gold Coast submarket called the Tides
is scheduled for delivery in 2008. The 51-story asset located in
Lakeshore East offers 1- and 2-bed units renting from $1,950- $3,250.
Units
•
In the City West submarket, a 207-unit mixed condo/rental tower Trio
will enter lease-up this spring. The Left Bank (350 units) is in lease-up.
Source: Reis, Inc
6,000
4,000
2,000
0
-2,000
-4,000
-6,000
-8,000
Completions
Absorption
02
03
04
05 06
07 08f 09f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
Daniel J. Hogan
Director of Research
[email protected]
614-857-1416
William T. Hinga
Business Development
[email protected]
614-857-1499
www.redcapitalgroup.com
800_837_5100
Columbus, OH_Boston, MA_Bozeman, MT_Charlotte, NC_Chicago, IL_Fredericksburg, TX
Irving, TX_Jupiter, FL_Linwood, NJ_Nashville, TN_Newport Beach,CA
Reston, VA_San Diego, CA_Syracuse, NY_Voorhees, NJ
©2006 RED CAPITAL GROUP (8/9/06)
Market Overview is a publication of RED CAPITAL GROUP. If you are interested in other metro areas we cover or would like to
read about the research methodology we apply in our reports, please visit us at www.redcapitalgroup.com/research.
RED CAPITAL GROUP®
Market Overview
Chicago, Illinois
Multifamily Housing Update
October 2007
EXECUTIVE SUMMARY
J
ob formation edged upward in
the Windy City, from 37,200
(1.0%) year-over-year in 1Q07
to 37,500 (1.0%) in 2Q07. Both
measures, however, were below the
54,900 (1.4%) monthly average job
gain from 2006. The decrease was
largely attributable to attrition among
wholesale and retail trade firms as
well as reduced hiring among business and leisure service providers.
Combined, the sectors contributed
37,000 net jobs in 2006 and only
22,000 in 2Q07.
Financial sector employment, which
accounted for 7.8% of total payrolls
in August, added a net of 5,400 jobs
y-o-y in 2Q07, up from 3,000 in the
comparable period last year. Similarly, hiring accelerated in the health
care sector as 11,100 net jobs were
created in 2Q07, compared to a
monthly average of 8,700 last year.
RED expect payroll growth of 32,000
(0.8%) in 2007, moderately lower
than the 1.0% rate recorded in 1H07.
Our econometric model generates a
forecast of 19,000 (0.5%) jobs in
2008, with a confidence interval of
9,000 (0.2%) to 28,000 (0.7%) jobs.
The median price of a single family
MSA home increased 1.7% y-o-y to
$283,200 in 2Q07. By way of comparison, the national metric fell 1.5%
to $223,800. Chicago registered a
3.7% advance in the OFHEO home
price index, the lowest rate recorded
since 1Q99. The pace of appreciation
accelerated in the condo market from
3.2% y-o-y in 1Q07 to 4.1% in 2Q07.
The metro occupancy rate rose 50
basis points sequentially to 95.2%,
owing to robust tenant demand and
developer restraint. In addition, the
quarter marked the first period in
which condo converters failed to reduce apartment inventories since
2003.
SNAP SHOT
Reis expect negative net absorption of
nearly 1,500 units in 2H07. The
cause of such pessimism is unclear.
Weak demand will result in a 40 basis
point drop in occupancy to 94.8%. In
2008, Reis anticipate demand to fall
short of supply, dropping occupancy
another 20 bps.
Effective rents increased 1.7% sequentially to $957, the fastest rate
recorded since 1Q01. The metric rose
4.6% year-over-year. Asking rents
grew at a moderately slower 3.6%
rate. The value of the average concession package fell from 7.1% of
asking rent in 2Q06 to 6.2% in 2Q07.
Reis forecast year-over-year effective
rent growth to decelerate to 3.4% per
year in 2007 and 2008.
Institutional money filled the gap left
by condo converters bidding for properties. As a result, we count 39 trades
of properties priced at $5 million or
more (ytd though Sept), totaling $1.3
billion in sales proceeds. This compares to $1.47 billion in sales volume
in all of 2006.
Real Capital Analytics reported an
average price of $151,244 per unit
from sales closed between January
and May 2007. This was up from an
average per unit price of $93,942 reported by the source in 2006. The
average reported cap rate fell 40 basis
points from 6.3% to 5.9%.
RED estimate generic metro asset 5year holding period total returns of
6.3%, below the 6.9% RED 50 average. The metro’s risk adjusted return
index ranks 23rd among the RED 50,
owing to below average historic volatility. Consequently, RED assign a
rating of “Accumulate” to metro assets. On a risk-adjusted basis, the
return profile is about average but we
view the Reis fundamental forecasts
as overly conservative. NOI growth
will likely exceed expectations.
Vacancy
(4.8% - 2Q07)
Effective
Rents
Y-o-y
change
Projected
2007
30bps
40bps
4.6%
3.4%
40bps
unch
37.5k
32k
($957 - 2Q07)
Cap Rate
(5.5% - 2Q07)
Employment
(3,894.4k - 2Q07)
KEY POINTS
•
The metro vacancy rate fell 50 basis points
sequentially to 4.8%. The metric was down
30 basis points year-over-year.
•
Asking and effective rents increased 3.6%
and 4.6% year-over-year, respectively. Reis
forecast year-over-year effective rent growth
of 3.4% in 2007 and 2008.
•
According to the National Association of
Realtors the median price of a single-family
home increased 1.7% year-over-year to
$283,200. Condo prices were up 4.1% to
$232,400.
•
Real Capital Analytics report 36 property
trades in the first five months of 2007. Sales
volume totaled $1,662.8 million. Loopnet
identify 12 transactions involving properties
priced at $5 million or more in 2Q07.
•
RED assign a rating of “Accumulate” to
metro assets. Reis forecasts appear overly
conservative and actual NOI growth should
exceed the model’s base case assumptions.
•
RED forecast employment growth of 32,000
(0.8%) in 2007 and 19,000 (0.5%) in 2008.
Chicago - Naperville - Joliet, Illinois Metropolitan Division - 2Q 2007
VACANCY TRENDS
•
•
Apartment demand exhibited signs of new life in 2Q07, leading to a 50
basis point decrease in vacancy. A net of 2,273 units were absorbed,
bringing the 1H07 total to 1,755 units.
No supply was delivered for the second consecutive quarter. Condo
converters also failed to remove apartment units from the rental stock
for the first time in 17 quarters.
Reis are pessimistic with regard to demand in 2H07. The service
forecast negative net absorption of nearly 1,500 units to result in a 40
basis point rise in vacancy to 5.2%. Reis forecast increased supply to
outpace demand in 2008.
Source: Reis, Inc.
8%
Metro Vacancy Rate
•
Apartment Vacancy Trends
6%
5.1% 4.8%
4%
2%
Chicago
U.S.A.
0%
4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q
RANK: 18th out of 50
COMMENT: Reis demand forecast appears overly pessimistic
99 00 01 02 02 03 04 05 05 06 07
RENT TRENDS
•
•
Source: Reis, Inc.
Effective rents increase $16 or 1.7% sequentially, the fastest rate since
1Q01. On a year-over-year basis effective rents advanced 4.6% to
$957. Asking rents rose 3.6% year-over-year to $1,020.
Despite positive momentum, Reis forecast effective rent growth to
decelerate to 1.0% in 2H07, gaining only $10 over the six-month
period. In 2008, Reis forecast year-over-year growth of 3.4%.
Marcus and Millichap are more optimistic. The brokerage firm
forecasts year-over-year effective rent growth of 4.7% in 2007. This
compares to a Reis forecasted 3.4%.
8%
Asking
Effective
6%
YoY Rent Trend
•
Metro Rent Trends
3.6%
2%
0%
-2%
-4%
RANK: 17th out of 50
COMMENT: Reis are overly pessimistic regarding effective rent growth for 2007.
In our opinion, the Marcus and Millichap estimate of 4.7% is more likely.
4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q
99 00 01 02 02 03 04 05 05 06 07
Metro Multifamily Cap Rate Trend
PROPERTY MARKET & CAP RATE TREND
•
•
Source: Reis, Inc.
According to Real Capital Analytics 36 investor grade properties
traded in the first five months of 2007, totaling $1,662.8 million in
proceeds. The average price was $151,244 per unit.
6.5%
Loopnet identify 12 trades involving properties priced at or above $5
million in 2Q07. Total proceeds totaled $432 million and the average
per unit price was $147,841.
6.0%
RED estimate generic metro asset 5-year holding period total returns
of 6.3%, below the 6.9% RED 50 average.
COMMENT: We estimate an indicative cap rate of 4.4% for institutional grade
assets. Our analysis shows that going-in yields would have to rise 40 basis points in
order to raise the expected rate of return to the RED 50 average of 6.9%.
Cap Rate
•
4.6%
4%
5.5%
5.0%
3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q
05
05
06
06
06
06
07
07
07
NOTABLE TRANSACTIONS
Property Name
The Streeter (Gold Coast)
Jefferson Place (The Loop)
Schaumberg Villas (Schaumberg)
Brookdale Village (Aurora)
RED CAPITAL Research
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
A
A
A
A
August 2007
July 2007
April 2007
April 2007
$210.0
$75.3
$32.4
$29.0
$436,590
$274,635
$108,000
$116,000
3.3%
4.2%
5.7%
5.2%
Chicago - Naperville - Joliet, Illinois Metropolitan Division - 2Q 2007
Metro Median Single Family Home Prices
DEMOGRAPHICS & HOUSING MARKET
Source: National Association of Realtors
$300
MSA
•
US
Prices (000)
$250
•
$200
$150
•
$100
03
Y
•
04 4Q 1Q 2Q 3Q 4Q 1Q 2Q
Y
05
06
06 06
06 07
07
Payroll Employment Growth
•
Annual Chg (000)
32
19
20
•
-40
•
-60
-80
-100
99 00 01 02 03 04 05 06 07f 08f
•
Year-over-year Payroll Growth Rate
Source: BLS
3%
•
Rate
1%
0%
•
-1%
-2%
•
-3%
-4%
01
02
03
04
The
Payroll employment was up 29,500 (0.8%) year-over-year in August.
This compares to 58,300 (1.5%) in the same month last year.
A total of 37,500 (1.0%) jobs were created year-over-year in 2Q07, a
modest gain from the 37,200 (1.0%) performance in the first quarter.
Employment grew at a faster 1.4% pace last year.
Faster attrition in the durable goods manufacturing sector lead to
weaker conditions for wholesale trade firms. Durable goods producers lost 2,000 employees year-over-year in 1Q07 and 2,900 in 2Q07.
Consequently, wholesale trade payrolls were reduced by 300 in 2Q07,
after gaining 4,500 employees in the same period last year.
Slower hiring among business service firms contributed to slower
growth year-to-date. A net of 7,700 employees were added in the
professional, scientific and technical service sector, down from
10,600 in 2006. Temp agency hiring slowed from 6,900 to 4,700.
Forecast
Chicago
USA
00
Home and condo sales fell 20.1% year-over-year in August.
median price was up 4.9% to $266,500.
Second Quarter 2007
0
-20
99
The metropolitan division registered a 3.7% increase in the OFHEO
home price index, ranking 18th among the RED 50.
Past 12 Months
80
2%
The median price of a single-family MSA home increased 1.7% yearover-year to $283,200 in 2Q07. Condo prices advanced at a faster
4.1% rate to $232,400. The average effective rent was 41% below the
estimated monthly payment on the median priced home, the 27th largest
gap among the RED 50.
EMPLOYMENT TRENDS
Source: BLS Data & RCG Research Forecast
60
40
Chicago metropolitan population increased 0.6% from 2005 to 2006.
The area benefited from slightly above average net international
migration and slower domestic out migration.
05
06
07
RED forecast payroll growth to range from 29,000 (0.8%) to 35,000
(0.9%) in 2007, with a point estimate of 32,000 (0.8%).
In 2008, RED anticipate slower payroll growth. Our econometric
model generates a forecast range of 9,000 (0.2%) to 28,000 (0.7%).
By way of comparison, Economy.com forecast job growth of 1.0% in
2007 and 0.7% in 2008.
RANK: 40th out of 50
COMMENT: Anecdotally, we assign a low probability of job growth toward the
lower end of the forecast range for 2008.
15%
10%
5%
RED Estimated Generic Unlevered Asset Total Return Probabilites
Chicago
3.9%
3.6%
Minneapolis
5.2%
6.0%
6.3%
7.4%
7.4%
8.7%
8.8%
10.6%
0%
90%
70%
50%
30%
10%
RED CAPTIAL Research
SUBMARKET TRENDS
Submarket
Lincoln Park
City West
Effective Rent
Physical Vacancy
2Q06
2Q07
Change
2Q06
2Q07
Change
$1,114
$1,168
4.8%
2.9%
2.1%
-80 bps
$846
$917
8.4%
5.6%
7.4%
180 bps
Gold Coast
$1,398
$1,518
8.6%
4.0%
4.2%
20 bps
The Loop
$1,443
$1,541
6.8%
7.1%
5.1%
-200 bps
South Shore
$841
$854
1.5%
6.0%
5.7%
-30 bps
SE Cook County
$751
$781
4.0%
4.4%
3.9%
-50 bps
SW Cook County
$766
$785
2.4%
5.8%
5.5%
-30 bps
Downers Grove
$827
$857
3.6%
6.8%
5.3%
-150 bps
Woodridge/Lisle
$840
$855
1.8%
7.9%
7.1%
-80 bps
Aurora/Naperville
$892
$937
5.0%
5.1%
4.8%
-30 bps
Wheeling
$930
$961
3.4%
4.1%
3.1%
-100 bps
Glendale Heights
$907
$946
4.4%
4.7%
4.4%
-30 bps
130 bps
Schaumburg/Hoffman
$909
$954
4.9%
3.5%
4.8%
Palatine
$966
$989
2.4%
7.1%
7.0%
-10 bps
Glenview/Evanston
$968
$1,015
4.8%
3.7%
5.0%
130 bps
-110 bps
Rogers Park/Uptown
Belmont-Montrose
Oak Park
$714
$740
3.6%
4.2%
3.1%
$1,035
$1,096
5.9%
3.7%
3.6%
-10 bps
$840
$872
3.8%
5.2%
4.2%
-100 bps
Glen Ellyn/Wheaton
$840
$904
7.7%
6.0%
5.1%
-90 bps
O'Hare
$819
$846
3.3%
3.8%
3.1%
-70 bps
East Lake County
$819
$847
3.5%
6.1%
5.3%
-80 bps
West Lake County
$867
$882
1.7%
9.2%
7.3%
-190 bps
McHenry County
$806
$810
0.5%
5.7%
5.4%
-30 bps
Kane County
$853
$875
2.6%
5.3%
4.8%
-50 bps
Joliet
$718
$735
2.3%
5.6%
4.3%
-130 bps
Completions and Absorption
SUPPLY TRENDS
•
•
No units were completed in 1H07 and Reis forecast only 413
completions in 2H07. The tide if forecast to turn next year as Reis
expect deliveries to total 2,362 units, the largest vintage since 2000.
Two properties with 559 units were under construction in the City
West submarket as of 10/1/2007. The projects are slated for
completion in 2008. One large rental property was under construction
in The Loop submarket. The 440 units are scheduled to enter the rental
pool in 2008.
Units
•
Source: Reis, Inc
Reis count nearly 9,500 condo units under construction as of October.
Another 11,303 condo units were in the planned / proposed stage of
development.
6,000
5,000
4,000
3,000
2,000
1,000
0
-1,000
-2,000
-3,000
-4,000
-5,000
-6,000
-7,000
-8,000
Completions
02
COMMENT: Supply is forecast to return to a long-run norm after a quiet 2007.
03
04
Absorption
05
06
07f
08f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
Daniel J. Hogan
Director of Research
[email protected]
614-857-1416
William T. Hinga
Business Development
[email protected]
614-857-1499
www.redcapitalgroup.com
800_837_5100
Columbus, OH_Boston, MA_Bozeman, MT_Chicago, IL_Fort Worth, TX
Fredericksburg, TX_Jupiter, FL_Linwood, NJ_Nashville, TN_Newport Beach,CA
Philadelphia, PA_Reston, VA_San Diego, CA_Syracuse, NY_Voorhees, NJ
©2006 RED CAPITAL GROUP (8/9/06)
Market Overview is a publication of RED CAPTIAL GROUP. If you are interested in other metro areas we cover or would like to
read about the research methodology we apply in our reports, please visit us at www.redcapitalgroup.com/research.
RED CAPITAL GROUP®
Market Overview
Chicago, Illinois
Multifamily Housing Update
May 2007
EXECUTIVE SUMMARY
T
he Chicago–area economy
lost momentum in the first
quarter as the pace of job
growth dropped from an eight-year
high 1.5% in 2006, when 54,900 jobs
were created to a 1.0% year-over-year
pace. Slower hiring in the business
services, construction and trade sectors was largely responsible. Business
service job creation declined by onethird as customers economized on the
use of contract labor, legal services
and IT systems consultants. Consumers retrenched in the face of higher
energy costs and stagnant housing
prices, contributing to a 300-job decline in wholesale and retail trade.
Likewise, homebuilders were in a
cautious mood, pulling 43% fewer
one-family permits than the first quarter last year and trimming 1,300 jobs
after two years of solid expansion.
Not every sector reported weaker results, however; first quarter hiring in
the health care and higher education
sectors continued at a robust pace,
rising 23% to a 15,500-job annual
rate. Brisk tourism and convention
trade contributed to a 4.8% increase
in lodging employment and a 2.3%
advance in leisure services overall.
Finally, the bull market for stocks and
commodities helped boost the rate of
financial service employment growth
to a 10-year high 5,800-job, 1.9%
pace from 3,400 jobs (1.2%) in 2006.
The first quarter slowdown was consistent with RED CAPITAL Research’s earlier expectations published in March. At that time, RED’s
econometric model produced payroll
forecasts of 27,000 for 2007, and
8,000 for 2008. The updated forecast
is for a range of 21,000 to 33,000 jobs
with midpoint of 27,000 for 2007, and
–5,000 to 15,000 positions, with midpoint of 5,000 in 2008.
First quarter apartment demand was
commensurately sluggish. Although
no supply was delivered, vacant in-
SNAP SHOT
ventory increased 517 units and the
metro average occupancy rate
dropped 10 basis points sequentially
to 94.7%. In response, Reis reduced
the forecast of 2007 absorption by
213 units to 167, but affirmed its
94.7% forecast of YE07 occupancy.
Reis also recorded slower rent
growth. Sequential effective rents
advanced $6 (0.6%) to $942, less than
one-half the $14 (1.5%) hike registered in 4Q06. On a year-over-year
basis, rents were up $35 (3.9%), a
step back from the $37 increase recorded last year. Average concession
levels were unchanged at $65, ranking
36th highest among the RED 50, improving from 38th at the end of 2006.
Below-trend job creation and sub-par
1Q apartment performance convinced
Reis to retreat from its $35 effective
rent growth forecast for 2007, dialing
back $6 to $29 (3.1%). The service
also assumed a more conservative
posture for the long-term reducing its
2008 - 11 compound rent growth rate
forecast 10 bps to 3.5%.
The foregoing didn’t curb investor
enthusiasm. Buyers closed 19 brokerassisted acquisitions of properties
valued at $5mm or more for a total of
$469 million, according to Loopnet,
up from 13 transactions and $355
million in 1Q06. The average price
per unit was $110,000, representing a
19% increase from the prior year average. The median cap rate was about
5.5%, but urban infill assets generally
traded at initial yields below 5%.
RED CAPITAL estimate probable
un-levered total returns for generic
metro apartment investments of 7.8%,
slightly less than the U.S. average.
But rent and volatility coefficients are
low, producing attractive riskadjusted returns. By our way of thinking, Chicago remains the deepest and
most attractive market in the Midwest, meriting assignment of an unconditioned “Accumulate” ranking.
Vacancy
(5.3.% - 1Q07)
Effective
Rents
Y-o-y
change
Projected
2007
10 bps
Unchd
3.9.%
3.1%
Unchd
50 bps
36.3k
27.0k
($942 - 1Q07)
Cap Rate Index
(.5.6% - 1Q07)
Employment
(3,813.2k - 1Q07)
KEY POINTS
•
Slower expansion in the business service,
construction and trade sectors reduced the
pace of metro job growth from 1.5% in
2006 to 1.0% in the first quarter.
•
Although the economy was slower overall,
hiring in knowledge-based services,
including health care, education and
finance accelerated.
•
RED CAPITAL forecast total job creation
of 27,000 in 2007 and 5,000 in 2008.
•
Retail apartment demand was sluggish, and
owners lost a net of 517 tenants.
Occupancy fell 10 basis points to 94.7%.
•
Rent trends were adversely affected,
causing sequential effective rent hikes to
decline to $6 (0.6%) from $14 (1.5%) in
the previous quarter.
•
Property trade accelerated nevertheless.
Proceeds from brokered trades of assets
valued at $5 million or more increased
32% for 1Q06 to $469 million. Sought
after infill assets were priced at initial
yields below 5%, but the Reis cap rate
index rose 20 bps to 5.5% in 2Q.
Chicago-Naperville-Joliet, IL Metropolitan Division - 1Q 2007
VACANCY TRENDS
•
•
Retail demand was softer in the first quarter, due in part to slower job
growth and perhaps the impact of shadow competition from unsold and
investor owned condos. Owners lost a net of 517 tenants, giving rise to
a 10 basis point sequential decline in occupancy to 94.7%.
At an average of 5.3%, Chicago moved up one place to 20th in the
RED 50 vacancy rate rankings.
Reis reduced its 2007 absorption forecast by 213 units to 167.
Nevertheless, the service affirmed its YE2007 and YE2008 occupancy
rate projections of 94.7% and 94.8%, respectively.
Source: Reis, Inc.
8%
Metro Vacancy Rate
•
Apartment Vacancy Trends
6%
5.4% 5.3%
4%
2%
CHICAGO
U.S.A.
0%
th
RANK: 20 out of 50
2008 VACANCY RATE OUTLOOK: Near equilibrium.
2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
00
01
RENT TRENDS
•
•
04
04
05
06
07
Apartments located in submarkets popular with young professionals
maintained impressive rent momentum. The Lincoln Park, Rogers
Park and the Gold Coast submarkets delivered 1.4% or better
sequential rent hikes. In contrast, the Loop was among the weaker
submarkets chalking only a 0.2% advance. Competition from a
growing inventory of unsold condos contributed to the moderate
increase.
Reis reduced its forecast for FY2007 effective rent growth from 3.6%
to 3.1%. The longer term outlook for CAGR of 3.5% remains intact.
8%
Asking
Effective
6%
3.9%
4%
3.2%
2%
0%
-2%
-4%
2Q 1Q 4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
00
Investors are showing keen interest in Loop submarket towers: 180 N.
Jefferson, 1 Delaware, 300 N. Canal St. and the Presidential Towers
exchanged hands at handsome prices since December.
01
02
03
04
04
05
06
07
Source: Reis, Inc.
6.8%
6.5%
6.3%
Cap Rate
Investor appetitive for Chicago-land properties increase in the first
quarter. A total of 19 broker-assisted trades were recorded by Loopnet
for a total of $469 million, comparing favorably to a gross of $355
million comparable proceeds in 1Q06, and Real Capital Analytics’
reported 2006 total of $1.47 billion.
01
Metro Multifamily Cap Rate Trend
PROPERTY MARKET & CAP RATE TREND
•
03
Source: Reis, Inc.
Weaker lease demand and competition from the shadow market of
unsold and investor-owned condos held first quarter rent hikes to an
average of $6 (0.6%), down from a $14 (1.5%) advance in the 4Q2006.
RANK: 28th out of 50
2008 RENT GROWTH RATE OUTLOOK: Decelerating.
•
02
Metro Rent Trends
YoY Rent Trend
•
01
6.0%
5.8%
5.5%
5.3%
2008 CAP RATE OUTLOOK:
There is little upward pressure on Chicago cap rates. But our downbeat payroll
forecast for 2008 suggests that investors should be cautious of high-priced
trophy properties.
5.0%
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q
05 05 05 05 06 06 06 06 07 07
NOTABLE TRANSACTIONS
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
BC
A
Jan-2007
Apr-2007
$13.2
$75.0
$97,780
$273,725
4.9%
4.0%
300 N. Canal Street (City West)
A
Feb-2007
$115.0
$254,990
N/A
Village Green (Aurora)
A
Jan-2007
$46.5
$109,650
N/A
Property Name
211 Delaware Street (Gold Coast)
180 N. Jefferson (Loop)
RED CAPITAL Research
Chicago-Naperville-Joliet, IL Metropolitan Division - 1Q 2007
Metro Median Single Family Home Prices
DEMOGRAPHICS & HOUSING MARKET
Source: National Association of Realtors
$300
CHICAGO
•
US
Prices (000)
$250
•
$200
$150
•
$100
03
04
Y
Y
3Q 4Q 1Q 2Q 3Q 4Q
05
05
06
06
06
06
Payroll Employment Growth
Retail demand for Loop condos is softer, but prices are firm and
owners are encountering good rental demand for vacant inventory.
2008 DEMOGRAPHIC OUTLOOK: The RED CAPITAL payroll forecast
foretells slower demographic growth in 2008.
Past 12 Months
•
80
Annual Chg (000)
The Chicago-land housing market outperformed the regional and
national averages. The National Association of Realtors reported that
the median priced existing home traded at $267,300 in 1Q07, an
increase of 1.4% year-over-year. By way of comparison, national and
Midwest region prices fell -1.8% and -2.8%, respectively.
EMPLOYMENT TRENDS
Source: BLS Data & RCG Research Forecast
60
40
Metropolitan Division population increased by 42,976 (0.54%) to
7,929,775 in 2006. The gain compares to a 33,823 (0.43%) advance in
2005. Net domestic migration flows remained a drain on local
population, generating a demographic loss of 66,997 last year.
27
20
5
0
-20
The Metropolitan Division hatched an average of 47,500 (1.2%) jobs
in the 12 months ended in April, representing moderately slower
growth than FY2006. Deceleration was largely confined to the construction, trade and business and professional services industries.
Conversely, education services, health care and finance registered
discernible gains over FY2006 averages.
-40
First Quarter 2007
-60
-80
•
-100
99 00 01 02 03 04 05 06 07f 08f
On an over-the-year basis, Chicago added 37,200 (0.9%) jobs in the
first quarter, down from 43,900 jobs in the previous 3-month period.
Net job cuts in construction, government and manufacturing were the
predominate factors contributing to this change.
Forecast
•
Year-over-year Payroll Growth Rate
Source: BLS
CHICAGO
USA
3%
2%
Rate
1%
0%
-1%
-2%
-3%
Forecast changes in the U.S. economy hold negative implications for
the Chicago metro economy. Specifically, National City Bank Chief
Economist Dr. Richard DeKaser predicts slower corporate capital
investment growth, a trend that in the past has had a negative affect
on Windy City job creation. Export / import flows and real consumption growth also are expected to recede, putting downward pressure
on the key retail and wholesale trade sectors. Moreover, DeKaser
anticipates a decrease in residential fixed investment, another factor
that will have a dampening affect on the Chicago economy. Consequently, payroll growth is expected to decline to 27,000 in 2007 and
5,000 in 2008. This compares to a previous forecast point estimates
of 27,000 and 8,000 reported in our 4Q06 report published in March.
RANK: 39th out of 50
-4%
99
00
01
02
03
04
05
06
07
2008 EMPLOYMENT GROWTH RATE OUTLOOK: Substantially slower
job growth
RED Estimated Generic Unlevered Asset Total Return Probabilites
15%
10%
Chicago
5.0% 4.4% 4.6%
Minneapolis
6.7% 6.5% 6.3%
Midwest Median
7.8% 7.8% 7.4%
8.9% 9.2% 8.3%
10.4% 11.1% 9.7%
5%
0%
90%
70%
50%
30%
10%
RED CAPTIAL Research
SUBMARKET TRENDS
Effective Rent
Submarket
South Shore
Gold Coast
Glenview/Evanston
SW Cook County
East Lake County
Lincoln Park
Rogers Park/Uptown
Aurora/Naperville
City West
Schaumburg/Hoffman
SE Cook County
Wheeling
Belmont-Montrose
Oak Park
Glendale Heights
Glen Ellyn/Wheaton
Palatine
Woodridge/Lisle
Downers Grove
O'Hare
The Loop
Metro
1Q06
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1Q07
810
1,382
964
770
806
1,120
696
888
834
914
746
921
1,033
837
905
844
950
825
812
809
1,447
907
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
832
1,475
998
771
829
1,161
730
934
886
939
767
944
1,082
854
932
878
985
852
854
832
1,508
942
Physical Vacancy
Change
1Q06
1Q07
2.8%
6.7%
3.6%
0.2%
2.8%
3.7%
4.9%
5.2%
6.2%
2.7%
2.8%
2.5%
4.7%
2.0%
3.0%
4.0%
3.6%
3.2%
5.2%
2.9%
4.2%
3.9%
5.7%
4.4%
4.2%
7.2%
6.5%
2.8%
4.6%
5.6%
5.2%
4.1%
4.6%
4.7%
4.0%
5.0%
5.0%
6.6%
7.6%
8.5%
7.5%
3.9%
7.5%
5.4%
6.3%
4.4%
5.2%
6.4%
6.1%
2.0%
3.5%
4.4%
8.2%
5.4%
4.3%
3.8%
3.5%
4.4%
4.9%
5.4%
6.9%
7.8%
6.0%
4.6%
8.2%
5.3%
SUPPLY TRENDS
•
60 bps
0 bps
100 bps
-80 bps
-40 bps
-80 bps
-110 bps
-120 bps
300 bps
130 bps
-30 bps
-90 bps
-50 bps
-60 bps
-10 bps
-120 bps
-70 bps
-70 bps
-150 bps
70 bps
70 bps
-10 bps
Completions and Absorption
6,000
Condominiums have been the product of choice for multifamily developers
for the past several years. Consequently, pipeline supply of purpose-built
multifamily rentals is thin. Only 686 investor grade units are expected to
be delivered this year, promising to be the smallest vintage in the last
twenty years. Apartments will be concentrated in the healthy Gold Coast
submarket as well as the saturated, City West and South Shore areas.
Source: Reis, Inc
4,000
2,000
Units
•
Change
0
-2,000
-4,000
Completions
Absorption
-6,000
Softness may persist in the Loop submarket, as two major projects are on
the horizon. Shadow competition from condo units entering the rental
pool already is exerting downward pressure on rent and occupancy.
-8,000
02
2008 SUPPLY TREND OUTLOOK: Rising, but digestible
03
04
05
06
07f
08f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
Daniel J. Hogan
Director of Research
[email protected]
614-857-1416
William T. Hinga
Business Development
[email protected]
614-857-1499
www.redcapitalgroup.com
800_837_5100
Columbus, OH_Boston, MA_Bozeman, MT_Fort Worth, TX
Fredericksburg, TX_Jupiter, FL_Nashville, TN_Newport Beach,CA
Philadelphia, PA_Reston, VA_San Diego, CA
©2006 RED CAPITAL GROUP (8/9/06)
Market Overview is a publication of RED CAPTIAL GROUP. If you are interested in other metro areas we cover or would like to
read about the research methodology we apply in our reports, please visit us at www.redcapitalgroup.com/research.
RED CAPITAL GROUP®
Market Overview
Chicago, Illinois
Multifamily Housing Update
March 2007
EXECUTIVE SUMMARY
T
he City with Broad Shoulders
has long been the piston that
drove the Midwest growth
engine, but lately it seems to be pulling a dead weight. According to the
Bureau of Labor Statistics, the metro
area was responsible for 39% of the
net payroll jobs produced in the 12state region in the year ended in January, rendering it not so much of a piston as an oasis of economic vitality
surrounded by nearly arid desert.
The metro division produced 54,900
(1.4%) jobs in 2006, its best performance since 1998. At the same time,
the unemployment rate plummeted to
the lowest level in 25 years (3.5%).
A surge in 1H06 skilled services hiring was primarily responsible, highlighted by a 22,300 (3.6%) job advance in business service payrolls and
a 12,600 (2.6%) net in the education
and health care service sector. Cranes
are visible everywhere on the skyline
and construction firms are hiring accordingly, adding 4,900 (2.8%) workers. The convention and tourism sector also is flourishing, giving rise to
10,600 (3.3%) new jobs in hotels,
restaurants and entertainment venues.
Trends in 4Q were slower, with overthe-year job growth dropping about
20% to 43,900 (1.1%). January and
February data followed form, registering 1.0% y-o-y advances in each case.
This downtrend causes RED CAPITAL Research’s econometric model
to produce a downbeat ‘07 forecast of
18m to 35m jobs with point estimate
of 27,000. The model foresees further
slowing in 2008, when job growth is
expected to range from -3,000 to
19,000. An upward revision of 4Q
data, which RCR considers likely,
would have a material positive impact
on these projections.
The robust economy and growing
uncertainty about home and condo
prices were potent catalysts for apartment demand. Tenants absorbed 811
units in 4Q (after adjusting for attrition of 500 units by way of condo
conversion), the highest total of net
move-ins recorded in a December
quarter since 1995. Unfortunately,
supply was plentiful as well. Developers completed the most units in one
quarter (1,113) since 2000, giving rise
to a 10 basis point occupancy rate
drop. Still, at 94.8% occupancy was
up 40 bps points y-o-y and perched at
the highest year-end level since 2001.
Further progress will not come easily.
Reis expect apartment supply to remain at challenging levels through the
end of the decade, with completion of
1,211 units in 2007, and an annual
average of 2,120 from ‘08 to ‘11. In
addition, shadow supply from unsold
condos may negatively influence the
market. Although the Chicago condo
market is among the better in the
U.S., unsold inventory represents
about a 9 month supply. Pressure may
begin to mount to offer more units for
rent in lieu of finding end buyers.
Asking rents topped $1,000 for the
first time, rising $10 sequentially and
$32 (3.3%) y-o-y. At the same time,
owners reduced rent concessions
nearly 10%, boosting effective rents
4.1% y-o-y to $936. The typical concession fell to 6.5% of gross rent,
raising Chicago to 22nd in the RED
50 by way of rent growth and 38th
with respect to rent concession level.
Reis expect rent trends to decelerate
to 3.6% in 2007, and maintain
roughly that rate through 2011.
Investors exhibited enthusiastic interest in metro properties, but sales velocity decelerated from the blistering
pace set in 2005. RCA report that 62
properties exchanged hands last year,
down from 66 in 2005. Total proceeds
of $1,470mm were recorded, a 33%
over-the-year decrease. The average
SNAP SHOT
Vacancy
(5.2% - 4Q06)
Effective
Rents
($936 - 4Q06)
Cap Rate
(5.5% - 4Q06)
Y-o-y
change
Projected
2007
40 bps
unch
4.1%
3.6%
70 bps
unch
Employment
(3,887.1k - 4Q06)
43.9k
27k
price of a unit fell 22% to $93,942. But cap rates
were stable, holding at an average of 6.3%.
By our count, 19 assets sold for $5mm or more
in 4Q06 for aggregate proceeds of $490mm. In
all, 3,600 units exchanged hands, yielding an
average price of $136,218/unit. Sales picked up
in early 2007, spurred by two gigantic high rise
trades. The sales of the Grand Plaza in River
North and Presidential Towers in the Loop set
the bar for high rise apartment deals. Combined
proceeds exceeded $700mm and the cap rate for
each trade was below 4% by our estimate.
The tower sales suggest that the Chicago downtown market is approaching an over-bought
condition. Buyers appear to be discounting significant rent increases, figuring that conditions
are ripe for the creation of an owner’s market.
Were our pessimistic economic forecast to develop, rapid rent growth is unlikely to evolve.
Nevertheless, one finds much to like in the
Windy City. It remains one of the deepest and
most liquid markets in the country with an attractive return profile. But discipline is demanded: investors should approach with caution
and buy “Opportunistically” on strong fundamentals.
Chicago-Naperville-Joliet, IL Metropolitan Division - 4Q 2006
VACANCY TRENDS
•
•
Renter demand was encouraging in the seasonally slow fall quarter.
After adjusting for conversions, net absorption totaled 811 units,
apparently the best 4Q performance recorded in more than ten years.
In spite of healthy lease interest, occupancy fell 10 bps sequentially
due to supply pressures. Developers completed 1,113 units, the largest
single quarter delivery since 2000. Supply promises to remain high.
With single-family and condo markets unsettled by unsold inventory
pressure, demand for apartments should be robust in 2007. Reis
conservatively project absorption of 380 units, resulting in a 10 bps
decline in occupancy. Stronger results are likely should the economy
perform better than the pessimistic RCR forecast suggests.
Source: Reis, Inc.
8%
Metro Vacancy Rate
•
Apartment Vacancy Trends
6%
5.6%
2%
CHICAGO
U.S.A.
0%
RANK: 21st out of 50
2008 VACANCY RATE OUTLOOK: Stable with upside potential
4Q 3Q 2Q 1Q
4Q 3Q 2Q 1Q 4Q
00
03
01
RENT TRENDS
•
•
•
8%
Effective rents gained momentum, advancing 4.1% y-o-y to $936.
6%
A sequential $14 (1.4%) effective rent increase in 4Q was the largest in
almost six years. Indeed, it was the first q-o-q advance exceeding 1%
since 1Q2001.
05
06
06
The value of the typical concession package dropped from $70 (7.1%
of gross revenue) to $64 (6.5%), lowest in four years.
4.1%
4%
2%
3.3%
0%
-2%
-4%
4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q 4Q
00
The pace of trade in the Chicago apartment mart accelerated in early
2007. The sale of a luxury rental/condo tower in River North set the
tone. A buyer paid an average of more than $300,000 per unit at an
initial yield of about 3.6% for this trophy asset.
2008 CAP RATE OUTLOOK: Demand for trophy properties exerted
downward pressure on cap rates in 1Q07.
02
03
03
04
05
06
06
Source: Reis, Inc.
7.0%
Trade in metro properties continued at a high level in 4Q. By RCR
count, a total of 19 trades valued at $5mm or more were closed for a
total of $490.4mm. The average price per unit was $136,218.
Real Capital Analytics report that trades count and proceeds declined
6% and 22%, respectively in 2006. The average cap rate was virtually
unchanged at 6.3%.
01
Metro Multifamily Cap Rate Trend
6.5%
Cap Rate
•
04
Asking
Effective
PROPERTY MARKET & CAP RATE TREND
•
03
Source: Reis, Inc.
RANK: 22nd out of 50
2008 RENT GROWTH RATE OUTLOOK: Moderating to near the U.S.
metro average.
•
02
Metro Rent Trends
In the fourth quarter, average asking rents pierced the $1,000 threshold
for the first time, rising 3.3% y-o-y to $1,001.
YoY Rent Trend
•
5.2%
4%
6.0%
5.5%
5.0%
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q
05 05 05 05 06 06 06 06 07
NOTABLE TRANSACTIONS
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
1212 S Michigan Avenue
A (High Rise)
Oct-2006
$65.0mm
$188,953
4.2%
Windscape Village (Naperville)
BC (Garden)
Dec-2006
$35.5mm
$100,852
5.6%
BC (High Rise)
A (High Rise)
Mar-2007
Jan-2007
$470mm
$300mm (est.)
$200,341
$393,000 (est.)
3.8%
3.6%
Property Name
Presidential Tower
Grand Plaza (Apt. Tower)
RED CAPITAL Research
Chicago-Naperville-Joliet, IL Metropolitan Division - 4Q 2006
DEMOGRAPHICS & HOUSING MARKET
Metro Median Single Family Home Prices
Source: National Association of Realtors
CHICAGO
US
$300
•
Prices (000)
$250
•
$200
$150
•
$100
$50
$0
240 264 3Q 4Q 1Q 2Q 3Q 4Q
05
05
06
06
06
Home prices were flat after mid-year 2005. Inventories of unsold
homes reached a 9-month supply last fall, and remain inflated despite a
moderate pick up of sales during the winter. Pending delivery of more
high rise condo units may exert downward pressure on prices.
2008 DEMOGRAPHIC OUTLOOK: Dependent on economic developments
EMPLOYMENT TRENDS
Source: BLS Data & RCG Research Forecast
Past 12 Months
•
80
60
40
County data for 2006 suggest that net out-migration levels subsided
last year. Total population increased 41,439 (0.5%) in Illinois
constituent counties, a 19% improvement over the prior year.
06
Payroll Employment Growth
Annual Chg (000)
•
Consistent net domestic migration losses held metro population growth
below 1.0% from 1999 to 2005. Losses in 2005 were the highest
recorded in the Census Bureau’s 15-year series.
27
8
20
0
-20
-40
-60
-80
-100
99 00 01 02 03 04 05 06 07f 08f
Chicago produced the best jobs performance since 1999 last year.
Establishment payrolls increased 54,900 (1.4%), fueled by phenomenal expansion in the skilled services and convention/tourism sectors.
Business service employment advanced by 22,300 (3.6%), paced by
the professional, scientific and technical services component which
encompasses among other things legal, accounting, tax preparation,
computer system design, engineering and architectural businesses.
Colleges, universities and ambulatory health care facilities also grew
liberally, giving rise to a 2.6% rise in health care and education services super-sector. In this leisure services sector, hotels hired 1,000
(2.6%) workers, while food and beverage operations added 8,500
workers for the equivalent of 3.6% growth.
Year-to-Date
•
Year-over-year Payroll Growth Rate
Source: BLS
CHICAGO
USA
3%
2%
Forecast
1%
Rate
Growth was slower in the fourth quarter 2006 than was observed
earlier in the year. January and February data were slower still, exhibiting over-the-year job creation levels of 38,400 and 36,900, respectively. A net loss of construction jobs contributed to the slowdown, as well as weaker retail and business services trends.
•
0%
-1%
-2%
-3%
-4%
99
00
01
02
03
04
05
06
07
The RED CAPITAL econometric payroll model produces a relatively pessimistic forecast for Chicago-land. The model extrapolates
on weakness observed in the most recent data to yield a 2007 projection of 18,000 to 35,000 jobs with a point estimate of 27,000. The
outlook for 2008 is weaker still, falling within a confidence band of –
3,000 and 19,000. An upward revision of 4Q06 data, a likely prospect in our view, would result in a more upbeat forecast.
RANK: 34th out of 50
2008 EMPLOYMENT GROWTH RATE OUTLOOK: Diminishing
RED Estimated Generic Unlevered Asset Total Return Probabilites
15%
10%
5%
Minneapolis
4.4%
5.0%
Chicago
6.5%
6.7%
7.8%
7.8%
9.2%
8.9%
11.1% 10.4%
0%
90%
70%
50%
30%
10%
RED CAPTIAL Research
SUBMARKET TRENDS
Effective Rent
Submarket
Physical Vacancy
4Q05
4Q06
Change
4Q05
4Q06
$1,098
$1,140
3.8%
3.1%
2.1%
-100 bps
City West
$844
$887
5.1%
5.7%
7.2%
150 bps
Gold Coast
$1,351
$1,454
7.6%
4.1%
4.8%
70 bps
The Loop
$1,393
$1,505
8.0%
8.3%
6.1%
-220 bps
Lincoln Park
Change
South Shore
$813
$831
2.2%
6.1%
6.7%
60 bps
SE Cook County
$741
$757
2.2%
5.7%
5.0%
-70 bps
-120 bps
SW Cook County
$763
$775
1.6%
6.3%
5.1%
Downers Grove
$805
$846
5.1%
6.3%
5.8%
-50 bps
Woodridge/Lisle
$822
$843
2.6%
8.3%
8.0%
-30 bps
Aurora/Naperville
$884
$927
4.9%
5.2%
4.5%
-70 bps
Wheeling
$916
$950
3.7%
4.9%
4.0%
-90 bps
Glendale Heights
$911
$932
2.3%
5.3%
5.0%
-30 bps
Schaumburg/Hoffman
$893
$940
5.3%
4.6%
4.7%
10 bps
Palatine
$953
$974
2.2%
8.0%
7.0%
-100 bps
Glenview/Evanston
$950
$994
4.6%
4.3%
4.0%
-30 bps
Rogers Park/Uptown
$700
$717
2.4%
5.0%
3.6%
-140 bps
$1,017
$1,076
5.8%
4.3%
2.7%
-160 bps
$845
$862
2.0%
6.4%
4.7%
-170 bps
Belmont-Montrose
Oak Park
Glen Ellyn/Wheaton
$841
$869
3.3%
6.6%
5.8%
-80 bps
O'Hare
$805
$838
4.1%
4.4%
3.9%
-50 bps
East Lake County
$799
$823
3.0%
6.6%
6.4%
-20 bps
West Lake County
$849
$872
2.7%
11.9%
10.5%
-140 bps
McHenry County
$792
$790
-0.3%
6.1%
6.4%
30 bps
Kane County
$833
$861
3.4%
6.2%
5.6%
-60 bps
Joliet
$699
$728
4.1%
6.2%
5.5%
-70 bps
Completions and Absorption
SUPPLY TRENDS
Source: Reis, Inc
7,500
•
•
Reis anticipate a brief period of supply relief in 2007, followed by
consistently high levels of new construction from 2008 to 2011.
5,000
Popular City West and Gold Coast neighborhoods will add 512 units in
2007, and another 200 units are expected to be completed in Oak Park.
0
2,500
Units
•
-2,500
-5,000
Supply is projected to average 2,120 units per year from 2008—2011,
an imposing barrier against further occupancy rate progress.
-7,500
Completions
-10,000
2008 SUPPLY TREND OUTLOOK: Supply will be great enough to impede
significant progress on occupancy, but not so great as to exert downward
pressure on rents and average occupancy rates.
02
03
04
05
Absorption
06
07f 08f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
Daniel J. Hogan
Director of Research
[email protected]
614-857-1416
William T. Hinga
Business Development
[email protected]
614-857-1499
www.redcapitalgroup.com
800_837_5100
Columbus, OH_Boston, MA_Bozeman, MT_Fort Worth, TX
Fredericksburg, TX_Jupiter, FL_Nashville, TN_Newport Beach,CA
Philadelphia, PA_Reston, VA_San Diego, CA
©2006 RED CAPITAL GROUP (8/9/06)
Market Overview is a publication of RED CAPTIAL GROUP. If you are interested in other metro areas we cover or would like to
read about the research methodology we apply in our reports, please visit us at www.redcapitalgroup.com/research.
RED CAPITAL GROUP®
Market Overview
Chicago, Illinois
Multifamily Housing Update
November 2006
EXECUTIVE SUMMARY
T
hird quarter job creation
cooled slightly to 1.1%, down
10 basis points from the 1H06
average and matching the 2005 average annual growth rate. Payrolls totaled 4,551,200, in the third quarter, an
increase of 51,800 year-over-year.
Increases in professional and business
service employment accounted for
64.4% of total employment growth in
3Q06, increasing 4.7%, y-o-y. The
leisure and hospitality sector added
10,000 jobs in 3Q06, accounting for
19.4% of total job growth. Y-o-y
growth in financial activities slowed to
6.6% in 3Q06, following an increase
of 10.9% in 1H06.
Unemployment fell 110bps to 4.5%
between August 2005 and 2006. The
rate decreased 20bps since July.
RED forecast payroll job creation of
52,000 in 2006 and 38,000 in 2007.
Slower domestic economic growth and
the housing market slowdown will
negatively impact job creation in 2007.
Metro occupancy averaged 94.9% in
3Q06, 30bps higher than the average
of the 50 metro areas tracked by RED
CAPITAL (RED 50), ranking 26th
overall. Occupancy was up 30bps y-oy, and unchanged since 2Q06.
The y-o-y vacancy improvement is
primarily attributable to the net absorption of 2,810 units in 1H06.
Negative net absorption of 100 units
was observed in 3Q06. Also benefiting occupancy was the lack of new
supply entering the market in 3Q06.
In 4Q07, Reis expect negative net absorption of two units and the addition
of 513 units to apartment inventory,
causing vacancy to increase 10bps. In
2007, Reis project net absorption of
1,690 units and 1,589 unit deliveries.
RED’s rental demand model supports
this forecast, anticipating 1.0% demand growth in 2007 after a gain of
0.5% in 2006.
Effective rents increased 2.4% be-
tween 3Q05 and 3Q06, ranking 38th
among the RED 50. Asking rents
increased 2.3% to $991 over the period, marking the seventh consecutive
quarter that effective rent growth outpaced advances in asking rents. The
average concession package declined
to 7.3% of gross rent revenue, down
from a high of 8.6% in 2004, as tightening markets allowed owners to reduce lease incentives.
Reis forecasts effective rent growth of
3.4% in 2007. RED’s econometric
rent model produces contrasting results
generating a more conservative forecast of potential rent growth.
Strong demand and moderate supply
create the environment for tightening
markets in 2007. Reis forecast unchanged occupancy y-o-y, but the
RED model suggests that higher occupancy can be achieved. The substantial inventory of unsold condominiums, both converted and purpose built
pose the greatest risk to the forecast
should owners choose to rent units
temporarily until the housing market
improves. Given the size of Chicago’s
rental market, the aforementioned
risks, even if realized, should not cause
substantial detriment to the market.
Average cap rates increased 20bps in
3Q06 to 6.1%, but remain below the
national and Midwest regional averages. The average price per unit
traded in the third quarter was
$96,800, down from the trailing 12month average of $120,400, implying
a down-market shift in buyer focus.
Overall, the Chicago market exhibits
strong supply and demand fundamentals and represents a good option for
investors seeking Midwest opportunities. But cap rates are low relative to
our revenue growth expectations, leading RED to assign an “Opportunistic”
rating to metro assets, suggesting that
cap rates have gotten ahead of market
fundamentals. Investors should be
patient until asset prices are rationalized.
SNAP SHOT
Vacancy
(5.1% - 3Q06)
Effective
Rents
Y-o-y
change
Projected
2007
30bps
10bps
2.4%
1.4%
20bps
unch
51.8k
38k
($922 - 3Q06)
Cap Rate
(6.1% - 3Q06)
Employment
(4,551.2k - 3Q06)
KEY POINTS
•
•
•
•
•
Vacancy fell 30 basis points between 3Q05
and 3Q06 from 5.4% to 5.1%, largely
attributable to the positive net absorption of
2,810 units in 1H06.
Effective rents increased 2.4% over the past
twelve months. Asking rents increased 2.3%
over the same period.
The Reis estimated average cap rate fell 20
basis points to 6.1%, since 3Q05. On a
sequential quarter basis, however, cap rates
increased 20 basis points.
Payroll job growth averaged 1.1% in 3Q06
as 51,800 jobs were created, year-over-year.
Growth in 1H06 was slightly more robust at
1.2%.
RED forecast the creation 52,000 jobs
(1.2%) in 2006 and 38,000 jobs (0.8%) in
2007.
Chicago, Illinois MSA - 3Q 2006
VACANCY TRENDS
•
•
Vacancy fell 30 basis points between 3Q05 and 3Q06 to 5.1%. On a
sequential quarter basis, vacancy remained unchanged. The year-overyear vacancy drop is attributable to net absorption of 2,810 units in
1H06. Negative net absorption of 100 units was observed in 3Q06.
Condo conversion slowed through the first three quarters of 2006, as
only 862 apartment units converted, 4,520 fewer than the total through
the third quarter of 2005.
RED forecast rental demand to increase 1.0% in 2007. Reis project
vacancy to climb 10 basis points in 4Q06 and remain at 5.2% in 2007.
Source: Reis, Inc.
8%
Metro Vacancy Rate
•
Apartment Vacancy Trends
6%
5.4%
4%
Chi
2%
0%
th
RANK: 26 out of 50
2007 VACANCY RATE OUTLOOK: Small Increase
QIII
QII
QI
00
01
02
RENT TRENDS
•
•
•
03
04
QIV QIII
05
05
06
Concessions averaged 7.0% of asking rent in 3Q06, less than onemonth free rent on a twelve-month lease, the lowest value since 4Q02.
Nationally, concessions averaged 5.3% in 3Q06.
RED forecast effective rent growth deceleration in 2007 due to slower
regional economic growth. RED anticipate effective rents to increase
2.3% in 2006 and 1.4% in 2007.
8%
6%
Asking
Effective
4%
2.4%
2%
2.3%
0%
-2%
-4%
QIII
QII
QI
QIV
QIII
QII
QI
00
01
02
02
03
04
05
05
06
Source: Reis, Inc.
7.0%
The trend of falling cap rates ended in 3Q06 as going-in yields
increased 20 basis points from 5.9% in 2Q06 to 6.1% in 3Q06.
Nevertheless, yields were 20bps below the comparable period of 2005.
6.5%
Cap Rate
Per unit prices averaged $96,800 in 3Q06 and $120,400 over the past
four quarters. The average size of properties traded in 3Q06 was 42
units. By comparison, the average size of properties traded over the
past year was 78 units.
QIV QIII
Metro Multifamily Cap Rate Trend
PROPERTY MARKET & CAP RATE TREND
•
02
QI
Source: Reis, Inc.
Effective rents increased 2.4% between 3Q05 and 3Q06, outpacing
asking rent growth for the seventh consecutive quarter. Asking rents
increased 2.3%, year-over-year.
RANK: 38th out of 50
2007 RENT GROWTH RATE OUTLOOK: Decreasing
•
QIV QIII QII
Metro Rent Trends
YoY Rent Trend
•
5.1%
U.S.A.
6.0%
5.5%
Properties in the Gold Coast submarket commanded the highest prices
over the past year, averaging nearly $240,000 per unit.
5.0%
2007 CAP RATE OUTLOOK: Stable
At a Reis indexed average of 6.1%, Chicago cap rates are below national and
regional averages.
QI
QII
QIII QIV
QI
QII
QIII
05
05
05
06
06
06
05
NOTABLE TRANSACTIONS
Property Name
Iron Gate
Wellington Apartments
South Paxton
South Wesley
RED CAPITAL Research
Property Class
Date of
Transaction
Total Price
(in millions)
Price per unit
Estimated Cap
Rate
B/C
B/C
B/C
B/C
September 2006
September 2006
August 2006
August 2006
$15.0
$5.0
$5.0
$5.0
$83,333
$92,213
$121,951
$104,167
5.2%
5.8%
4.7%
5.4%
Chicago, Illinois MSA - 3Q 2006
Metro Median Single Family Home Prices
Source: National Association of Realtors
•
$300
MSA
US
•
Prices (000)
$250
$200
•
$150
$100
03
04
QII
QIII
QIV
QI
QII
Y
Y
05
05
05
06
06
Payroll Employment Growth
75
52
The homeownership rate increased 360 basis points since 2000 to
70.0%. The average rate of homeownership among the RED 50 is
67.1%.
The median price of a single family MSA home increased 4.9%
between 2Q05 and 2Q06 from $265,400 to $278,500. The median
condo price increased 5.9% to $223,200, over the same period.
2007 DEMOGRAPHIC OUTLOOK: Stable
Population growth and household formation will continue to outpace the
regional average.
Past 12 Months
38
50
•
•
25
0
-25
Payroll job creation totaled 46,700 or 1.1% in 2005, the largest annual
increase since 2000.
Over the past twelve months year-over-year growth averaged 51,600
or 1.2%.
Year-to-Date
-50
•
-75
-100
•
-125
99
00
01
02
03
04
05
06f 07f
•
Year-over-year Payroll Growth Rate
Source: BLS
•
Chicago
USA
2%
1%
•
0%
-1%
•
-2%
-3%
-4%
99
00
01
02
03
In 3Q06, year-over-year payroll growth averaged 1.1%, down 10
basis points from the 2Q06 rate of 1.2%.
Professional and business services and financial activities combined
to account for 71.0% of payroll growth in 3Q06 and 62.8% of growth
in 1H06.
Leisure and hospitality employment increased 2.5% year-over-year in
3Q06, as 10,000 jobs were created. In 1H06, growth for the sector
averaged 3.0% or 11,200 jobs.
Forecast
3%
Rate
Metro population increased 0.5% between 2004 and 2005 from
9,393,259 to 9,443,356.
EMPLOYMENT TRENDS
Source: BLS Data & RCG Research Forecast
Annual Chg (000)
DEMOGRAPHICS & HOUSING MARKET
04
05
06
RED forecast payrolls to increase between 50,000 (1.1%) and 55,000
(1.2%) in 2006.
In 2007, RED anticipate payrolls to increase between 30,000 (0.7%)
and 45,000 (1.0%).
The magnitude of the lower job creation in 2007 partly depends on
Chicago’s sensitivity to slower domestic growth.
RANK: 34th out of 50
2007 EMPLOYMENT GROWTH RATE OUTLOOK: Decreasing
RED CAPTIAL Research
SUBMARKET TRENDS
Effective Rent
Physical Vacancy
Submarket
Lincoln Park
City West
3Q05
3Q06
Change
3Q05
3Q06
$1,085
$1,109
2.2%
2.7%
2.9%
Change
20 bps
$829
$868
4.7%
6.0%
4.6%
-140 bps
Gold Coast
$1,373
$1,426
3.9%
4.7%
3.5%
-120 bps
The Loop
$1,409
$1,478
4.9%
8.6%
6.9%
-170 bps
South Shore
$820
$826
0.7%
5.7%
6.3%
60 bps
SE Cook County
$743
$757
1.9%
5.1%
4.3%
-80 bps
100 bps
SW Cook County
$759
$770
1.4%
5.3%
6.3%
Downers Grove
$811
$845
4.2%
5.9%
5.9%
0 bps
Woodridge/Lisle
$819
$844
3.1%
8.6%
8.3%
-30 bps
60 bps
Aurora/Naperville
$882
$900
2.0%
4.7%
5.3%
Wheeling
$918
$939
2.3%
4.2%
4.4%
20 bps
Glendale Heights
$907
$917
1.1%
5.7%
4.5%
-120 bps
Schaumburg/Hoffman
$904
$924
2.2%
3.7%
3.5%
-20 bps
Palatine
$946
$961
1.6%
7.8%
6.9%
-90 bps
Glenview/Evanston
$941
$980
4.1%
4.0%
4.4%
40 bps
Rogers Park/Uptown
$689
$708
2.8%
5.5%
4.6%
-90 bps
$1,018
Belmont-Montrose
$1,049
3.0%
4.1%
3.4%
-70 bps
Oak Park
Glen Ellyn/Wheaton
$838
$845
0.8%
5.7%
5.1%
-60 bps
$836
$854
2.2%
6.7%
6.3%
-40 bps
O'Hare
$812
$819
0.9%
4.1%
4.0%
-10 bps
East Lake County
$802
$826
3.0%
6.4%
6.8%
40 bps
West Lake County
$859
$881
2.6%
7.6%
8.1%
50 bps
McHenry County
$799
$792
-0.9%
5.9%
5.5%
-40 bps
Kane County
$839
$848
1.1%
6.5%
4.9%
-160 bps
Joliet
$703
$729
3.7%
5.9%
5.1%
-80 bps
Metro Average
$900
$922
2.4%
5.4%
5.1%
-30 bps
Completions and Absorption
SUPPLY TRENDS
•
•
Reis report that only 326 apartment units were delivered year-to-date,
compared to the 1,200 unit total through the first three quarters of
2005.
6,000
Reis project the completion of 513 apartment units in 4Q06, 451 of
which are under construction in the Loop submarket. The remaining
62 will be delivered in the City West submarket.
4,000
Completions
Absorption
5,000
Units
•
Source: Reis, Inc
3,000
2,000
In 2007, Reis project 6,314 unit completions, only 19.2% or 1,214 are
apartment units, the remaining are condo.
1,000
2007 SUPPLY TREND OUTLOOK: Stable
0
Between 4Q06 and 4Q07, Reis project apartment inventory to increase 0.5%.
03
04
05
06f
07f
RED CAPITAL GROUP
Two Miranova Place
Columbus, OH 43215
Daniel J. Hogan
Director of Research
[email protected]
614-857-1416
William T. Hinga
Business Development
[email protected]
614-857-1499
www.redcapitalgroup.com
800_837_5100
Columbus, OH_Boston, MA_Bozeman, MT_Fort Worth, TX
Fredericksburg, TX_Jupiter, FL_Nashville, TN_Newport Beach,CA
Philadelphia, PA_Reston, VA_San Diego, CA
©2006 RED CAPITAL GROUP (8/9/06)
Market Overview is a publication of RED CAPTIAL GROUP. If you are interested in other metro areas we cover or would like to
read about the research methodology we apply in our reports, please visit us at www.redcapitalgroup.com/research.

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