New and experienced investors alike are hitting road blocks in the current market, i.e. lack of inventory and increased competition on all fronts. These investors have money to deploy and goals to achieve but limited opportunities in the current market.
The current months supply of inventory of 2-4 unit multifamily apartment buildings on Chicago’s north side (as I measure it) is down a whopping 75% from 12 months ago. At the end of October 2012 there was approximately 2.4 months supply vs. 9.7 months for October 2011. Generally, a healthy market has 5-6 months supply of inventory.
To say there is a major disconnect in the supply and demand for this asset class is an understatement. The result is much higher sale prices on a year over year basis. This is great for investors who ventured into the market before there was light at the end of the tunnel. In some cases, property purchased in 2009-2011 is already reselling for profit without major capital improvements.
I think there is still plenty of upside left in the market. Inventory will continue to tighten going into the winter months but we could see a pop in bank REO listings toward the end of the year if there is a need to clear up the books for tax purposes, so watch for that. The key to making money is not to chase deals that don’t make sense. Plenty of properties are getting bid up well past the point of profitability only to come back to the next high bidder or even to the open market again. Big banks control a lot of inventory and the federal government (i.e. tax payers) still backs 90% of all mortgages. The market is far from functioning on its own.
To find off-market opportunities, a lot of investors are looking into buying at foreclosure auctions (sheriff sales). This can be a profitable way to go about acquiring real estate but the ranks of investors in this arena are swelling and competition is equally as stiff, many with deep pockets and a lot of experience. Short sales continue to be a solid way to acquire distressed assets at a decent discount in some cases but deals are fewer and farther between these days as banks have become much more sophisticated about maximizing every dollar from a sale. The new normal for real estate doesn't seem to have presented itself yet.
Is it time to start incorporating a value for appreciation in your underwriting? If you believe the market was oversold then this could be a realistic assumption. Be careful though, there is still a big pipeline of potential sellers out there who want to sell but can't because they owe more than their property is worth. Oh, and the shadow inventory that the banks control is still there too (even though no one talks about it anymore).
A few neighborhoods with good upside at this time include West Town, Logan Square and Irving Park. There were a lot of foreclosures in these areas that are still working through the system. We should continue to see good value-add buys here.
If you're an investor looking to purchase multifamily investment property in Chicago, contact Brent Hall to get started today.