The low hanging fruit has been purged from the market throughout most of the north side neighborhoods in Chicago (not counting the shadow inventory of REO properties that will filter into the market for years to come, albeit at higher valuations). Investors in the market today are continuously finding themselves in a Battle Royale for good buying opportunities. So where should you look to buy in the current market and should appreciation play into your investment analysis?
Recent sales data for a handful of north side community areas (Rogers Park, West Ridge, Uptown, Lincoln Square, North Center, Lakeview, Lincoln Park, Near North Side, North Park, Albany Park, Irving Park, Avondale, Logan Square, West Town and Edgewater) shows that there is a collective 2.09 months of supply of residential 2-4 unit multifamily properties currently available for sale. Historically, 5-6 months supply is considered a healthy market. Below that range, we are technically in a sellers market and above the range, a buyers market.
You can calculate Months Supply of Inventory (MSI) using the number of properties under contract or sold in a given month. I prefer to use properties under contract as recent sales have typically been off market for 30+ days which doesn’t give you as accurate a picture of the current market. To calculate MSI using properties under contract, simply divide the total number of properties for sale on the last day of the month by the total number of properties under contract for the month example: 10 properties for sale on the last day of the month / 5 properties under contract that month = 2 months supply.
Below is a break-down of MSI for 2-4 unit multifamily properties in Chicago by the community areas mentioned earlier.
We can see that demand outstrips supply across the board here. We can also assume that supply is historically low at 2.09 months (collectively for all areas) because the market is in a recovery stage where demand typically is still building. What I want to know is:
- How does the current market demand stack up versus demand at pre-bubble highs?
- What is the likelihood of upward pressure on pricing over the next 12 months (short-term)?
- What neighborhoods stand to appreciate the most in the short term based on anticipated demand?
This chart takes the same available inventory for sale from January 2013 and compares it to sales from January 2006, allowing us to see the difference in current market demand vs market demand at recent cyclical highs. See the Hypothetical Months Supply Inventory –Sold column for the break down. As you can see, if you take the historically high demand from 2006 and apply it to the inventory available to purchase in 2013 the MSI drops significantly almost across the board. This tells me there is potential for increased demand (buyers) to enter the market which could push prices higher even if supply increases at an incremental rate.
I believe supply will increase marginally toward a recovery level over a 12-36 month period but the next 12 months will see minimal supply added to the market. Here are three reasons why. One, pricing is still substantially lower than 2006-07 highs in some neighborhoods, leaving many owners under-water or break even at best. It might be a while before we see this group re-enter the market as sellers outside of distressed sales. Two, ready, willing and able sellers may continue to shy away from the market due to lack of reinvestment opportunities or they may simply want to wait for a higher anticipated future valuation. Three, asset managers supervising the disposition of REO properties have shown that they are content to slowly sell repossessed assets.
So, if you are in the market this year and you recognize that appreciation could play a part in your investment strategy for the first time in many years, where should you focus your efforts? Based on the difference between recent and historical sales volumes, it’s a safe bet that buyers will be looking to get back into prime neighborhoods again while they are still affordable. Lakeview, Lincoln Park, North Center and Lincoln Square are my appreciation picks for 2013. These neighborhoods had between 50-85% fewer sales in Jan 2013 vs. Jan 2006. Logan Square, West Town, Irving Park, Avondale and Irving Park are hot neighborhoods right now and will likely trend higher in value throughout 2013 but likely at a slower pace compared to neighborhoods where historically higher sales volume hasn’t caught up yet.
It’s important to note that this analysis is based on a snapshot of 1 month out of 12. The Months Supply of Inventory varies month to month. Also, comparing sales figures from 2006 to current levels of available inventory in 2013 is a stretch especially when you consider that many factors influencing demand in 2006 may not exist in the current market. Demand at present, is historically low so count on more buyers entering the market as the recovery expands over the next 12-24 months. A further assumption with this analysis is that supply will come to market at an incrementally slower pace than demand throughout 2013, I could be wrong about this but there are still a lot of would be sellers out there with little or no equity in their properties and this will likely keep them out of the market until values move higher.
Contact Brent Hall to discuss buying and selling multifamily property in Chicago.