The Chicago Apartment Market Offers a Unique Combination of Benefits to Investors

When it comes to investing in apartments at a gateway market with low capital requirements, a wide choice of investment opportunities, above average income returns, attractive capital returns,  and the low investment risk of a world-class economy and a market with a large and stable population base, Chicago is the obvious choice.

The Chicago metropolis is the third largest in the USA with a 2020 population count of over 9.6 million. It is also a major world financial center, and one of the nation’s largest and dynamic job markets. Furthermore, Chicago city (nicknamed as Chicagoland), boasts the second largest central business district in the U.S.

The robustness of Chicago’s economy is underscored by the fact that it is the nation’s largest transportation, distribution and logistics (TDL) hub, hosting the largest number of TDL companies (including the majority of third-party logistics providers) and supported by an unmatched TDL infrastructure and network that includes the second busiest airport in the country and major terminals by six of the seven Class I railroads. Chicago is the nation’s rail hub, as it is the only U.S. gateway where these Class I railroads can interchange traffic. Adding to Chicago’s dominance in the TDL sector is the size of its industrial market, which is by far the largest in the country with an inventory that is by one third larger than the second largest industrial market in the U.S.

There are several arguments, which when considered together, make a very compelling case for investing in the Chicago apartment market. In particular, investors can enjoy the following benefits by acquiring apartment assets in the Chicago residential market:

  • Low long-term investment risk, as it is backed by an enormous economy and employment base that rivals nations in terms of its size

  • Large and stable demand base fueled by a large and stable population and above-average household income

  • Relatively low capital requirements for investment entry

  • Numerous and diverse investment opportunities across a wide spectrum of locations, price levels, asset sizes and asset qualities

  • High liquidity and easy investment entry and exit

  • High initial yields and income returns from renting the property

  • Attractive long-term capital returns

 

Chicago’s Huge and Diverse Economy Reduces the Long-Term Risk of Investing in Apartments

Chicago’s residential market is backed by an enormous and diverse economy that rivals nations in terms of its size. Chicago’s economy, with a Gross Regional Product of over $690 billion is larger than the economies of whole countries like Poland, Thailand, Sweden and Belgium (worldbusinesschicago.com). 

The Chicago metropolitan economy is the third largest in the United States in terms of Gross Domestic Product and employment, providing jobs to over 6.2 million people (per the latest data provided by the Bureau of Economic Analysis). It is home to over 30 Fortune 500 companies, including Walgreens Boots Alliance, Boeing, Archer Daniels Midland, The Allstate Corporation, Kraft Heinz, McDonald’s Corporation, US Foods, and many more. Chicago has the second largest Securities Brokers, Dealers, and Exchanges cluster in the U.S. and remains the global center of derivatives trading in terms of scale and talent.

 

Figure 1 Chicago MSA Nonfarm Employment: Shares by Economic Sector

Source: Bureau of Labor Statistics

 

Chicago’s economy is diverse with no sector accounting for more than 21% of total nonfarm employment, according to the data provided by the Bureau of Labor Statistics as of August 2021 (see Figure 1). Not surprisingly, the trade, transportation and utilities sector has the largest share of total employment in the Chicago metropolitan area (20.6%) followed by professional and business services (17.9%), education and health services (15.5%) and Government (11.3%). The area’s employment base has remained relatively stable over the last decade as it has been growing at an average rate of 1.2% over the period 2009-2019.

Chicago’s Large Population Base and Demographics Support a Robust and Diverse Demand for Apartments

According to the latest 2020 Census data, the Chicago metropolitan area is home to 9,618,502 people. This population count represents a 1.6% increase over the last decade and as such it provides a quite large and stable source of demand for apartments. The Chicago city population count in 2020 was 2,746,388, representing a 1.9% increase over the last decade.

According to the latest American Community Survey data, people aged from 20  to 54 years old accounted for 47% of the Chicago MSA total population in 2019. This is important because individuals in this age group are the most active in the housing market by renting, buying their first home, or upgrading to a better place (see Figure 2). It is also important to note the relatively high percentage (15%) of people in the age group of 65 years old and over, which belongs to the “empty nest” group. Individuals in this age group are typically renting or buying smaller houses or apartments.

 

Figure 2 Chicago Metropolitan Area Population by Age Group in 2019

Source: U.S. Census Bureau

 

Robust demand for both owner-occupied and rental housing in the Chicago residential market is also supported by the area’s above-average per capita and household income.  According to Census Bureau data, the per capita income in the Chicago MSA in 2019 was $40,144 while the median household income was $75,379, with the former being 10 % higher than the respective national average and the latter being higher by 20%. Furthermore, 66% of the area’s households had an income in excess of $50,000. It is also important to note that 27% of the area’s households had an income between $100,000 and $200,000 and 11% an income higher than $200,000. These percentages beat comfortably the respective national averages, with the former being 20% higher and the latter 130% higher. Thus, the area’s household income composition supports a solid and diverse demand for apartments across a wide range of price and rent levels.

In the last decade, apartment demand in the Chicago metropolitan area has been also fueled by increases in household income. According to BEA data, per capita personal income and wages in the Chicago MSA increased by 47% and 41%, respectively, over the period 2009-2019. Rising incomes contribute to new household formation and rising demand for apartments, as they allow to individuals living with their parents or in joint living arrangements to move out and buy or rent their own house or apartment.

 

Relatively Low Capital Requirements for Investment Entry

Investments in apartments in the Chicago metropolitan area have considerably lower capital requirements compared to the other two largest residential markets in the U.S. In particular, according to data provided by the National Association of Realtors (NAR), in the second quarter of 2021, the median sales price for apartment condo-coops homes in the Chicago MSA was $247,900, which was by 23% lower than the median apartment price in the New York MSA ($322,500) and by 59% lower than the median apartment price in the Los Angeles MSA ($601,700). As indicated in Figure 3, capital requirements for apartment investment entry in the Chicago MSA are also lower than some other major gateway markets, such as Boston, Washington D.C., Miami, and San Francisco.

 

Large Transaction Volumes Provide High Liquidity and Easy Entry and Exit to Apartment Investors in the Chicago MSA

The Chicago apartment market is the fourth largest metropolitan apartment market in the USA (surpassed in size only by the New York, Los Angeles and Dallas metropolitan markets) and the third in terms of total housing inventory. According to data provided by the American Community Survey and the National Multifamily Housing Council, the total inventory of apartment units in the Chicago MSA was 706,319, and the total number of housing units 3,869,464.

 

 

 

Figure 3 Median Sales Prices of Apartment Condo-Coops Homes in Selected Gateway Markets in the Second Quarter of 2021

Source: National Association of Realtors

 

The Chicago apartment market provides easy entry and exit to investors as it boasts thousands of properties for sale and thousands of residential property transactions. According to the Illinois Association of Realtors (IAR), the total monthly listings and total home sales in the Chicago MSA in September 2021 amounted to 22,633 and 11,653, respectively. Note that 37% of total sales (4,339) represented sales of condo units. Chicago city registered 1,645 condo sales in September 2021. To better grasp the enormous size of the transaction activity in the Chicago housing market consider that the total sales of residential properties in the first nine months of 2021 amounted to 105,442.

The very large volume of listed properties does not only facilitate easy investment entry in the Chicago’s apartment market but also allows investors to apply a variety of investment strategies across different locations, price ranges, asset sizes and asset qualities. For example, Census Bureau data show that the existing housing stock in the Chicago MSA is well diversified across the different price levels, allowing investors to diversify their holdings across the different price ranges. As indicated in Figure 4, with the exception of properties valued at over $1 million, the percentage allocations of existing occupied stock across the different price levels range from 8.1% for properties priced between $400K and $500K to 27.7% for properties priced between $200K and $300K.

 

 

Figure 4 Chicago MSA: Price Diversity of Existing Occupied Housing Stock

Source: Census Bureau

 

Apartment Investors in the Chicago MSA Can Enjoy Attractive Initial Yields and Income Returns

Apartment investors can enjoy attractive income returns in the Chicago MSA compared to other major gateway markets. According, to the most recent CBRE Cap Rate Survey, in the first semester of 2021, cap rates for stabilized infill multifamily properties in Chicago ranged between 4.0% and 4.75%, while in Los Angeles ranged between 4.0% and 4.25% and in Boston from 3.25% to 3.75%.  During the same period, cap rates for stabilized multifamily properties in the Chicago suburban areas ranged from 4.5% to 5.25%, compared to 3.75%-4.5% in the Los Angeles suburbs and 3.25%-3.75% in the Boston suburbs.

According to the data provided by the CBRE survey, the income return provided by multifamily investments in Chicago MSA in 2020 was similar or higher than the income returns that can be achieved in the majority of the gateway markets covered by the survey, especially in the case of suburban locations.

 

The Chicago Apartment Market Offers Attractive Capital Returns

The strength and robustness of demand for housing in the Chicago residential market is evidenced in the strong and consistent increases in the area’s house prices since 2012, when the U.S. markets started recovering from the global financial crisis. According to the Federal Housing Finance Agency (FHFA) House Price Index, these price changes ranged from 2.3% in 2012 to 9.5% in 2013 (see Figure 5). The increase of 8.9% in 2020 is noteworthy, as well as the 5.7% increase for the first half of 2021. The cumulative increase in house prices from the beginning of 2012 until the first half of 2021 was 59.3%, representing a compounded annual appreciation rate of 5%.  These strong price increases result in high capital returns, which in combination with income returns between 4% and 5% can provide to apartment investors in the Chicago residential market a before-tax annual total return of 8-10%.

Median prices of apartment condo-coops homes in the Chicago metropolitan area from 2012 to 2021 reflect the same strong rising trend portrayed by the FHFA house price index. As indicated in Figure 6, the median apartment price in the Chicago MSA increased from $130,800 in 2012 to $247,900 in the second quarter of 2021 representing a cumulative increase of 90%. Again, these price increases point to the strong capital gains that investors can potentially achieve in the Chicago apartment market.

It should be noted that the FHFA house price index measures changes in prices for the same house quality in order to capture price changes that are solely attributable to market forces. As such, it is a more accurate measure of changes in market prices than median sales prices.

 

Figure 5 House Price Changes in the Chicago MSA: 2012-2021

* Price change refers to the first two quarters of 2021

Source: FHFA House Price Index

 

 

 

 

 

Figure 6 Median Sales Prices of Apartment Condo-Coops Homes in the Chicago MSA: 2012-2021

* Price refers to the second quarter of 2021

Source: National Association of Realtors

 

Conclusion

As it has been shown throughout this article, there is a compelling case for investing in the Chicago apartment market as it offers to investors a multitude of benefits such as the low risk that comes with an enormous, stable and diverse economic base;  robust apartment demand supported by a very large, stable and diverse population base and above-average household incomes; low capital requirements for investment entry compared to other major gateway markets; easy investment entry and exit supported by very large transaction volumes; possibility for applying diverse investment strategies across different locations, price levels, asset qualities and asset sizes; higher income returns compared to many other gateway markets; and potential for strong capital gains, as evidenced in the strong price increases of the last nine years.

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