The Chicago Real Estate Forecast: What Investors Must Know for 2018

They say that, in China, “May you live in interesting times” is a curse hurled at your worst enemies. I can’t vouch for that, but we’ve been through a lot with the Chicago real estate market. You gotta love Chicago. I have always thought of it as the most American of cities, but it has always been uniquely itself at the same time. I’m glad to see new opportunities opening up in the coming year for Chicago’s real estate forecast—without any too-dramatic shifts in sight.

We have a large, complex market here, but it’s turning out to be one with a range of opportunities for real estate investors to buy low and potentially sell at rising price points in the coming year.

What Chicago’s Real Estate Forecast Looks Like for 2018

The local market provides a challenging investment environment, and so far the forecast for 2018 shows every indication of continuing in that vein. Chicago retained its title as the only global financial center with an undervalued housing market in the 2017 Annual UBS Global Real Estate Bubble Index, released at the end of September. Housing prices are rising in the U.S. at two speeds, the study notes, and Chicago is in the slow lane. Housing prices here have risen 15% in real terms since 2015, but they remain 30% below their 2006 peak. The city’s real estate has been considered undervalued for several years now, as the Chicago’s emergence from the 2008 recession has proceeded at a protracted pace.

Repositioning opportunities in Chicago are becoming more rare, especially in the city center, but there are still value-add properties to be found in the suburbs.

The suburban multifamily real estate market is healthy and stable, though there is a high level of competition and entry into the market can require a cash investment. For investors willing to wait, buying from distressed homeowners facing a staggering property tax hike, especially in older, more established neighborhoods may become a significant opportunity.

If a distressed property is acquired as a result of these pressures, however, there are a number of factors that favor the buy and hold approach. Chicago has the lowest price-to-rent ratio of the world cities surveyed, which is the length of time a real estate holding has to be rented to pay for itself. As a rule, multifamily properties in Chicago provide adequate income to pay the mortgage and operating expenses—even in a depressed market.

Analysis of Chicago Real Estate Investing Niches

We see lots of apartments and not enough houses in Chicago, but there are investment opportunities on both markets. I’m staying with distressed single-family properties, but let’s take a look at the overall real estate scene in a little more detail.

Luxury units show investment opportunities as overbuilding in downtown Chicago continues. This will make the rental market become more competitive as underperforming properties may be sold off at discounted prices. Appraisal Research vice president Ron DeVries predicts that rents will not fall in that segment even after the market has cooled down, so a buy and hold strategy could be a winner. However, the luxury market probably holds less long-term promise for investors who want to buy and sell as the median sale price for this segment has plummeted by 23% in the last year.

Multi-family real estate may still be on a countdown to market saturation, as analysts have been warning for many months, or that moment may have arrived. More than 12,000 new apartments will reach the market between the last quarter of 2017 and the end of 2019. This market segment was declared flat last August and a month later it was reported that median rent for Chicago apartments was falling, while demand remained high. It may be too early to say just what the market is doing, but that is certainly the backdrop for a downturn.

To complicate matters, the city introduced a new housing program over the summer that enhances affordability requirements in gentrifying neighborhoods in the North Branch Industrial Corridor, Near West Side and West Town, and the Milwaukee Avenue Corridor. This program will cost developers part of a project’s value in those areas. It joins a list of developers’ headaches that includes high land prices and construction costs, labor issues, and a permitting process that is already difficult. The city will locate tenants for the 10% of housing set aside as affordable, which may compete with lower-priced rehabbed investment properties held as rentals.

That said, rents have been rising in Chicago’s suburbs for the last seven years and show no sign of a downturn. New construction has been spread throughout the region, so there is no overbuilding, and the positive rent trend is expected to continue. Vacancy in the area was 4.5% in Q2 2017. One analyst predicted that rents in the Chicago suburbs will rise 2.5-3.5% between Q4 2017 and Q4 2018. This all bodes well for a buy and hold approach if multi-family properties are your niche.

Student housing started the academic year down. The University of Illinois at Chicago is reporting an uptick in enrollment, but REIT housing provider American Campus Communities says vacancies are up too. Columbia College Chicago, where enrollment is off by about a third since its peak in 2008, is selling its 343-room dorm in the South Loop, which is expected to be repurposed, and Columbia College Chicago, Roosevelt University, and DePaul University sold their 1,279-room University Center in August. This market looks unpromising for investment.

Single-family houses in Chicago enjoyed high demand throughout 2017. Chicago’s house market was the second busiest in the country in Q2 2017, Bloomberg noted, and the activity has spilled over into the suburban counties. However, the inventory of homes for sale was down 7.8% compared to last year, at 34,619 units. Presumably, as a result, houses stayed on the market 66 days before they sold, the shortest length of time since at least 2005.

Besides the brisk sales, a decline in listings was behind the low inventory. Chicago real estate blogger Gary Lucido stated that, in the affluent North Side neighborhoods of West Town, Lake View, North Center, Lincoln Square and Uptown, inventory declined by 27.3% and 26.6% in July and August, respectively. Lucido speculated that homeowners were unwilling to sell at the prevailing prices. I agree, but also believe this is also complicated by the high rate of residents who are still underwater on their mortgages.

Listings of detached houses, the category that was most in demand, fell 8.7% throughout the Chicago metro area in August, similarly to July. Decreased inventory did not mean decreased sales, however.

There is something here for everyone’s portfolio—whether you set your sights on a luxury apartment building or a house on the outskirts of town, you will find investment opportunities opening up. If you’re looking for a quick turnaround, you can find that too.

Distressed properties made up a record low of 7.5% of all single-family real estate transactions in the Chicago metropolitan area in August 2017, compared to 12.2% a year earlier. Yet, Chicago ranked third nationwide (after Miami and Las Vegas) for the percentage of homes with negative equity, that is, homes with mortgages greater than their worth. In Chicago, 10.8% of homes were “underwater” in Q2 2017. That was exactly double the national rate.

Distressed properties are a promising niche for investors in light of the tight and undervalued real estate market. Investors looking for a quick exit from their investment can take advantage of the high demand on the housing market, and for those who would prefer to take a longer position, those properties can generate rental income until the market fully recovers its value.

Another advantage is the comparatively low cost of entry into the market. Although the market is shrinking, as many real estate firms are no longer active, there is likely to be less competition here than for acquisitions in other sectors.

Finding Leads on Opportunity in 2018

HomeVestors’ Value Proposition

Overall, it looks like the best real estate investment opportunities in the coming year will be with single-family and distressed properties. If you can find one that is both—bullseye! But to do that, you’ll need a strong lead generation system.

As a HomeVestors® franchisee leveraging the best marketing tools and the “We Buy Ugly Houses”® national brand, I have distressed homeowners come directly to me. Using the proprietary ValueChek® software program, it helps me to quickly determine if a property has the potential to deliver a solid ROI. If so, I make an offer on the spot. This puts me ahead of the competition in one of the most promising and lucrative real estate investing niches. I feel well-positioned to bring in new business next year. How about you?

Perhaps it’s time to rethink your market position and get in touch with HomeVestors® today.

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