Apartments in the Chicago metro region haven't been on my radar for quite a number of years, but my interest perked up when I came across an article, Falling Values Slam Apartment Owners, in the Chicago Sun-Times this morning. Here are some of the conclusions he found:
Falling property values in Cook County have put about $13 billion in multifamily mortgages at risk of default, about 30 percent of the total debt. Most of the risky loans are tied up in buildings with six units or fewer.
Foreclosures of apartment buildings fall heaviest on poor neighborhoods. For the 2-6 unit buildings, the foreclosure rate in 2009 was 13.9 percent for poor neighborhoods vs. 4.2 percent for regions with high incomes. For larger buildings, the comparative foreclosure rates were 7.8 percent and 2.1 percent last year.
Within Chicago, rents don't cover operating costs for about 74,000 apartments, or one in eight of all units.
The article confirmed what I had thought was inevitable back when I was helping a fellow agent and apartment owner back in 2005: apartment buyers were overpaying and there would be a day of reckoning for them.
Back then he was looking at 6 to 8 unit buildings to purchase for potential condo conversion and/or to buy-and-hold for appreciation. The properties that I analyzed with him (there had to have been 12 to 15) all had one financial feature that I remember clearly, low Cap Rates. I know that the Cap Rate (NOI/Sale Price) is not the only statistic for valuing apartment buildings, but I also knew that Cap Rates at about 4.5% to 5.5% were pretty much unsustainable.
According to statistics from DePaul University published in the article, that day of reckoning for Chicago apartment owners in low income neighborhoods started in 2007, but just recently started for high income neighborhoods in 2009:
I did some quick research in my own backyard in a blog post about buying an apartment in downtown Joliet, Illinois:
The MRED MLS shows 69, 2+ unit properties for sale in Joliet, but I looked at the 6 that were 4+ units or more. From the information I can find, none of them appear to be in foreclosure, but from the limited financial information available I was able to determine the cap rate (NOI/Asking Price). All 6 were above 7.5% with a couple near 10%.
That tells me that at least a few sellers are pricing their units attractively for cash flow purposes. That is something that we weren't seeing 3 to 6 years ago and the reason why some apartment owners are now facing foreclosure.
I guess I should give my buddy a call and hope he took a pass on some of those apartment albatrosses we looked at many years ago.
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