Investors like rental properties in 'burbs
At the end of 2016 Origin Investments, through a partnership with Draper and Kramer, acquired Village Park of Palatine, an approximately $48 million apartment complex in Palatine. Because this was the second significant multifamily investment in suburban Chicago in 15 months, we posed the following questions to Origin's co-founder David Scherer and one of its vice presidents of acquisitions, Tom Briney.
Q: You've invested more than $85 million in suburban Chicago multifamily projects, why?
A: From the broad view, the acquisition of two multifamily complexes in suburban Chicago aligns with our primary investment philosophy, to acquire multifamily or commercial office assets in eight different markets across the U.S., including Chicago and its suburbs. Equally as important, we look to acquire assets that are challenged and where values can be enhanced.
With that philosophy in place, we've immersed ourselves in those eight markets, to gain a thorough understanding of the dynamics of markets and long and short-term investment opportunities. That effort over the last 15 months has resulted in the acquisition of Iroquois Commons (Naperville) and then Village Park of Palatine.
Q: Does the trend of businesses moving downtown concern you? Does it have any bearing on the suburban apartment market?
A: Based on the headlines we read, the perception is that there is this great migration of companies and workers to trendy offices downtown in the Fulton Market, River North and other such locations. Yet that is a misconception. According to statistics from CoStar, the amount of office space absorbed downtown is less than the space absorbed in the suburban markets.
Thus, while it is easy to get distracted by the attention created when a major suburban business employing several hundred people announces its intent to relocate downtown, the impact to most suburban apartment complexes is negligible.
Q: How will an increase in supply impact investment activity?
A: When evaluating any investment an assessment of future supply threats is imperative. For example, new suburban product coming on line represents 2 percent of the total inventory. In contrast, new product coming on line in downtown Chicago is approximately 23 percent of the total inventory -- quite the stark contrast.
As a result, our suburban investments won't be threatened by new supply. That will allow us to create a steady, growing cash flow. Why? Suburban rental rates don't support new construction. Not everyone can pay $3,000 a month in rent for a one-bedroom. Rent as a percentage of earnings is at an all-time high and, in our opinion, a threat to urban rental growth in Chicago. This affordability is precisely why we are investing in suburban multifamily properties.
Q: How much more active in suburban multifamily projects do you expect to be in 2017 and 2018?
A: We'd like to be even more active in suburban Chicago, and are looking at a number of opportunities. It's simply takes time to maneuver through the process of identifying a prospective acquisition and reaching an agreement with sellers on matters of price and other terms of a transaction.