2023 forecast: Sunny skies ahead for suburban multifamily development and investment
Suburban Chicago has seen a boom in apartment construction in recent years, with cranes dotting the skies from Mount Prospect to Orland Park and 11,600 new units built or under construction since 2020. But with rising interest rates and construction costs, continued supply chain challenges and economic uncertainty, will suburban multifamily development lag in 2023?
As a former banker who transitioned into multifamily development and investment, I believe that although the market is cooling from its frothy 2021 high, there is still plenty of runway ahead. Here's why.
Surging demand
With 2022's interest-rate hikes, many people have been priced out of the single-family home market and will rent instead. In June 2022 the cost to own a home was $839 more per month than renting, almost $200 higher than at any time since 2000, according to John Burns Real Estate Consulting. Also, a recent Credit Karma survey found 54% of renters believe they will never own a home.
At the same time, more and more people simply prefer to rent, happy to enjoy modern apartments' luxe finishes, wealth of amenities like cybercafes, pools and coworking spaces, and low-maintenance lifestyle where everything from snow shoveling to pool cleaning to upkeep and repairs are handled by professional maintenance teams. Baby Boomers and Millennials both have embraced upscale apartment living. In fact, at my company, Wingspan Development Group, our properties attract everyone from young families and single professionals to empty nesters.
Due to the growing number of people who need or want to rent, more suburbs are rezoning to allow for multifamily development, especially municipalities seeking to create vibrant, walkable live/work/play downtowns. Before we built 20West and Maple Street Lofts, two luxury multifamily communities in downtown Mount Prospect, the village had not seen a new Class A apartment building in 30 years, but it has now reprioritized multifamily development as part of an emphasis on enlivening the downtown and improving its tax base. Many suburbs have even been offering tax incentives to attract this type of development.
In all, developers built 2,100 new apartments in Chicago's suburbs in 2020, 3,600 in 2021 and 2,000 in 2022, per Integra Realty Resources, with 3,700 units under construction and for delivery over the next 18 months. While these new units will help keep pace with local demand - the suburban occupancy rate was 97.5% in the third quarter 2022 - nationally, 4.6 million new multifamily units will be needed by 2030, according to the National Apartment Association. So yes, there's plenty of runway left.
Ability to attract capital
And it's not just renters that have an increased appetite for suburban apartments - the multifamily sector has been a solid investment over the long term, offering attractive, dependable returns of 8%-12% on average. People need a place to live, whatever the economy. Rents typically rise at least as fast as inflation; even if expenses rise, rents can be adjusted upward.
Banks and others will continue to supply capital to experienced multifamily developers. That includes individual investors, although there are some restrictions on who can invest. For example, in most real estate private equity deals, the SEC requires investors to be accredited. That means they must show earnings of $200,000 per year for the last two years (or $300,000 as a couple) and $1 million net worth not including their primary residence.
A developer may even have its own fund to capitalize its projects. For example, Wingspan recently launched WDG GP Fund II, the successor to our popular Fund I. While Fund I invested in our pipeline of multifamily projects in southeast Wisconsin, and central Florida, Fund II will fund additional developments in central Florida, southeast Wisconsin, suburban Chicago and our likely entrance into new markets. Wingspan focuses on ground-up development in targeted growth markets, typically building a 175- to 300-unit Class A garden, wrap or horizontal property located near public transportation, schools, parks, lakes and other outdoor amenities, as well as essential retail.
Strong fundamentals remain
Taken together, despite some economic headwinds, these factors indicate continued strong fundamentals for the multifamily sector in 2023 and beyond. Watch for more apartment construction in suburban Chicago, especially Class A multifamily in downtowns near transit with plenty of amenities and an ultraconvenient lifestyle.
* Todd Younger is the fund and investor relations manager for Wingspan Development Group. He manages Wingspan's real estate private equity funds.