Suburban apartments have been popular with investors this year amid high occupancies and rising rents, allowing landlords to cash out of their properties for big gains. Broadshore, for instance, recently sold Bourbon Square, a 612-unit complex in Palatine, for $139 million, 44% more than it paid for the property in 2014.
But the Glenview sale generated a relatively modest outcome for Broadshore, which sold the building for $87.7 million, or about $367,000 per unit, county records show. That’s up 9% from the $80.5 million, the price a Broadshore predecessor company paid for the property in 2017.
Multiple crosscurrents are helping and hurting the suburban multifamily investment market at the same time. On the good side, landlords are raking in profits as rents soar. The median net suburban rent rose to a record $1.87 per square foot in the first quarter, up 17% from a year earlier, according to the Chicago office of Integra Realty Resources, a consulting and appraisal firm. Betting the trend will continue, many investors are willing to pay up for suburban apartments.
“The fundamentals in housing are very strong, they are going to continue to be very strong,” said apartment broker Peter Evans, senior managing director at Berkadia, which sold the Reserve.
That optimism has fueled a healthy volume of big suburban apartment sales this year. In Northbrook, Tapestry Glenview, a 290-unit property next to Interstate 294, recently sold for $97 million. Legacy at Fox Valley, a 272-unit complex in Aurora, sold for about $71 million in May.
But the volatile financial markets and rising interest rates have shaken up the commercial real estate world, including apartments. Investors that finance their acquisitions with debt must absorb higher borrowing costs, limiting what they can pay for a property. The yield on the 10-year Treasury, a key benchmark used as a basis for commercial mortgage rates, has risen to about 3.45%, up from 1.67% at the beginning of the year.
“The rising cost of capital is making deals more difficult to get done, for sure,” Evans said.
Mesirow may have lucked out, closing on the Reserve acquisition in August during a period of relative calm in the bond market, at least by 2022 standards. The firm financed the acquisition with a $56.1 million loan arranged by Walker & Dunlop, according to a mortgage filed with the county.
But pessimism about the economy and inflation has returned to the market in recent weeks, pushing Treasury rates back up to their highest level of the year.
“The math is getting very difficult,” Evans said.
Many investors are also steering clear of Cook County for the time being over concerns about the potential for rising property taxes there, according to brokers and investors.
Built in 2015, the Reserve is 95.1% occupied, according to CoStar Group, a real estate information provider. The average unit rents for $2,353 per month, or $2.36 per square foot.
Once led by prominent Chicago dealmaker Richard “Richie” Stein, Mesirow’s real estate business today focuses mainly on apartments, with a multifamily portfolio stretching across the country. Its holdings include properties in Texas, Georgia, Massachusetts, Florida and North Carolina, according to Real Capital Analytics, a New York-based research firm.
In addition to the Reserve, Mesirow owns only one other multifamily asset in the Chicago area: the Mil’Ton, a 292-unit property in north suburban Vernon Hills.