ReJournals | Illinois Multifamily

Waiting and seeing: How the multifamily sector responded to 2020—and readies for 2021

December 16, 2020

When the pandemic became a hard reality last spring, it led to shutdowns and ultimately, furloughs and layoffs. With so many out of work, there was anxiety that apartment dwellers would have trouble paying rent and owners would start defaulting on their commitments to the banks.

Thankfully, that scenario did not play out quite in the way that many feared.

“If I were to describe the situation since last April, the one word I would use is ‘steady,’” said Jim Darrow, principal at Chicago-based Essex Realty Group. “After the shutdown, everybody was able to get back to some sort of normalcy, doing some business and selling some buildings.”

Submarket performance

In the trenches, owners and investors worried about rent collection during April were surprised by collection rates nearing 98 or 99 percent of what is typical. This continued for June and July, with drop-offs occurring in August when savings accounts and federal stimulus funds began to dry up.

Properties in the suburbs performed admirably during the pandemic, but that wasn’t the case in many Chicago neighborhoods. The bright spots, according to Darrow, were Rogers Park and Hyde Park, with owners there experiencing little trouble collecting rents or seeing increases in vacancy.

“Believe it or not, the biggest erosion in occupancy has been Lakeview, Lincoln Park and the traditional North Side neighborhoods that really haven’t seen vacancy issues in a long time,” Darrow said.

Investor activity

Whether it’s stocks or real estate, investors are often warned that “past performance is not indicative of future results.” According to Michael Episcope, CO-CEO of Chicago-based Origin Investments, that’s truer today than ever before, given the new reality that COVID-19 has created.

“Individuals are anchored to returns generated over the past ten years rather than what the market is likely to deliver based on where the risk-free rate is today,” Episcope said.

Origin recently surveyed over 300 high-net-worth investors to find the minimum internal rate of return and multiples on equity they would expect to achieve over a five-year hold period. The investors were asked about Class A ground-up developments; new, stabilized Class A properties and 30-year-old, value-add Class B assets.

The survey found that at least 30 percent of respondents had “exceedingly high, bordering on unrealistic” expectations for return rates and multiples on equity. “In today’s environment, expectations of internal rates of return greater than 17 percent, and multiples that are more than 2.0x may be ‘unicorns’ that are difficult to find,” said Episcope.

“Wait and see”

It’s interesting that these high-net-worth investors have the greatest confidence in new, Class A assets. In Chicago, these types of properties are largely located downtown and in the inner neighborhoods—where tenants are now less willing to pay exorbitant rents for access to a city that they can’t currently take advantage of. Most commutes are to the kitchen table rather than the Loop and the entertainment and nightlife options that entice residents to located downtown are currently dark. With city life to take part in, why pay city rents?

This has led many, especially young professionals in their 20s, to find cheaper accommodations in the suburbs or to move in with family as they wait and see how long the effects of the pandemic will be felt. This is a short-term scenario, of course, and Darrow expects that once vaccine availability is more widespread, downtown offices, restaurants and everything in between will open back up—bringing residents back with them.

Investors, too, are taking a wait and see approach, often to their detriment.

“Investors waiting for ‘unicorns’ will make far less money than those who are putting their capital to work in deals today,” said Episcope. “It is better to have all your money working at a (slightly) lower rate of return than to be on the sidelines.”


So much of what happens next depends on our ability to corral the COVID-19 virus. The first vaccine doses have already been administered in the U.S.; however the elderly, high-risk individuals and healthcare workers are, understandably, making up this first phase of inoculations. It may take until summer 2021 at the earliest before more individuals can gain access to the vaccine.

There is nearly universal sentiment that, with widespread vaccine availability, the economy is ready to pick up right where it left off at the end of 2019. If that’s the case, business can reopen to full capacity and hire the necessary employees. As a result, rents will rise again.

Since 1990, Essex Realty Group, Inc. has served Chicago’s investment real estate market as a top multifamily real estate brokerage firm. Contact us to learn more about our recent Chicagoland multifamily and mixed-use property sales and talk to a Chicago multifamily broker today.

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