Navigating Chicago's Multi-Family Market: Insights from a Leading Mortgage Banker
In a recent interview, Igor Zhizhin, Principal of American Street Capital, a national mortgage banking firm specializing in securitized non-recourse debt, shared valuable insights into the current state of Chicago’s real estate market, particularly focusing on the multifamily sector and financing landscape.
American Street Capital, founded in 2009, operates nationally but maintains a strong focus on the Midwest region, particularly within a 100-mile radius of Chicago, along with significant activity in Florida and the Southeast. The firm specializes in placing debt for small to medium-sized companies, typically handling transactions between $1 million and $15 million.
Chicago’s multifamily market presents a nuanced picture, with distinct segments each facing their own challenges and opportunities. The market is effectively divided into several key segments. In the city proper, there’s a clear distinction between Class A properties—newer, full-amenity buildings constructed within the last decade—and the city’s historic housing stock, with approximately 35% of multifamily properties being century-old structures. The west and south sides of the city primarily consist of affordable housing, with about 75% of properties receiving subsidies, primarily through Section 8 housing programs.
The suburban landscape differs significantly, featuring larger complexes often containing several hundred units, compared to the city’s typical 20-40 unit properties. This disparity is primarily driven by land and construction costs, which are substantially higher within city limits.
Despite various challenges, Chicago maintains a unique position among major U.S. markets. “Cap rates in the high sixes to low sevens are readily available,” notes Zhizhin, “and you can still find properties under $125,000 per door.” This stands in stark contrast to other major markets like New York, Miami, or Los Angeles, where similar properties typically command over $200,000 per door.
The new construction landscape presents a number of challenges. Many current developments were planned during the COVID era and are now grappling with doubled interest rates as their rate caps expire. While institutional developers with substantial resources can weather these challenges, smaller mid-rise projects are struggling. Zhizhin cited a recent example of a 140-unit project in Uptown filing for bankruptcy.
The lending environment has become increasingly complex over the past 45 days, with material increases in interest rates and widening spreads. “The next 60 days will really set the table for how 2025 is going to go,” Zhizhin predicts. He emphasizes that developers and investors now need to be much more capitalized, typically requiring 30% equity to secure financing.
For smaller investors, Zhizhin recommends a strategic pivot: “They need to kind of reestablish their entire business plan. Liquidity is absolutely the name of the game these days.” He suggests focusing on fewer projects—perhaps 50-75 units annually instead of 100-150—and maintaining stronger cash positions. The days of being “asset rich and cash poor” are over, he warns, as the market demands more patient capital and longer holding periods.
While Chicago’s real estate market faces its share of challenges in 2024, it continues to offer unique opportunities for well-capitalized investors who can adapt to the evolving landscape. The key to success, according to Zhizhin, lies in maintaining strong liquidity, carefully selecting projects, and taking a more measured approach to growth. As the market navigates through this period of adjustment, those who can balance patience with strategic positioning will find themselves best equipped to capitalize on the opportunities that emerge in one of America’s most resilient real estate markets.
