In every city there are a handful of neighborhoods that were hit extremely hard by the financial crisis, but have seen a dramatic turnaround in the past few years. For example, outsiders think of Detroit as this run down, Dante’s Inferno-type city that’s rotting away. However, we ask you to take a look at Detroit again and tell us what you see. In fact, we’ll tell you what you’re going to see: a revitalization movement, new job opportunities, decreasing vacancy rates, to cut the matter short, a re-birth.
We see South Shore as having a similar re-birth, albeit in a much different way. The financial crisis took a large toll on a predominately blue collar community (as it did for most of America). Capital from Chicago and as far as Los Angeles continues to flow into South Shore. Cap rates have compressed from 15% to 9-13% in the course of the last 15 months. We recently closed a transaction at 6700 S. Clyde which was a 9.7% cap rate on a condo-quality building.
South Shore is filled with beautiful apartment buildings that are generating enormous cash flow; we strongly believe it will continue to have a high rental demand for years to come for a plethora of economic reasons:
- Home sales continue to favor the upper middle class & Upper class communities because the core of home owners went underwater 5 years ago are either still underwater or they do not have the down payment to support a home purchase again
- Americans are struggling to save significant amounts of money
- The cost of living has increased in Chicago
- Chicago as a whole saw a 7.4% increase in rents in 2014 compared to 2013
- Zillow’s Chief Economist Stan Humphries was quoted by the Chicago Tribune, “Next year, we expect rents to rise even faster than home values.”
If we put these pieces above together, we come to the following conclusion:
The working class as a whole cannot afford a home because investors scooped them up during the recession which lifted home prices prices and thereby decreased affordability. There is also a lack of savings brought on by a lack of wage growth, and a rise in the cost of living. For these reasons, many of the working class neighborhoods such as the South Shore, remain major rental markets.
So why are we so bullish on the South Shore besides the fact it is historically a high rental market?
- New Developments- The Award Winning 500 acre development between 79th & 87th just south of the South Shore
- Geography- South shore is situated blocks from Hyde Park and 5 miles from the CBD
- Solid Foundation- Institutional invesors, such as Wolcott Group, Pangea, and others have accomplished much of the initial legwork to catch a falling knife and assist in cleaning up the area
- Increasing Investment by Businesses- Mariano's, a middle/upper grade grocery store has secured a development in the South Shore area. We see this has the beginning of a slow progression towards small & large businesses investing into the community
For these reasons, we see the South Shore as an opportunity for an investor to achieve 9-10% yields and up to 22% cash-on-cash returns on an annual basis. Additionally, they are able to get in on the early stages of an economically changing neighborhood. The Lakeside Project has corporate giants such as GE, US Steel Corp, and Cisco backing the project. Their plan is to build over 13,000 single family and multi-family units. Additionally, there will be 17 million square feet of retail, a new high school, a 1500-slip boat marina, and top top it off, it will be LEED certified. This project will create tens of thousands of jobs, not to mention a migration of permanent residents.