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Morguard buys Echelon Chicago apartments in Fulton River District from Crescent Heights

It’s also one of the few big downtown apartment sales in a year that has been disrupted by rising inflation and interest rates, making it harder for investors to stretch for deals. Volatile financial markets and recession talk have made some investors more cautious. Uncertainty about property taxes in Chicago have curbed the enthusiasm of others.

But Chicago’s got one big thing going for it: Downtown rents have rebounded since the beginning of the pandemic, climbing to record levels in the first quarter. Morguard has been increasing rents between 12% to 18% at its Chicago properties, Morguard executive John Talano told analysts and investors in a recent conference call.

Chicago “is definitely coming back strong,” he said, according to a transcript.

Now with four downtown properties, Morguard knows Chicago well. It entered the market in 2012, when it acquired Alta at K Station, a two-tower, 848-unit complex next door to Echelon. Morguard also owns Marquee at Block 37, a 690-unit high-rise in the Loop, and Coast, a 515-unit building in the Lakeshore East development. The firm completed its acquisition of Echelon yesterday.

“We believe in the city,” Talano, senior vice president of US operations at Morguard North American Residential REIT, said in an interview. “We’re absolutely considering” more acquisitions in downtown Chicago.

As the owner of Alta at K Station the next block east, Morguard was a logical buyer of Echelon, with an opportunity to run the two properties in a coordinated way.

“We will have some significant management synergies there,” Talano said.

Built by Chicago developer Steve Fifield, Echelon opened in 2008 on the block south of the Blommer chocolate factory. Crescent Heights paid $104.3 million for the building in 2012. Monthly rents range from $2,082 for a studio to $3,615 for a two-bedroom unit, according to real estate data provider CoStar Group. The average apartment rented for $3.28 per square foot in the second quarter, up 6.5% from a year earlier. The building was 95.5% occupied, up from 94% in second-quarter 2021.

A Crescent Heights executive declined to comment, as did an executive at CBRE, which brokered the sale.

Big downtown apartment buildings sold at a brisk pace before the COVID-19 pandemic, but the pace of deals has dropped off over the past two years. Even the recent rebound in rents has not spurred more downtown sales. Aside from Echelon, just two other downtown deals, including the pending $180 million sale of Alta Roosevelt in the South Loop, have crossed the $100 million threshold so far this year. Some big properties have sat on the market for months.

Many in the real estate industry say the prospect of rising property taxes has scared off investors. Cook County Assessor Fritz Kaegi increased assessments in the city last year, and many landlords are bracing for a big jump in property taxes this year as a result. Some investors are waiting to see how much taxes increase before venturing back into the market.

“I think that was a big factor” in the slowdown, says Ron DeVries, senior managing director in the Chicago office of Integra Realty Resources, an appraisal and consulting firm. “A lot of the institutional money just wasn’t looking at deals because of the uncertainty.”

Talano agrees that rising assessments have reduced the city’s appeal with multifamily investors. But he thinks the opportunities in Chicago still outweigh the risks.

“I think it’s scared a lot of people off, but the pendulum has swung too far,” he says.

Property taxes are based on assessments, so rising assessments often result in higher taxes. Kaegi’s office valued Echelon at $93.0 million, well below the property’s $133 million sale price, but up 71% from its prior value of $54.5 million.

So even though the assessor’s estimate was much lower than the Echelon’s true market value, the property’s tax bill could jump this year. Crescent Heights has appealed its assessment to the Cook County Board of Review, which could still reduce the property’s value.

With so few recent downtown sales this year, the Echelon deal offers a key data point indicating how much a Chicago high-rise is worth these days. Echelon’s price equates to about $380,000 per unit—pretty middle-of-the-road.

Another closely watched valuation metric, the property’s capitalization rate or first-year yield, works out to 4.5%. A cap rate usually equals a building’s net operating income divided by its price; the lower the cap rate, the higher the price, and vice versa.

Echelon’s 4.5% cap rate is roughly in line with those for downtown deals over the past several years, according to Real Capital Analytics, a New York-based research firm. But it’s much higher than the sub-3% cap rates on some multifamily properties Morguard owns in the South, Talano said. Given the big disparity, it made sense to sell those properties and buy in Chicago, he said.

“For us, it was an easy decision,” Talano said.

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