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Pay Attention to the Numbers




We live in a time of continuous information. Our phones barrage us with emails, texts, messages and news. Our computers, televisions and tablets stream content with body-cam detail. And since bad news sells advertising more easily than good news, we get overwhelmed by the crisis du jour, which frequently shapes our collective attitudes. Of course, there are real issues and bad news, but it’s important to take a step back sometimes and remind ourselves of the larger picture.

As apartment investors, how do we process all this news and the bigger picture? For those of you who know me and my colleagues at Essex, we are extremely data focused. Like a baseball team, we track every play, every pitch and every at bat. We keep this data at the ready for our negotiations… and occasional articles.

The bigger picture I wanted to look at is how prices have changed over the past 20 years. I thought this was a reasonable time frame not only because Essex has granularly tracked this data, but also because these were certainly tumultuous decades.

In 2002, we were recovering from the tragedy of 9/11. We then saw wars in Iraq and Afghanistan. From 2008-2011, we endured the Great Recession and a near-collapse of the financial system. More recently, we’ve suffered through a global pandemic, political turmoil and a crisis of gun violence. These historic events are in addition to more apartment-centric changes such as property taxes, interest rate policies, money supply and inflation.

So how did Chicago’s apartment market perform during these tumultuous times? As the below chart illustrates, during the past 20 years Chicago’s North Side neighborhoods have enjoyed annual compounding growth rates of between 4.4% and 5.8%. That equates to 6.8% to 10.4% non-compounding annual growth rates and 136% to 208% increases in value.

It's also important to note that these are unleveraged measures of appreciation, whereas most apartment investors apply leverage. A 5.0% annual compounding rate of appreciation in Evanston, with a 33% down payment, equates to a 15% annual compounding rate of return on invested capital – not including the cash flows or depreciation benefits.

It also makes sense that these rates of appreciation were inversely correlated to cap rates. In other words, Rogers Park typically traded at the highest cap rates, while Lincoln Park and Lakeview traded at the lowest cap rates. It tracks that investors were willing to accept lower initial returns in Lincoln Park and Lakeview in exchange for higher rates of appreciation. Similarly, investors demanded higher initial returns in Rogers Park due to lower rates of appreciation. Regardless of the distinctions between the neighborhoods, these rates of appreciation are remarkable across all these sub-markets.

The chart also shows the result of investing $100,000 in 2002 at these different levels of appreciation. While the difference between 4.4% and 5.8% doesn’t sound like a lot, over 20 years those differences are meaningful.

I would be remiss if I didn’t amplify how these gains have been hard earned in the face of choking regulations and rapidly rising expenses. They didn’t occur by accident. They are the result of the collective good efforts of housing providers. Like the endless stream of bad news, the daily grind of property stewardship can seem unrelenting. Being a housing provider is not easy or for the faint of heart. Multifamily is a make-money-slowly industry. But for those who are good stewards, do not over-leverage and maintain a long-term view, the rewards are unmistakable… and material

Doug Imber is President of Essex Realty Group, Inc.; a Principal in Back Nine Apartment Investors, LLC; and a half-glass-full pragmatist.




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