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hicago's multifam properties struggle under debt costs
Chicago's multifamily properties are facing significant challenges due to surging debt costs, despite appearing to have strong fundamentals on paper. The Otis, a 92-unit Pilsen property owned by CedarSt, boasts a 92% occupancy rate but its debt-service coverage ratio (DSCR) sits at just 55%. This means the property's revenues only cover half of its debt service costs.
The landlord was able to secure a one-year extension on its $25 million loan, which was issued in 2021 when the building's DSCR was 1.25, according to Morningstar Credit. Despite debt cost troubles, CedarSt is also refinancing the property, as it did earlier this year with The Duncan, a 260-unit brick complex at 1515 West Monroe Street.
A potential rate cut in September could provide much-needed relief for property owners, but some may find it too little, too late. Out of 14 Chicago-area multifamily properties carrying securitized floating rate debt of at least $20 million, ten are watchlisted by lenders, and only two have a DSCR above 1.
The Cityview at Highlands apartments in suburban Lombard was hit hard by interest rate hikes, with one loan servicer report noting that the loan's interest rate increased from 3.3% in July 2022 to 7.6% in July 2023. This resulted in landlord Torchlight Investors paying $1.5 million more in interest payments than the year prior. In a more recent report, the servicer noted the rate had climbed again to 7.9%.
Despite the challenging rate environment, Chicago's multifamily market has shown some signs of life in 2024, with the region leading the country in rent growth last year. This has attracted more investors to the market and encouraged sellers to test their luck.
So far, the results have been mixed, with eight out of 16 high-profile multifamily sales resulting in gains for sellers, four resulting in losses, and four with unknown outcomes due to still-unrecorded sale prices or loan information. With over 20 large-scale listings still on the market, a potential rate cut could improve sellers' outcomes.
