Investing In Chicago Real Estate-Do Your Research

Over the past 10 years, the population of Chicago stagnated. In the last three years it decreased 1.5 percent – 110,000 fewer people; not surprisingly, rents rose only 7 percent and home prices 7 percent. About 200,000 people packed up and moved out; many to Champaign, Rockford and elsewhere in Illinois, but also to Phoenix, Milwaukee, Los Angeles, Indianapolis, Dallas and other big cities.

Until the recent spike (which is unlikely to endure here) home prices increased at just about the rate of inflation, 2 to 3 percent a year. This suggests very weak demand for housing of all sorts. Another measure of demand – the ‘income price’ – shows that home prices have for the past decade been lower than the average local income would support.

Although current demand for housing is poor, investors must focus on future demand. Our best indicator for future demand is jobs; more jobs mean more demand for housing.

During the pandemic all markets lost jobs, so our estimates for future growth rest on how quickly those jobs return. For Chicago that recovery has been poor; the total number of jobs is still 5 percent lower than before the pandemic, while the national average is only 2 percent. This means future demand will be weak; many of these job losses will be permanent.

We need to consider what kinds of jobs are involved. In big markets like Chicago many jobs are simply linked to the size of the population – doctors, dentists, grocery stores, the kinds of services that all people need. Jobs in construction often are cyclical – due to surges in home building that don’t last. Jobs that provide growth beyond these basic levels allow us to gauge if future growth will be high or low.

Over the last three years, 200,000 jobs were lost in Chicago, including 20,000 in retail, 20,000 in manufacturing, 20,000 in healthcare, 20,000 in government and 40,000 in business services. Losses across the board, which goes along with the decrease of the population. Only the finance sector and the relatively small construction sector have not lost jobs.

The most likely scenario going forward is continued contraction of this very large market, which in the last 20 years has hemorrhaged manufacturing jobs.

In markets where the overall demand for housing is shrinking, investors still can find opportunities because some sub-markets are always doing better than others. In the absence of reliable growth the best strategy is to shade towards the upper half of the market: rehabbing homes to higher rent values or dividing big homes into upscale rental units; be aware that future rent increases will be modest, so keep a strict budget. Large apartment properties should be avoided because of the risk of declining occupancy.

Promising sub-markets can be identified with the help of zip code data. Investors should stay away from zips with very high or very low home prices, should look for zips with a lot of renters, and should look for steady home price increases. Among the selected sub-markets shown, zip codes 60402 (Berwyn), 60506 (Aurora), 60608 (Chicago), 60616 (Chicago), and 60804 (Cicero) look promising.

Investors must know the best rent range in local zip codes, where the largest number of current renters are found. On average a tenant moves within two years; you’ll regularly have to find new ones. Properties with rents in the best rent range have the least trouble attracting replacement tenants. Above that range, investors face the risk of multi-month vacancy during tenant turnover or may even need to reduce rents to attract tenants.

This post first appeared on Forbes.com. To see the original, click here.