California investor buys new north suburban apartments

08 January 2020

Passco is making its first bet on the suburban Chicago rental market, paying $90 million for a property in Vernon Hills.

A West Coast real estate firm is joining the crowd of investors betting on Chicago's suburban apartment market.

A venture of Irvine, Calif.-based Passco paid more than $90 million last week for the 260-unit Atworth at Mellody Farm apartments in Vernon Hills, sources familiar with the deal confirmed.

The building, part of the Whole Foods-anchored, 270,000-square-foot Mellody Farm shopping center in the northern suburb, becomes the latest suburban apartment cash-out by its developers, Chicago-based Focus and Atlanta-based Atlantic Realty Partners.

The duo put the seven-acre project at 1111 N. Milwaukee Ave. up for sale in June, less than a year after it opened. The apartments at the time were 93 percent leased, according to a marketing flyer from Moran, which brokered the sale.

It's a similar play to the one the developers ran in 2017, when they scored a big gain with an $81 million sale of a new 239-unit apartment complex in Glenview.

Focus and Atlantic Realty Partners are capitalizing on the strength of the suburban apartment market, where many new properties have been lucrative for developers. Just as it has downtown, demand for rental units in the suburbs has soared on the back of a strong job market. Many are attracting younger tenants looking to rent instead of own, as well as empty-nester baby boomers looking to downsize but stay close to their suburban hometown.

The latter helped boost leasing at Atworth, where 38 percent of its tenants are over 45. That contrasts with most downtown apartment projects, such as Focus and Shapack Partners' Parker at Fulton Market, where 9 percent of renters are older than 45.

The Atworth sale "demonstrates how investors look at the strength of the suburban market," said Focus CEO Tim Anderson. "Having a strong market, it was a good time to sell."

The Atworth strays from a popular feature among suburban apartments today: proximity to public transportation. The nearest Metra stations to the property are more than three miles away.

But many residents there don't mind driving to the Metra, and most are drawn to the Atworth's access to Mellody Farm's shopping and entertainment, said Passco Director of Acquisitions Jake Niles.

"They want that walkability, which you cannot find within any suburban asset in this general location in Lake County," he said.

The Atworth is the first Chicago purchase for Passco, which has $3 billion in assets under management, primarily multifamily properties in the southeastern United States.

Niles said the firm has eyed other new-development apartment acquisitions in the Chicago suburbs and has an appetite for more, but that a surge in new supply in certain locations has made it tricky to find good deals.

Developers completed about 3,500 apartments in the Chicago suburbs last year, the most in more than 20 years, according to the Chicago office of consulting firm Integra Realty Resources. Another 2,500 could be completed this year.

Niles said Passco doesn't expect a lot of the new competition to pop in Vernon Hills or Lake County, where he sees many towns taking a "restrictive" approach to allowing new rental units. But he likes the high-income demographics of the area, which will be key to supporting a high-end apartment building.

"The property leased up in 10 months," Niles said of the Atworth. ”That speaks volumes to the demand in this area and the lack of new supply."

Pete Evans, managing partner in Moran's Chicago office, represented Focus and Atlantic Realty Partners in the sale.

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Next Article - Passco acquires 260-unit multifamily property adjacent to Mellody Farms

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