June 24, 2020 12:38 PM
Alby Gallun, Crain's Chicago Business
A Chicago developer has cashed out of a new ultra-luxury Lake Forest apartment project for $54 million, a rare big deal in a real estate market turned upside down by the coronavirus.
Focus sold Kelmscott Park Apartments, a 111-unit development in downtown Lake Forest that the developer completed in 2018, to Intercontinental Real Estate, a Boston-based investment firm, said Focus CEO Tim Anderson.
Intercontinental paid $53.8 million for the property at 145 Morris Lane, according to a deed filed with the Lake County recorder. That works out to about $484,000 per apartment, a record per-unit price for the Chicago suburbs, according to Real Capital Analytics, a New York-based research firm.
Record-setting or not, big real estate deals of every kind aren’t happening as much as they were just four months ago, before the coronavirus pandemic swept into the Chicago area. With the economy in a severe recession, a lot of investors are holding off on big financial commitments as they try to assess how long the downturn will last and how it will affect rents, occupancies and property values.
Many owners of retail property and hotels already are grappling with an existential crisis. Apartment landlords aren’t suffering as much, but with so many of their tenants out of work, plenty are having a hard time collecting rent.
That’s not a worry at Kelmscott Park, which sits in one of Chicago’s wealthiest suburbs and is well-insulated from the recent economic havoc. Sixty-six percent of its tenants are over 50, and many are renters by choice, with an average annual household income of about $320,000, according to a marketing brochure from Jones Lang LaSalle, which brokered the sale.
“Rent as a percentage of their income is so small that you get real strong collections, and you don’t have turnover even in a really bad economic downturn,” Anderson said. “They’re sticky tenants.”
The property’s wealthy clientele offer a stability that appeals to investors in a turbulent time. But Kelmscott Park is an outlier, so its sale may not say much about the state of the broader apartment investment market.
Intercontinental, which signed a contract to buy the property in March, before Gov. J.B. Pritzker’s stay-at-home order, did not respond to a request for comment. The firm owns several other properties in the Chicago area, including an office building in the Fulton Market District and apartment buildings in the South Loop and Near North Side.
Focus developed Kelmscott Park apartments in a joint venture with Castlelake, a Minneapolis-based investment firm. Anderson declined to say how much the project cost to build or disclose financial details about the deal but said “it worked out well.”
“The sale price was a very good price from an excellent buyer that understood the long-term value of such a unique investment,” he wrote in an email.
The apartments—the first built in Lake Forest in more than three decades, according to Anderson—are part of a larger residential development on a 10.5-acre site in the suburb that once was home to the village’s municipal services building. The project includes a dozen single-family homes priced at $1.3 million—seven are complete—and two condominium buildings totaling 42 units with an average price of about $800,000. Focus has completed one of the condo buildings.
Kelmscott Park Apartments include about a dozen apartments set aside as affordable for people who meet certain income threshold. The market-rate apartments at Kelmscott Park rent for $2,251 per month for a one-bedroom unit to $4,719 for a three-bedroom, according to Focus. The average market-rate unit rents for $2.60 per square foot.
Though developers continue construction of projects started before the pandemic, only a few are breaking ground on new buildings. Wary of the uncertainty, few equity investors and lenders are financing new developments for the time being.
But Focus isn’t idle. The firm is putting the pieces in place for more projects in Lake and DuPage counties and in Chicago’s River North neighborhood, and it has three development sites under contract, Anderson says. The firm also is developing an office building underway in Fulton Market in a joint venture with Chicago-based Shapack Partners.
While he’s optimistic the market will come back, Anderson doesn’t pretend to know what it will look like when it does. He sees promise in the suburbs as more young families move out of the city. But like his peers in the business, he has never operated in a pandemic.
“You’re not sure where it’s all going to go right now,” Anderson said.
This article was originally published in Crain's Chicago Business.