Elevated interest rates have affected sales volume, which has slowed 30% since 2023, according to CoStar. While cap rates have risen, market pricing trends suggest property values haven’t dropped in proportion to the increase in interest rates, Felsot said. 

“It points to healthy value preservation and healthy demand for Chicago’s multifamily sales even in the face of higher rates,” he said. 

Robust workforce housing demand in Chicago

Historically, workforce housing has been a source of durable demand from renters—and durable cash flow for Chicago multifamily investors, Felsot said. 

“These are not top-of-the-market properties with extensive amenities. Rather, they provide safe, secure housing options close to job centers and transportation hubs,” he said. “Often these properties were constructed decades ago when land wasn’t at the premium it is today. Over time, they’ve become a much more affordable alternative to newly constructed multifamily properties with extensive amenities.” 

In Q1 2024, the vacancy rate at higher-end Chicago properties was 9%, while vacancies at more affordable properties were below 5%, according to CoStar.

Interest rates are staying higher for longer

The Federal Reserve has kept interest rates elevated in an effort to bring inflation back to its 2% target.  

Higher interest rates can pose challenges, but multifamily investors with longer-term low loan-to-value loans at higher debt service coverage ratios should be in a good position to weather ups and downs, Felsot said. 

On the other hand, investors who over-levered and relied on variable-rate debt might be forced to add additional capital when refinancing, or they might need to sell assets. 

“The latter scenario could open opportunities for well-capitalized buyers in any market, including Chicago,” Felsot said. 

Investors seeking or refinancing apartment loans may also want to consider prepayment options that provide flexibility when interest rate relief arrives.

Updating apartment layouts in Chicago

Some older buildings’ floor plans have fallen out of step with renters’ preferences. Formal dining rooms, for instance, aren’t as in-demand as they used to be. That space may have more value if converted into an additional bedroom, home office or larger kitchen with a breakfast nook, Felsot said. 

“We’re seeing owners get creative with space planning to make sure their units’ layout fits what renters are looking for,” he said. 

Managing Chicago utility costs

Inflation hasn’t spared property management expenses. Multifamily investors looking for ways to cut costs may want to consider implementing a Ratio Utility Billing System (RUBS), Felsot said. 

RUBS is a method for allocating utility costs to residents in apartments without individual metered service, particularly if submetering isn’t feasible. Utility payments are divided among units based on factors such as the number of residents, each unit’s square footage and the number of water fixtures or appliances in each unit.  

“It reimburses the property owner, at least partially, for overall utility costs,” Felsot said. “While market acceptance differs from location to location, it’s something that could be considered in higher-inflation environments.” 

Some communities have rules governing RUBS and other utility billing methods, so check local regulations before getting started.