Transactions are also starting to pick up following a period when elevated interest rates weighed on sales volume. Cap rates have normalized at around 6%, according to CoStar. 

“Buyers and sellers are coming back together, and we’ve seen clients take advantage to buy properties that haven’t been on the market in a while,” Felsot 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. Workforce housing also tends to be insulated from competition.  

“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.” 

As of Q4 2024, the vacancy rate at higher-end Chicago properties was 7.2%, compared with 5% at more affordable properties, according to CoStar.

Uncertainty for interest rates

The Federal Reserve has paused interest rate cuts earlier this year after starting to ease rates in late 2024. The timing of future rate cuts is uncertain and will depend on a variety of competing economic factors, many driven by the new administration’s early policy moves that could put upward pressure on prices.  

“The market appears to be accepting a new normal for interest rates rather than holding out for a return to the 4% range, because we don’t know if those days are coming back,” Felsot said.

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, he 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 no longer fit evolving renter 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.  

RUBS adds some administrative work compared with including forecasted utility costs in a unit’s rent. But when utilities are included in rent, the property owner risks absorbing unexpected utility cost spikes during the lease term. RUBS helps align renters’ utility payments to actual expenses. 

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