Investment Opportunities in Emerging Neighborhoods
Emerging neighborhoods often provide excellent opportunities to both novice and experienced investors. Modest acquisition costs and significant appreciation potential can offer investors a strong return on investment.
The key is to successfully identify these changing neighborhoods by setting the right criteria and using appropriate data.
Identifying Emerging Neighborhoods
For example, we analyze three criteria when identifying an emerging neighborhood: demand, growth factors, and area profile.
Of course, the laws of supply and demand are important to any analysis. I want to determine two things. First, is there an adequate population to support rental demand? And second, what is the proportion of prospective buyers to prospective renters?
One way for a real estate investor to gain an edge is to identify a significant event that will add value in a given neighborhood. It may be a recently completed project that has yet to fully impact property values, or it may be an upcoming project that will have a transforming effect.
The third criterion I look at is the area profile, which includes data regarding acquisition costs, rental rates, availability of public transportation and average building age.
Qualities of Emerging Neighborhoods
A key characteristic in many emerging neighborhoods is the prevalence of below average rents, often related to the existence of rather dated units that have not been fully maintained. For example, we may quickly link relatively low rental prices in a neighborhood to the fact that many of the smaller multi-unit buildings are of pre-WWII vintage. With modest touch-ups and diligent property management, an investor may enjoy better rents in such buildings.
Emerging neighborhoods are often populated by a high percentage of renters, which increases demand for rental units and apartment buildings.
Examples of Emerging Neighborhoods
This article will focus on three different neighborhoods that offer some exciting numbers:
- Washington Park
All three neighborhoods are densely populated, ranging from 8,700 sq/mi in Washington Park to 12,800 sq/mi in Bronzeville. Every neighborhood enjoys a good to excellent transit score, ranging from 67 to 73 out of 100.
Woodlawn is an example of a neighborhood where many rent rather than buy. This is due in part to the fact that the neighborhood’s average income is $45,501, and expenditures average $40,496. The average sales price per unit is just $58,839, while median rents range from $1,019 for a one-bedroom to $1,386 for a three-bedroom. The average cap rate exceeds nine percent.
Zillow’s Home Value Index (ZHVI) for Woodlawn certainly supports its status as an emerging neighborhood. The ZHVI has increased 32.3 percent in just one year, with Zillow forecasting another 13.8 percent increase over the next 12 months. Median rents are $1,300, well below Chicago’s $1,800 overall median. Not surprisingly, Zillow rates the real estate market here as “very hot.”
Current and future projects are transforming the area. For example, University of Chicago (UC) expansion projects should invigorate a large area on the South Side, including the Woodlawn and Washington Park neighborhoods. The School of Medicine recently opened a new trauma center, the first new one on the South Side in 25 years. A new residence/dining facility opened in 2016, and another project, the Woodlawn Residential Commons, should be completed for the 2020-21 school year.
The biggest UC-related project of all is the planned Barack Obama Presidential Library. The former president is a past and current South Side resident. For 12 years, he was a professor at the UC Law School.
A redesign of the Jackson Park Golf Course may also stimulate real estate values. The Chicago Tribune notes how President Obama called Tiger Woods to encourage his participation in a re-design of the century-old layout.
The gap between average income ($60,400) and expenditures ($48,593) is larger in Washington Park than in Woodlawn. Still, the average sales price per unit is still a relatively modest $62,807, only slightly higher than in Woodlawn. Median rents are still modest, ranging from $900 for a one-bedroom to $1,200 for a three-bedroom. Washington Park’s cap rate is very desirable at 11 percent.
The University of Chicago is developing an arts block on land it owns near the Garfield Boulevard Green Line station. The other major UC projects should also have a positive effect on Washington Park real estate.
The gap between average income ($54,470) and expenditures ($45,553) is also greater in Bronzeville than in Woodlawn. However, the average sale price per unit of $135,001 is more than double that of the other two neighborhoods. Not surprisingly, Bronzeville already garners somewhat higher rents than in Woodlawn and Washington Park, ranging from a median of $1,040 for a one-bedroom to $1,525 for a three-bedroom unit. The average cap rate is calculated as six percent
The 2016 opening of a new Mariano’s grocery store signals a positive demographic shift. Even Bronzeville is close enough to benefit from UC expansion projects to the south. At the same time, Bronzeville’s proximity to a vibrant downtown bodes well for the future prospects of this emerging neighborhood. The ZHVI for Bronzeville has increased 11.8 percent in the past year, and there’s another 7.8 percent increase forecast for the year to come.
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