With many lenders and equity investors wary of big, risky apartment projects these days, securing financing wasn't easy for developer Darren Sloniger. “It was probably right up there in the top three of the heaviest lifts of my career,” he says.
Undaunted by the worst downtown apartment market in two decades, a Naperville developer is moving forward with two rental projects totaling more than 500 units on the west end of the Fulton Market District.
Marquette has scored construction financing for the two developments near Union Park, an 11-story building at 1454 W. Randolph St. and a 26-story project at 1400 W. Randolph, said Darren Sloniger, the company’s president and chief investment officer. That’s tough to pull off in the current real estate market, which has pushed many lenders and equity investors to the sidelines, unwilling to finance big, risky developments.
“It was a lot of fricking work,” Sloniger said. “It was probably right up there in the top three of the heaviest lifts of my career.”
Apartment development, and construction generally, has declined substantially this year after a prolonged boom that added tens of thousands of units to the downtown market. The value of residential construction projects, including apartments, started in the Chicago area in the first seven months of the year totaled $2.24 billion, down 27 percent from the same period in 2019, according to research firm Dodge Data & Analytics. Many new projects no longer make sense amid falling rents and occupancies, and an uncertain economic outlook.
“Everyone is a little more cautious,” Sloniger said.
But the slump has resulted in one positive change for developers: lower construction costs. Sloniger estimated Marquette’s two projects will cost 7 to 8 percent less than they would have before the coronavirus pandemic.
In July, Marquette obtained a $40.9 million construction loan from St. Louis-based Stifel Bank & Trust for the project at 1454 W. Randolph, according to Cook County property records. New York-based J.P. Morgan Chase also provided about $17 million in mezzanine financing for the 243-unit development, which is believed to cost about $85 million.
Marquette also secured construction financing for the $112 million project at 1400 W. Randolph. Sloniger declined to identify the lender for the 278-unit building but said the total debt for the development accounts for about 58 percent of its cost.
Marquette plans to host a groundbreaking ceremony for the projects on Sept. 17. The developer’s other Chicago projects include the Mason, a 263-unit building at 180 N. Ada St. completed last year, and Catalyst, a 223-unit property at 123 N. Desplaines St. The firm also owns several multifamily properties in the Chicago suburbs, Michigan, Indiana, Minnesota and Texas.
Because lenders and equity investors have pulled back the past six months, many downtown apartment projects are on hold for the time being. But with construction continuing among projects begun before the coronavirus and recession, developers will complete about 3,500 apartments in downtown Chicago this year, up from 2,935 in 2019, according to the Chicago office of Integra Realty Resources, a consulting and appraisal firm.
Yet the drop in construction starts this year will result in downtown deliveries falling to just 1,700 units in 2021. Integra forecasts that deliveries will rebound to 4,200 apartments in 2022, noting that figure could drop significantly if financing doesn’t become more widely available.
Sloniger is confident that demand for apartments in downtown Chicago will rebound by the time Marquette finishes its two buildings, sometime in first-quarter 2022.
“We’re experiencing some temporary pain that I don’t think is going to last,” he said.
He’s also feeling good about Marquette’s timing from a supply standpoint, expressing confidence that many downtown developers, unable to secure financing, will remain sidelined for a while. That will result in less competition for tenants when Marquette starts leasing the buldings.
“There’s going to be zero supply, so getting a deal done right now is huge,” he said.
Marquette has tweaked the design of its buildings for the coronavirus era, adding touchless controls for elevators and other device and air filtration systems designed to reduce the circulation of pathogens, Sloniger said. The developer also has redesigned fitness centers and amenity areas into smaller spaces to limit the number of people coming into contact with one another.
To obtain a zoning change for the Chicago projects, Marquette agreed to include lower-priced apartments that conform with the city’s Affordable Requirements Ordinance. The firm is meeting its ARO obligation by including about half of the required 100-plus affordable units in Medical Center Apartments, a tower it's redeveloping near the Old Cook County Hospital on the West Side.