Champaign Illinois too high to buy?

Question

I’ve partnered with an owner of quite a few properties in Bloomington and Decatur. Together him and I own a 32 unit just outside Decatur, and it’s doing well. I have a few more units in Urbana that do ok, but not killing it. My question is the prices in the Urbana/Champaign area. They seem so high as compared to places just outside city limits. Just compare the same type of property in Bloomington, champaign and Decatur. How can these prices be so different? Interesting.

Quentin McNew · Answer

I love Champaign, IL. I don't know if I love Illinois as a state haha. The macroeconomics have me thinking Champaign, IL area solid growth. You hear economic drivers like new sports complex in Rantoul, casino coming to Danville, etc. I have always counted rentals in Danville and Rantoul you buy for 30-35k that rent for $700 to NEVER have appreciation. If it happens then great, but I am not expecting it.

Lot of variables to pay attention in the "tax" game. Rantoul, IL (10 minute north) actually had the highest "tax rate" in the county for awhile, but the houses were assessed super low that you didn't realize it. Mahomet, IL (10 minute west) has some of the highest assessments per house, school district, etc.

My personal opinion is "cheap money" and "tax incentives" boomed building more than supply and demand fundamentals the past 4 years. Private equity building on campus with no localized knowledge of market research. I have talked to multiple apartment owners, some that have owned for 15+ and 20+ years in Champaign and they have told me this past year is the highest vacancy they have ever had (this may be from coronavirus... but I think it's from overbuilding more than anything). I don't know the building unit count statistic influx, but I can't believe it is anywhere close to the net migration (supply/demand fundamentals). I would be pretty nervous being on campus anywhere with the huge influx of supply, especially if you have "maturity date" within 2 years coming due on commercial loans that would only work at what are historically low interest rates right now.

This is article that was showing the new building inventory becoming a problem that will serve you good market research @Abhishek Banerjee

"The owners of the Gramercy Park Apartments in west Champaign asked the board of review to reduce the assessment of their property, with a weighted age of 52 years, by more than a million dollars.

“As of January 1, 2019, CoStar (a commercial real-estate information provider) reports vacancies in the Champaign-Urbana area at 10.5 percent,” said the Grammercy appeal. “New deliveries have outpaced demolitions by 275 units in 2018.”

Grammercy said that enrollment increases at the University of Illinois are fueling the apartment construction boom but noted there still are too many units in the market.

“Currently the market cycle appears to be at the end of Phase II — Expansion or at the beginning of Phase III — Hypersupply,” said its appeal.

Grammercy said its annual net operating income has dropped from more than $1 million in 2014 to a loss of more than $300,000 in 2018. It said its vacancy rate was 41 percent in 2018."

https://www.news-gazette.com/news/local/housing/tom-kacich-apartment-landlords-call-for-lower-tax-assessments-amid/article_b8b70990-e3b7-5f57-bd2b-a9a0689150a5.html

Quentin McNew · Answer

I agree with you. Green Street Realty seems to be at every corner now and looks aggressive from a outside 3rd party view I would say. Syndications have been huge on campus. The opportunity zones (deferring capital gains if placed in these developments) as tax incentives are leading the way to building instead of demand, but time will tell.

It will be interesting to see how everything plays out after election, eviction moratoriums, forbearance with lenders, etc.

Shawn Q. · Answer

It's a complex question, so forgive me if I'm a bit wordy on this one (and lots of guesses, so I could be entirely wrong). Mostly it's a historical issue, but also partly the range of industries that are/were in town. I'm thinking Carle, Kraft, Busey, and the other larger employers (which is kind of a reflection of the historical issue).

For the historical piece - the University is one of the earliest land grant Universities. Like the other land grants (I think) it was originally an Ag school so all the most prosperous farming families sent their kids to town for a time for multiple generations. The town also got more important as a waypoint on the City of New Orleans, and the intersection between I57 and I74. So, over 180+ years there's been a concentration of wealth in town - has to be the largest in the state outside of Chicago. That wealth, proximity to chicago and cross-continental transportation routes, and a cheap student work force brings industry to town which for the most part has stuck around throughout the years.

All of that raises the demographic economic base of the town, but the University is the biggest driver there by far. No other employer can hold a candle to their benefits. Salaries are crazy high too - take a scroll through the grey book sometime and look at the high-five through mid-six figure salaries (if they're faculty that's a 9 month salary - they get more for summers, research, publications, fellowships, and more). There are some ri-hi-hich folks in town and that's just the University. All the attendant industry also makes bucks. The University also provides some free-money incentives for housing - outright purchases or stipends. Students coming to town are also generally pretty rich - we have (had) the top three Chinese student population in the country. Undergrad population is 37K or so and out of state tuition is $30K or so, so those are some decent numbers in terms of welcoming rich folks to town, along with all the additional money injected into the community by rich kids. It's a public Ivy school with one of the best Engineering schools in the country - so it's a strong international draw.

That much money has historically increased property costs. We'll see if that trend reverses with Covid and the rampant overbuilding in town, but I think minor corrections in town it's still a secure market. Now, if you'll excuse me I need to go run the numbers on a run-down duplex I just looked at that I almost certainly will never buy. Ah, practice!

Darius Ogloza · Answer

Simple.  Hal the computer from Kubrick's "2001: A Space Odyssey" was built in Urbana, Illinois.

The concentration of talent and wealth in Urbana (I am a proud graduate - Bronze Tablet - Class of 1984) makes this a very different market than those surrounding towns.  Arcola, anyone?  Seriously.

Shawn Q. · Answer

The overbuilding is highrises in/around campus. High density, high cost, and high amenities. That was great when there was tons of foreign money coming in, but not so great now. Pretty sure there are still 1-2 new buildings opening now/soon as well. @Quentin McNew can tell us if I'm wrong, but it seems most of the new developed stock is out of town larger companies. Most of the older apartment stock is larger local long-time owners, and they're generally (in my opinion) lazier and don't run their portfolios well. I'm guessing the older players are going to get killed when the new stock starts dropping rents to get occupied. As for what I'm investing in - SFR rentals. I think there are still opportunities, particularly off campus. The people still in town are going to want a little bit of yard to stare at when they're sick of staring at their WFH computer.

Quentin McNew · Answer

1. Yes those properties are away from campus. Gramercy is 5 minutes west and right off the interstate 72. I would say Gramercy is around a C class asset types even with extensive remodel they just completed this past year.

2. Student housing hard to get statistics on facts. The city just approves permits if it passes zoning, permits, etc. The city doesn't tell people how to operate business, but just follow the local zoning and ordinance. I don't have crystal ball, but think virtual learning isn't going anywhere. Supply is going to start cutting rents if not already and already increasing concessions (free rent 1 month, etc). You never know what private equity or syndications are happy with 3% returns and capital preservation. It's a different game for small investors that want higher returns for it to be worth full time investors time.

3. I have been managing property 8 years, but bought my first property in Champaign as a "house hack" 3 years ago. I guess only 3 years since first purchase (After knocking out my housing expense, then I burned the ships and went full time investing last year), although seems longer than that but that may be just because coronavirus. I started out all creative financing, seller finance, etc and focus on single family with around 70 SFR in Champaign area and the remaining 20 in Indianapolis, IN (mix of property and 8 unit building in Indianapolis). It would of been a lot more easier doing 10+ unit deals or buying a 70 unit apartment building, but since local to me and boots on ground allowed more creative acquisitions. Coronavirus and this year has been the worst for me on rent collections with about 10 homes not paying (10-20% vacancy...bad). Class B and class A areas have done well (Mahomet homes are 100% collection, example), demographic, etc are all variables though. I know some investors that haven't been affected at all primarily in the B class residential and I believe the screening process mitigates most of your risk. A couple properties inherited bad tenants, eviction moratoriums, etc has made perfect storm for me. This is why I have adjusted a little bit and couple recent acquisitions have been section 8 housing for guaranteed rent and hedge. End of the day: if I find houses all in at "cost basis" under 75%..... I am buying still

Abhishek Banerjee · Answer

So excited to see a post on Urbana Champaign, these never pop up! I went to UIUC about a decade ago, and always wonder what kind of a market it is as an investor!

@Matthew Davis Are your Urbana units student rentals, or something else? How long have you had them? Have they appreciated quicker than the ones in Decatur?

@Michael Willard  Hi Mike! Curious about your point of being weary of campus. Having been a student, I lived on the campus bubble. I know Green Street has become a different beast in the last decade, but broadly speaking, what are you weary of? I recognize that Covid has put a different sort of uncertainty in the market but outside of that, what concerns you about the campus in UIUC?

@Shawn Q. Good context! Some of it was true back when I was a student too, but definitely some interesting tidbits. Are you looking at student housing or something else? Where do you think most of the overbuilding is? Is there a segment of the market that you believe still has good opportunity?

Account Closed Agree on all counts with you re: Urbana Champaign being culturally different. I don't know the Urbana Champaign market well enough, but I have heard that taxes in Urbana are higher. I am comparing to Champaign here, not Rantoul / Decatur. Do you find that Urbana's increased taxes and regulation don't impact your returns due to higher rents (per memory, Urbana had lower rents than Champaign, at least around the areas where undergrad students lived), or that you underwrite it into your math and as long as it works, you go with it? What kind of investments do you have in Urbana?

Looking forward to reading all your responses!

Account Closed · Answer

Following on other replies about the presence of university and hospitals in Champaign/Urbana, I would add that there's a specific cultural dimension at play that contributes to the difference in price between parts of these cities and other areas of Central Illinois. Most, or basically all, of the highest earning employees in these industries--doctors, specialists, professors, university/medical administration--relocate to Champaign/Urbana from elsewhere in the US and internationally. The difference culturally between these cities and surrounding towns is quite stark to someone arriving from a major city or foreign country. The concentration of these people in C-U is compounding: C-U feels more cosmopolitan while surrounding areas feel more strange to outsiders. This is all to say that in addition to proximity to workplace, quality of schools, etc, there's a premium put on the relative diversity and openness I would argue. The prices in C-U are only high if the target market is viewed as interchangeable with places like Rantoul, Danville, Decatur, etc. I often hear people complain about the taxes and regulation in Urbana, where I personally invest, but those to me are able to be priced in for a particular demographic (ie liberal/progressive professionals) that finds the city very appealing.

Christopher Isom · Answer

@AJ Leman

I wasn’t really expecting to come across any old classmates on here.

@Matt I’d say Champaign is mainly cash flow only. You won’t have any appreciation at least not much. It’s also hard to know with all the next rental complexes they’ve built and continue to build.

Matthew Davis · Answer

@AJ Leman, nope, moved here in 2005.

Champaign Illinois too high to buy?

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