Marc Realty Capital partner David Ruttenberg, photographed Oct. 10, 2016, in a downtown Chicago apartment building he developed, says small apartments are more profitable to own and more affordable for renters. (Michael Tercha / Chicago Tribune)
The apartment market in Chicago has been red hot, with record development of new luxury high-rises, refurbishment of old buildings and soaring rents.
Developer David Ruttenberg, 36, has had his hand in all of it as the trend of city living has become popular with millennials and empty nesters. As a partner at Marc Realty Capital, he began during the recession in 2009 buying bad loans and distressed real estate, and then started lending money to developers who couldn’t get loans from banks or needed loans faster.
Marc eventually branched into development of new luxury apartments and converting old condo buildings into apartments. Recently the firm made an entree into new condos through the Illume project at 111 S. Peoria St. and partnered with R2 to purchase property eyed for retail development in the Fulton Market area — the old Isaacson & Stein Fish Co. building at Fulton and Halsted Street. Retail development, including the Old Town and Streeterville neighborhoods, is becoming a growing focus, Ruttenberg said.
Ruttenberg discussed his views on real estate in a recent interview with the Tribune. The interview has been edited for length and clarity.
Q: Has the apartment market become glutted after all the construction since 2009?
A: There are about 11,000 apartments being constructed in Chicago right now. A lot of people are talking about a glut now — all in the high end and concentrated in River North, Streeterville. There’s not that many in the West Loop, but there are some. These walk-to-work, walk-to-play locations are the most desirable. So they are going to get filled. It’s just a matter of are they going to be the same rents as today, or a little more, or a little less? I don’t think you are going to see a huge drop in rents because there are 3 million people that live in Chicago — 9 million in the metropolitan area.
Q: Renting is popular now. Will that change?
A: Renting is cheaper than owning — for everyone. If you put $100,000 down as a down payment, there’s a cost of capital for that. You could be earning anywhere from 2 to 10 (percent) depending on how you invest that. So the moral of the story is those units are going to get leased.
Q: Relative to some cities, Chicago rents have not escalated as sharply. Why?
A: There are a lot of neighborhoods — Wicker Park, Logan Square, Lincoln Park, Lakeview and now Uptown. So people have a lot of options and that pushes down rents. If I’m looking at a building in River North and it’s too expensive, I can go and look at River West. I live in River West because I’m paying half the rent I’d pay in River North.
Q: Why are there such tiny apartments being built?
A: If you can deliver a low-priced unit in a great location, they fill up overnight. And so if I can build a studio for 350 square feet and I can charge $1,400 as a developer, I am getting $4 a square foot. That’s a tremendous rent per square foot in Chicago. So it really pencils out on the development side for the developer. For the renter, they are missing out on 50 or 100 square feet, but they are saving $200 or $300 a month compared to other properties where the studio size is larger. And you don’t need a big kitchen because you hit (a delivery service) on your phone, and the food’s there in 18 minutes.
Q: Do you see other trends in these prime locations?
A: We are trying to build buildings without parking because only one-third of renters in Chicago have cars, and if I can still rent to 67 percent of them that’s a lot of people I can still rent to.
Q: Do you think we’ll see construction of starter condos — maybe $350,000 or below — again?
A: No. Because if you have a $350,000 condo that’s 1,000 square feet in the Gold Coast or River North, I want to buy that entire building and convert it back to apartments. After we rehab it, fix up the common areas of the building and put in professional management and leasing, the value as an apartment building far exceeds the value of a condo building. And while there are efficient market forces out there and as long as interest rates are as low as they are and cap rates are sub 5 percent for great located buildings in Chicago, you are going to see a huge push for deconversion.
Q: What about new condo buildings with higher-priced units?
A: I find them the most fascinating thing right now in Chicago real estate. Whereas in New York you are now seeing a downturn in the condo market, and in Miami you have 11,000 apartments being constructed right now and you have Zika, and some of these international markets not doing as well as they were. You are probably going to see decreases in velocity and prices. Chicago now, besides Wanda Vista (architect Jeanne Gang’s planned 93-story tower), you have only 900 condominiums being planned. Of those 900, we think 600 are going to be built because some of these developments will be very challenging to get done.
Q: Why is that?
A: It’s hard to get condo projects built in the city of Chicago now because construction costs have really gone up a lot, getting a construction loan for a condo project requires a large liquidity and net worth. You need presales of 30 percent to 40 percent to get the bank loan, and then you need to put in 30 percent equity. It’s no longer the days of putting 5 percent equity in.
Q: Where do you see the new development happening next?
A: You are seeing a lot of restaurants now in Pilsen. And a lot of developers want to be in Pilsen. But neighborhood groups are fighting it. Your manufacturing districts are now being opened up to alternative uses. Maybe Elston, between Chicago Avenue all the way up to North — if those manufacturers ever start moving out that would be a great area to develop. Goose Island, we think, and our partners too, we are invested in Goose Island. And we think that’s going to be a big office and technology center. I can see the (area around the) United Center.
Q: Do you think prices are bubbly now?
A: Any time you see something go up 2.7 times, 2.8 times in an eight-year period, that points to exorbitant growth and you haven’t seen income growth, earnings go up 2.8 times. They haven’t increased by 280 percent. So it’s so hard to call a top of the market or a bubble, and we continue to see deals that we think are safe where we get a risk-adjusted return that we are comfortable with.
Q: What would rising interest rates do?
A: They would cause a decrease in asset values. But major governments are keeping rates low. That leads me to believe that we are relatively safe at least for the foreseeable future. As long-term borrowing rates stay low, asset values will stay high. What goes up must come down.
Q: So eventually we face a risk.
A: But they always shoot up higher. If you look at the prices before the Great Recession everything shot back much higher. You already see condos in the Gold Coast, River North surpassed where they were before the crash. You haven’t seen the recovery in a lot of tertiary secondary markets. There’s been a flight to quality.