An Analysis of the Market Potential For Rental Apartment Development --- Cantera --- Warrenville, Illinois

Transcription

1 An Analysis of the Market Potential For Rental Apartment Development August 11, 2017 INTRODUCTION At the request of, Tracy Cross & Associates, Inc. evaluated the market potential for rental apartment development in. Specifically focusing upon a 5.5-acre parcel located within the existing mixed-use development, this summary analysis establishes the following: Conclusions regarding the depth of the Warrenville area for apartment development over the next several years based upon pertinent economic, demographic and residential trends which define the marketplace. Conclusions regarding the overall marketability of new rental units within the large-scale mixed-use development. These conclusions are based upon factors associated with location, depth of the market, and the alignment of competing communities, both existing and planned. Product development guidelines to ensure that the apartment community holds measurable market support and can attain acceptable rates of absorption at benchmark rent levels. These guidelines address unit types, sizes and mix, unit features/finishes, community amenities, etc. Alternative rental rate strategies and associated absorption forecasts to enable financial modeling. General Limiting Conditions Tracy Cross & Associates, Inc. has made extensive efforts to confirm the accuracy and timeliness of the information contained in this study. Such information was compiled from a variety of sources, including interviews with developers/property managers and their agents, government officials, and other third parties. Although Tracy Cross & Associates, Inc. believes all information in this study is correct, it does not warrant the accuracy of such information and assumes no responsibility for inaccuracies in the information provided by third parties. Conclusions and recommendations established in this analysis represent a professional opinion and are based upon forecasts into the future which could be significantly altered by outside occurrences. These include, among others, the possible interplay of unforeseen social, economic, physical/environmental, and governmental actions. In this regard, Tracy Cross & Associates, Inc., its owners, and its employees shall be held harmless of changes in conditions that may materially result from these occurrences.

2 THE SUBJECT PROPERTY The subject property is located north of Diehl Road, roughly one-quarter mile west of Winfield Road in Warrenville, DuPage County, Illinois a western suburb of Chicago. It is situated just south of Interstate 88 (The Ronald Reagan Memorial Tollway) and six miles west of Interstate 355 (The North South Tollway). GEOGRAPHIC DELINEATION OF THE SUBJECT PROPERTY WARRENVILLE, ILLINOIS Subject Property Source: Microsoft Streets & Trips and Tracy Cross & Associates, Inc. The subject property is located within Warrenville s acclaimed development a large-scale, mixeduse community replete with commercial/office, retail/entertainment and residential uses., formerly a 650-acre limestone quarry, is now a bustling business mecca anchoring the nationally recognized I-88 research and development corridor that runs through the heart of DuPage County. Through a public-private partnership established in 1988, Warrenville was able to develop the depleted quarry into, primarily, a main line employment center that has become the corporate headquarters for a number of companies including RR Donnelley, Liberty Mutual Life Insurance, Patterson Medical, EN Engineering, Exelon Nuclear, FuelTech and Phonak Hearing Systems. Page 2

3 In addition to the numerous commercial/office facilities internal to, the development is home to a Super Target store, a Life Time Fitness facility, a Regal Stadium Cinema/Main Events Entertainment complex, five banks, a hotel, a daycare center and a wide variety of restaurants/night spots including Twin Peaks, Eddie Merlot s, Rock Bottom Brewery, Chevy s, California Pizza Kitchen, Corner Bakery Café, Red Robbin, Chipotle, Pot Belly, Zoup, Buffalo Wild Wings, Masala, Skippy s Gyros and McDonald s. The subject property itself is located in the southern portion of the overall mixed-use development aligning the Regal Stadium Cinema/Main Events Entertainment center. From this location, all of the aforementioned restaurants, along with Super Target, are within close proximity and walking distance to the immediate south and east. Subject Property As highlighted in the following aerial illustration, the 5.5-acre parcel consists of the western portion of the Regal Stadium Cinema/Main Events Entertainment parking lot. Page 3

4 Residentially, contains two established neighborhoods, both of which are located north of I-88. Village, which was developed during the period, consists of 160 for sale townhome and flat-over-flat units with two-car attached garages. At base sales prices ranging from approximately $150,000 to $175,000 during its initial sales and marketing period, this development reached final sellout in 36 months averaging 4.4 sales monthly. Today, resale closing prices within Village range from $196,000 to $280,000. The other residential component of is the 343-unit Preserve at rental apartment community which opened in This development consists of garden-style apartments distributed among a series of two-story buildings each with a limited number of hallway-access, single-car garages. A variety of one bedroom, one bedroom plus den and two bedroom offerings are available in a footage range of 775 to 1,325 square feet. Corresponding posted base rents currently extend from $1,400 to $1,900 monthly and average $1,560 for a 1,064 square foot apartment. This translates to a value ratio of $1.47 per square foot. Attached garages are leased separately at $135 monthly. Several detached garages are also available for an incremental monthly fee of $110. Community amenities include a clubhouse with community room/kitchen, fitness center, dry sauna, hot tub, racquet ball courts and a business center; a swimming pool and deck area; tennis courts; a sand volleyball court; and a covered gazebo containing a gourmet grill. Preserve at began leasing in February 1996 and achieved stabilized occupancy in March 1998, reflecting an overall absorption rate of 12.5 units per month. At the close of June 2017, this community reported a vacancy rate of just 2.3 percent. The Preserve at is the only apartment community to be constructed in Warrenville for more than 20 years. However, located just east of is the 400-unit Dwell at Naperville community, formerly Lincoln at the Parks, which was built in 1997 but renovated as recently as 2015/2016. Dwell at Naperville offers one and two bedroom unit types extending in size from 641 to 1,140 square feet with posted base rents ranging from $1,345 to $1,602 monthly. On average, this community supports a base lease rate of $1,506 for a unit containing 896 square feet of living space, equal to a value ratio of $1.68 per square foot. As of June 2017, Dwell at Naperville had 19 vacant units translating to a rate of 4.8 percent. The influence of the overall development upon Warrenville cannot be overstated. With, Warrenville s estimated daytime population has reached approximately 25,000, a level nearly double its permanent population base which stood at an estimated 13,072 in April The subject property s location along the I-88 corridor will provide future residents with a very reasonable commute to additional employment concentrations outside of Warrenville in the nearby communities of Naperville and Aurora to the immediate west and south and Lisle, Downers Grove and Oak Brook to the east. And, via I-88 s connection with I-355, major sources of employment in and around Lombard, Itasca and Schaumburg can be reached within a 20- to 30-minute drive time. In addition to shopping/dining alternatives internal to, prospective residents will find an abundance of shopping options along Winfield Road, Warrenville Road, Butterfield Road, Illinois Route 59 and Naperville Road. Aligning these nearby arterials, virtually all major retail categories and service providers are represented ranging from grocery, gas and convenience items to various big box venues. Moreover, situated just three miles to the southeast along Route 59 is the Westfield Fox Valley regional shopping mall anchored by national retailers such as Macy s, JC Penney and Sears. For public transportation, the nearest METRA rail station is located two miles to the south at 105 E. 4 th Avenue in Naperville. From this location, via the BNSF Railway line, express trains reach the city of Chicago s Union Station in 32 minutes. Page 4

5 Although it is not anticipated that there will be a preponderance of school-aged children residing within Covington Realty s community, the subject property is served by the highly regarded Naperville Community Unit School District 203. Students in grades K through 5 would attend Mill Street Elementary School, while those in grades 6-8 would attend Jefferson Junior High School. Students at both schools recently posted standardized test scores well above state averages. Secondary education will be provided by Naperville North High School. Statistics for the school year indicated a total enrollment of 2,825 students. Of those students participating in the American College Testing (ACT) program last year, an average composite score of 24.9 was achieved, a level above the state average of THE PROPOSED DEVELOPMENT While the primary purpose of this analysis is to provide detailed development guidelines regarding the most marketable mix of apartment units within the subject property, the product form itself will consist of a wrapstyle, four-story courtyard-type building including a structured parking garage internal to the building. At this time, is envisioning a development size of units with 300+ enclosed parking spaces. As a part of this overall concept, intends to offer an extensive amenity package replete with a courtyard comprised of an outdoor swimming pool, an expansive deck area, an outdoor fire pit, grilling stations and green space; a community room with kitchen, game tables and lounge areas; a fitness center; and more. Unit features, too, will be extensive including luxury oriented features and finishes such as granite or quartz kitchen countertops, stainless steel appliances, in-unit washers and dryers, private patios or balconies, etc. Page 5

6 BACKGROUND TO THE MARKET The overall geographic area from which residential demand support for the community will emanate consists of the host DuPage County in its entirety. Representing the second largest county in Illinois, DuPage County comprises square miles generally extending from I-294 on the east to Kautz Road on the west, and from Devon Avenue on the north to 87 th Street on the south. The selection of this broad geographic area is based upon a number of factors including commonalities relative to sources of employment, commuting patterns established along the I-88, I-355 and I-290 expressway systems, Routes 53, 59 and 83, Butterfield Road, Roosevelt Road and North Avenue, and/or the METRA commuter rail network. It also considers socio-economic and demographic similarities of area residents; and the alignment and location of rental apartment developments which will serve as sources of competition, both direct and indirect. From a more localized perspective, the Warrenville Primary Market Area (PMA), which consists of the host Naperville Township together with the adjoining townships of Lisle, Milton and Winfield in southwest DuPage County, provides population, household and income insight relative to the character of the immediate area surrounding the subject property. GEOGRAPHIC DELINEATION: DUPAGE COUNTY AND THE WARRENVILLE PMA Source: Microsoft Streets & Trips and Tracy Cross & Associates, Inc. As summarized in the following paragraphs, rental apartment development within the subject property, and throughout DuPage County and the Warrenville PMA, can be supported by empirical evidence found in key demand-related variables including expected levels of household growth, historical and projected construction activity and current and expected conditions in the competitive marketplace. Page 6

7 As detailed in Exhibit 1, the 2010 Census revealed that DuPage County averaged the addition of 1,159 households annually during the timeframe to a 2010 base of 337,132. Household growth during the ten-year period moderated from gains witnessed during the 1990s when households increased by more than 4,500 annually. Several factors contributed to this decline, most notably the implosion of the for-sale housing market beginning in late 2005, coupled with the subsequent national recession which continued through the close of the decade. Other contributing factors included the largely built-out nature of DuPage County as a whole, coupled with strict zoning covenants and/or the higher price of housing in many of the component municipalities of the county such as Burr Ridge, Clarendon Hills, Hinsdale and Oak Brook, among others. In the localized Warrenville PMA, household gains during the period accounted for 65.7 percent of household growth county-wide with the PMA witnessing the addition of 762 new households annually during this ten-year span. Estimates derived from the Census Bureau s annual American Community surveys indicate that DuPage County supports a 2017 household base of 346,803, representing the annual addition of 1,382 households yearly since 2010, with household growth through 2022 projected at 1,403 per annum. These estimates/projections, which are nearly equal to gains registered during the period, reflect continued growth in the regional economy, albeit at rates below the nation as a whole, balanced by tighter lending controls which will hold back potentials in the for sale sector and constraints upon ownership supply caused by the absence of significant new subdivision development of scale. Notably, the host Warrenville PMA is expected to account for roughly onehalf of the county s household growth over the forecast period with an estimated 645 household additions expected annually through Although tenure distributions in DuPage County favor ownership housing which currently accounts for 74.2 percent of all occupied units, the market area supports a relatively substantial base of renters, estimated at 89,472 households. Moreover, since 2000, renter household additions have accounted for 59.4 percent of net household growth (743 renter households) yearly throughout DuPage County. And, over the last 17 years ( ), nearly 50.0 percent of annual renter growth or 356 households yearly occurred in the four-township Warrenville PMA. RENTER-OCCUPIED HOUSEHOLDS DUPAGE COUNTY AND WARRENVILLE PMA Average Annual Change Area DuPage County 76,839 84,297 89, Percent of Total Households Warrenville PMA 35,502 39,104 41, Percent of Total Households Source: U.S. Census Bureau; Census 2000 and 2010 and Environics Analytics, 2017 As highlighted in the following text table, over 55.0 percent of all households in both DuPage County as a whole and the Warrenville PMA in particular maintain a household size of two persons or less. With the typical renter profile of apartment units consisting primarily of singles and couples without children (including empty nesters), along with non-traditional households such as divorcees, widows and singles living together as couples, the current composition of area households lends adequate support to new apartment development within the property. Page 7

8 1 POPULATION, HOUSEHOLDS, AND INCOME -- DUPAGE COUNTY AND WARRENVILLE PMA -- DuPage Warrenville City of DuPage Warrenville City of Attribute/Year County PMA Warrenville Attribute/Year County PMA Warrenville Population Households , ,108 13, , ,036 4, , ,587 13, , ,654 4, , ,070 13, , ,128 4, , ,575 13, , ,353 4,944 Average Average Annual Change Annual Change ,295 1, , ,774 1, , ,798 1, , Population by Race/Hispanic or Latino 2017 Households by Type Total Population 936, ,070 13,072 Total Households 346, ,128 4,898 Not Hispanic or Latino 798, ,968 9,923 Married Couple with Children 96,189 41,545 1,262 White Alone Not Hispanic 561, ,615 7,162 Married Couple without Children 101,438 40,331 1,414 Black Alone Not Hispanic 48,876 24, Other Family with Children 26,024 11, Asian Alone Not Hispanic 109,405 46, Other Family without Children 20,238 7, All Other Races Not Hispanic 78,448 29,798 1,532 Nonfamily with Children Nonfamily without Children 102,243 44,393 1,481 Hispanic or Latino 137,784 51,102 3, Housing Units and Tenure 2017 Household Income Total Housing Units 368, ,567 5,194 Total Households 346, ,128 4,898 Occupied Housing Units 346, ,128 4,898 Under $25,000 40,485 15, Owner Occupied 257, ,567 3,896 25,000-34,999 22,533 8, Percent ,000-49,999 37,607 14, ,000-74,999 57,044 23,400 1,022 Renter Occupied 89,472 41,561 1,002 75,000-99,999 48,710 19, Percent , ,999 66,080 28, ,000 and Over 74,344 35, Vacant 21,199 8, Median $83,075 $88,008 $77,738 Percent Source: U.S. Department of Commerce, Bureau of the Census: Census 2000 and 2010; Environics Analytics; and estimates by Tracy Cross & Associates, Inc.

9 COMPOSITION OF AREA HOUSEHOLDS: 2017 DUPAGE COUNTY AND WARRENVILLE PMA DuPage Warrenville Attribute County PMA Total Households 346, ,128 1-Person Household 86,925 37,134 2-Person Household 105,985 44,463 3-Person Household 58,305 24,443 4-Person Household 54,066 22,611 5-Person Household 26,140 10,535 6 or More Person Household 15,382 5,942 1 Person Households Percent Number ,925 37,134 2 Person Households Percent Number 105,985 44,463 Source: Environics Analytics; 2017 Demographic Snapshot Householders in DuPage County reflect a median age of 52 years. Most germane to rental apartment forms, 15.5 percent of county-wide householders are under the age of 35, while another 21.6 percent fall between the ages of 55 and 64. Numerically, these two age categories total 128,445 households in DuPage County. In the PMA, the same two age categories collectively represent 55,642 households or 38.3 percent of the overall base. Area households are generally affluent with estimated 2017 median annual incomes in DuPage County and the PMA standing at $83,075 and $88,008, respectively. These compare with the $66,243 median represented for the Chicago region as a whole. More importantly, as summarized in the following table and detailed in Exhibit 2, at least two-thirds of resident households in the strongest lifestyle age categories of Under 35 and Aged 55 to 64 earn at least $50,000 per annum. HOUSEHOLD AGE AND INCOME CHARACTERISTICS: DUPAGE COUNTY AND WARRENVILLE PMA -- Total Households DuPage County Attribute Number Percent Median Number Warrenville PMA Percent Median Total Households Under 25 Years Years Years Years Years Years Years 85 Years and Over Total Households Under 35 Years With Incomes of $50,000 or More Total Households Aged 55 to 64 Years With Incomes of $50,000 or More 346, $83, , $88,008 8, ,629 4, ,988 45, ,902 20, ,724 62, ,544 27, ,854 72, ,467 30, ,151 74, ,645 30, ,623 48, ,910 19, ,318 23, ,230 8, ,151 11, ,106 3, ,423 53, $70,567 25, $59,115 35, , , $98,645 30, $82,623 58, , Source: Environics Analytics: Household Income by Age of Householder and Tracy Cross & Associates, Inc. Page 8

10 2 HOUSEHOLD INCOME BY AGE OF HOUSEHOLDER DUPAGE COUNTY AND WARRENVILLE PMA Income Under $25,000 $25,000-34,999 $35,000-49,999 $50,000-74,999 $75,000-99,999 $100,000 and Over Percent Percent Percent Percent Percent Percent Age of Number of of Total Number of of Total Number of of Total Number of of Total Number of of Total Number of of Total Householder Households Households Households Households Households Households Households Households Households Households Households Households Total Median DuPage County Years Years Years Years Years Years Years 85 Years & Over 2, , , , , ,598 $42,629 4, , , , , , ,023 75,902 4, , , , , , ,048 94,544 4, , , , , , , ,467 6, , , , , , ,824 98,645 7, , , , , , ,957 66,910 6, , , , , , ,675 43,230 4, , , , , ,133 32,106 Total 40, , , , , , ,803 $83,075 Warrenville PMA Years Years Years Years Years Years Years 85 Years & Over 1, , ,314 $36,988 2, , , , , , ,708 63,724 1, , , , , , ,320 82,854 2, , , , , , ,898 93,151 2, , , , , , ,620 82,623 2, , , , , , ,041 50,318 2, , , , , ,329 30,151 1, ,898 23,423 Total 15, , , , , , ,128 $88,008 Source: Environics Analytics and Tracy Cross & Associates, Inc.

11 With a location along I-88, six miles west of I-355, there are over 1.1 million suburban private sector jobs within an approximate 30-minute commuting distance from the subject property, representing almost one-third of total suburban private sector employment in the six-county Chicago metropolitan area. SUBURBAN PRIVATE SECTOR EMPLOYMENT AREAS INCLUDING AND PROXIMATE TO WARRENVILLE Total Suburban Private Sector Employment: 2016 Percent of Number of Six-County Area Workers Metro Area Six-County Chicago Metro Area (1) 3,507, Within a 30-Minute Commute of Warrenville: 1,158, DuPage County 554, Cook County 486, West Suburban Cook County 116, Southwest Suburban Cook County (2) 100, Northwest Suburban Cook County (3) 231, Chicago-O'Hare 37, Southeastern Kane County (4) 45, Will County (5) 71, (1) (2) (3) (4) (5) Includes Cook, DuPage, Kane, Lake, McHenry, and Will counties in Illinois. Includes Berwyn, Brookfield, Chicago Ridge, Cicero, LaGrange, Lemont, Lyons, McCook, Oak Lawn, Orland Park, Summit, and Willow Springs. Includes Des Plaines, Elk Grove Village, Park Ridge, Rolling Meadows, Rosemont, Schaumburg and Schiller Park. Includes Aurora and North Aurora. Includes Bolingbrook, Naperville (south), Plainfield, and Romeoville. Source: Illinois Department of Employment Security: Where Workers Work 2016 During the time period, residential building activity in DuPage County averaged 3,106 units annually, distributed between 2,489 single family homes (including single address townhomes and duplexes) and 617 in the multi-family sector. As detailed in Exhibit 3, the strongest periods of new residential construction in the county occurred during the 1990s when volumes averaged nearly 4,800 units annually due in large part to intense development along the Illinois Route 59 corridor. Heightened residential development occurred again between 2000 and 2006 when authorizations averaged 3,536 yearly, a result of robust single family detached and attached for sale activity fostered by relatively low interest rates, shifts in renter to ownership tenure and, as we now know, extremely lax lending practices during the housing boom. Residential construction volumes in DuPage County began to slide in 2007 and precipitously so starting in Between 2008 and 2011, for example, residential building activity dropped to a yearly average of only 634 units, representing a decline of 85.2 percent from averages. Since 2011, residential permit volumes have improved, averaging 1,351 units annually through However, compared to authorizations registered during the period, permit levels over the past five years are still down 68.4 percent. While influenced to a certain extent by the lack of developable land in DuPage County for large scale development, the more modest level of construction activity over the past five years is a result of a for sale marketplace that is still a shell of its former self. However, multi-family permit volumes over the past five years in DuPage County totaled 1,685 units, virtually all of which occurred in the rental apartment sector. This compares to Page 9

12 3 TRENDS IN RESIDENTIAL BUILDING PERMITS DUPAGE COUNTY AND WARRENVILLE PMA Suburban Chicago DuPage County Warrenville PMA Percent Percent Percent Percent Percent Percent of of of of of of Single Multi- Suburban Single Suburban Multi- Suburban DuPage Single DuPage Multi- DuPage Year Total Family Family Total Area Family Area Family Area Total County Family County Family County (1) 25,931 20,002 5,929 4, , , , , ,415 18,294 4,121 3, , , , ,354 22,410 4,944 4, , , , ,664 25,125 4,539 4, , , , ,639 26,051 5,588 5, , , , ,020 23,969 6,051 5, , , , , ,110 24,320 7,790 5, , , , , , ,879 22,188 6,691 4, , , , ,813 24,668 6,145 5, , , , , , ,812 27,789 7,023 4, , , , , ,476 26,475 6,001 3, , , , ,970 28,072 6,898 4, , , , , , ,252 30,469 6,783 3, , , , ,409 31,402 6,007 2, , , , ,905 31,200 5,705 3, , , , ,523 32,181 6,342 3, , , , ,149 24,216 4,933 3, , , , ,359 14,868 2,491 1, , ,301 6,113 1, ,752 3, ,223 3,169 1, ,048 3, ,679 4,283 2,396 1, , ,069 5,542 1,527 1, , ,500 5,931 2,569 1, , ,366 5,905 2,461 1, , ,537 5,975 2,562 1, Annual Average ,821 18,411 4,410 3, , , , Sources: U.S. Department of Commerce, Bureau of the Census, C-40 Construction Reports and Tracy Cross & Associates, Inc.

13 just 721 total multi-family permits in the five years prior. Notable apartment developments pulling permits over the past five years in DuPage County include: Elm Creek Townhomes in Elmhurst, Elmhurst 255 (Elmhurst), Avant at the Arboretum (Lisle), Apex 41 (Lombard), Tapestry (Naperville), Courthouse Square (Wheaton) and Wheaton 121 (Wheaton). MULTI-FAMILY PERMIT TRENDS: DUPAGE COUNTY, ILLINOIS 1,800 DuPage County MF Permits Percent of Suburban MF Permits , , , , DuPage County MF Permits Percent of Suburban MF Permits Source: U.S. Bureau of the Census: C-40 Construction Reports and Tracy Cross & Associates, Inc. Of the 1,685 multi-family permit authorizations recorded during the last five years, 1,361 occurred within the Warrenville PMA representing a market capture rate of 80.8 percent. RENTAL DEMAND In DuPage County, construction requirements for new rental housing will average 760 units annually over the next five years, i.e. if supply is made available and appropriate rent levels are maintained on a site-bysite basis. As outlined in the following text table, this demand forecast can be reconciled using accepted methodologies of expected renter household growth, coupled with market stabilization and replacement derivatives. ANNUAL RENTAL HOUSING DEMAND SUMMARY DUPAGE COUNTY Attribute Number Expected Annual Renter Household Growth (1) 632 Annual Vacancy Requirement to Maintain Balance in the Market (2) 37 Annual Replacement 0.10 Percent of 2017's Renter Inventory (3) 91 Derived Annual Demand 760 (1) (2) (3) Determined by applying the expected percentage of renter households (45.0 percent) to the anticipated number of new annual household additions between 2016 and 2021, i.e., 1,403 per year. Represents the additional units needed, above those mirroring renter household growth, to maintain a normal 5.0 percent vacancy rate. Represents a typical replacement percentage for moderately mature residential areas. Sources: U.S. Census Bureau; Environics Analytics; and Tracy Cross & Associates, Inc. Page 10

14 The 760-unit annual demand forecast can also be supported on the basis of renter household growth over the past 17 years. For instance, since 2000, DuPage County has witnessed the addition of 743 new renter households per year. Again, if supply is made available and proper rent levels are maintained, the Warrenville PMA is capable of capturing at least 50 percent of DuPage County s rental apartment demand base. CURRENT COMPETITIVE CONDITIONS In order to assess the competitive environment within which the community will exist, our firm conducted a detailed analysis of regional market trends relative to rental apartment absorption, vacancy characteristics and rental rate growth, focusing upon newer (post-1985) rental apartments throughout suburban Chicago, isolating upon alternatives in the west suburban area, generally encompassing all of DuPage County, along with portions of west suburban Cook and southern Kane counties, and defined for purposes of this analysis as the West Suburban Competitive Market Area (CMA). Conditions in this defined area will influence absorption potentials within subject property. For perspective, as of June 2017, the West Suburban CMA was host to 93 separate communities marketing a total of 26,825 rental units built or fully renovated in 1985 or later. More than three-quarters of this competitive area (21,185 units or 79.0 percent) are found in suburban areas west of I-355, concentrated in Aurora and Naperville which (alone) account for 10,530 units or 39.3 percent of the CMA s total. Since 1995 and through June 2017, the suburban marketplace as a whole averaged a net absorption rate of 1,205 rental units annually. Cyclical in nature, absorption levels during this year period peaked in 1999 at 3,583 net units, and again during the most recent January-June 2017 period at 3,708 units (seasonally adjusted and annualized). Of suburban-wide net absorption during the last six months, the West Suburban CMA accounted for 53.9 percent of all activity. The most recent spike in activity in both the suburbs as a whole and the CMA in particular resulted from increased construction activity over the past two years, positive employment growth region-wide, and a desire of many households in Chicago to remain mobile. NET ABSORPTION: POST-1985 RENTAL APARTMENT DEVELOPMENTS -- SUBURBAN METRO AREA & WEST SUBURBAN CMA DECEMBER ,000 3,500 3,000 2,500 2,000 1,500 1, ,000-1,500-2,000-2,500 Net Absorption in Units West Suburban CMA Average: 398 Suburban Metro Area West Suburban CMA Page 11

15 Rental rate growth has been subject to market forces. As depicted in this trend line narrative, efforts to encourage lease-up during the for sale housing boom period, and again during the recession a few years later which brought with it staggering job losses region-wide, necessitated substantial concessions and/or rent rollbacks to encourage lease-up and higher occupancy levels, with average base rents in the West Suburban CMA settling at $1.16 per square foot at the close of Since 2009, however, posted rents have advanced to a June 2017 average of $1.58 per square foot, reflecting a 4.1 percent annual increase over the $1.16 per square foot value noted 7.5 years earlier (December 2009). RENT TRENDS: POST-1985 RENTAL DEVELOPMENTS -- WEST SUBURBAN CMA JUNE $1,500 Average Rent (Bar) Rent Per. Sq. Ft. (Line) $1.60 $1,450 $1.55 $1,400 $1.50 $1,350 $1.45 $1,300 $1.40 $1,250 $1.35 $1,200 $1.30 $1,150 $1.25 $1,100 $1.20 $1,050 $1.15 $1,000 $1.10 $950 $1.05 $900 $1.00 $850 $0.95 $800 $0.90 Rent concessions and/or rollbacks, coupled with limited new apartment construction in many suburban areas, have also had a dramatic impact upon vacancies in the marketplace. As illustrated in the following graphic, suburban vacancies among stabilized developments fell from a high of 8.8 percent in 2002 to a relatively balanced 4.7 percent by the close of As a point of reference, in a normal or balanced market, vacancies of 5.0 to 6.0 percent are typically required for filtering, or movement between developments. In tandem with a struggling economy, vacancies began to move upward again in 2007, reaching the 7.4 percent market in Notably, by the close of 2011, rent concessions and discounts, coupled with continued upheaval and uncertainty in the for sale sector, saw suburban-wide vacancies settle at a balanced 5.0 percent. Vacancies in the West Suburban CMA generally patterned the suburban marketplace through 2006 and also during the period when they rose past the 8.0 percent mark. However, improving economic conditions over the last few years, together with lingering supply and demand issues in the for sale sector, have resulted in tighter market conditions as evidenced by a June 2017 overall stabilized vacancy rate of 3.3 percent suburban-wide, and 3.3 percent throughout the West Suburban CMA as well. Page 12

16 VACANCY TRENDS: STABILIZED RENTAL APARTMENT DEVELOPMENTS (1) -- SUBURBAN METRO AREA & WEST SUBURBAN CMA JUNE Percent June 2017 Suburban Metro Area West Suburban CMA (1) Excludes programs in initial stages of absorption. Newer Comparable Apartment Developments While the preceding paragraphs present a general overview of the rental marketplace, certainly not all of the apartment complexes found in the West Suburban CMA will be directly or even indirectly competitive with the prospective community, especially those which were: 1) built or completely refurbished before 2005; 2) have low grade unit features and community amenities; 3) are smaller in scale; and/or 4) occupy locales removed from major transportation corridors and/or METRA rail service. Thus, from a practical standpoint, and considering scale, unit features, community amenities and/or location, 22 newer and/or fully renovated developments offering a collective 6,234 apartment units are viewed to represent the most direct sources of suburban competitive substitution vis-à-vis the proposed development. These include moderate- to higher-density and/or mixed-use developments in suburban areas aligning either I-88 or I-355 in the municipalities of Aurora, Downers Grove, Elmhurst, Itasca, Lisle, Naperville, North Aurora, Oakbrook Terrace, Wheaton and Woodridge. Mirroring trends in the overall West Suburban CMA, vacancies among stabilized direct comparables are currently tight with 123 units unoccupied as of June 2017 reflecting a vacancy factor of 2.8 percent (see Exhibit 4). This vacancy rate, however, excludes seven developments currently undergoing there initial absorption periods, many of which have recently entered the market. As highlighted in the following text table, current absorption rates range from a low of 5.6 units per month at Metro 59 in Aurora to a high of 19.6 units monthly at Springs at Orchard Road in North Aurora. Page 13

17 4 West Suburban CMA Totals/Averages --- 6,234 1, $1,733 $1.86 $1,688 $1.81 4, Aurora $1,908 $1.91 $1,761 $ Station Boulevard , , Metro 59 - Phase I ,058 2, , Downers Grove ,003 $2,263 $2.26 $2,263 $ The Residences at the Grove ,003 2, , Elmhurst $2,217 $2.39 $2,046 $ Elmhurst , , Itasca $2,123 $2.24 $1,960 $ The Residences at Hamilton Lakes , , Lisle --- 1, $1,351 $1.77 $1,351 $1.77 1, Avant at the Arboretum , , Green Trails 1987/ , , The Towers at Four Lakes 1989/ , , Lombard $1,969 $2.12 $1,874 $ Apex , , City View at the Highlands 2003/ , , Naperville --- 1, $1,561 $1.69 $1,541 $1.67 1, Arbors of Brookdale 1989/ , , Bristol Station 2002/ , , Brookdale Lakes 1990/ , , Brookdale on the Park (2) 1986/ , , Dwell at Naperville 1997/ , , Tapestry , , North Aurora ,142 $1,654 $1.45 $1,654 $ Randall Highlands ,469 1, , Springs at Orchard Road , , Oakbrook Terrace ,199 $2,698 $2.25 $2,698 $ Regency Place ,199 2, , Wheaton $1,921 $2.09 $1,890 $ Courthouse Square , , Wheaton , , Woodridge ,075 $1,704 $1.59 $1,704 $ The Retreat at Seven Bridges 1996/ ,075 1, , (1) Excludes rental programs currently undergoing renovation and/or new programs undergoing initial absorption. (2) Statistics exclude 52 income-restricted units. COMPOSITE SUMMARY: NEWER, LARGER-SCALE COMPARABLE APARTMENT DEVELOPMENTS -- WEST SUBURBAN CMA -- Year Rent Characteristics: June 2017 Average Average Posted Average Effective Stabilized Developments (1) Municipality/ Built/ Number Number Percent Unit Size Number Number Development Renovated of Units Vacant Vacant (Sq. Ft.) $ $/Sq. $ $/Sq. Ft. of Units Vacant Vacant Percent

18 ABSORPTION TRENDS: SELECTED NEWER APARTMENT DEVELOPMENTS -- WEST SUBURBAN CMA -- Average Absorption Rate to Stabilization Total Total Total Units Percent of Program/Location Units Occupied Vacant Monthly Total Units 500 Station Boulevard/Aurora Metro 59 - Phase I/Aurora Elmhurst 255/Elmhurst The Residences at Hamilton Lakes/Itasca Apex 41/Lombard Springs at Orchard Road/North Aurora Courthouse Square/Wheaton Total Average , , Among the 15 stabilized competitors, excluding those developments that were built in the 1980s and 1990s but have recently undergone full renovation, an average absorption rate of 10.0 units monthly was achieved. Among this group, absorption rates ranged from a low of 3.9 units monthly at the smaller scale Regency Place community in Oakbrook Terrace to a high of 13.5 units per month at the 403-unit City View at The Highlands development in Lombard. HISTORICAL ABSORPTION TRENDS: SELECTED NEWER APARTMENT DEVELOPMENTS -- WEST SUBURBAN CMA -- Reached Average Absorption Rate Stabilized to Stabilization Total Began Leasing Occupancy Units Percent of Program/Location Units (Month/Year) (Month/Year) Monthly Total Units The Residences at The Grove/Downers Grove 294 August 2008 December Avant at the Arboretum/Lisle 310 July 2013 June City View at The Highlands/Lombard 403 August 2003 December Bristal Station/Naperville 348 June 2002 June Tapestry/Naperville 298 March 2014 June Randall Highlands/North Aurora 146 February 2013 September Regency Place/Oakbrook Terrace 112 March 2007 June Wheaton 121/Wheaton 306 March 2013 June Total 2, Average As of June 2017, the average posted asking rent among the 22 newer, largerscale comparable developments in the West Suburban CMA stood at $1,733 monthly for a 931 square foot apartment home. This translates to a value ratio of $1.86 per square foot. However, because many communities were offering some form of lease incentive and/or discount at the time of our survey, primarily those in lease-up, the average effective rent came in 2.6 percent lower than the posted asking rent. Incentives consist, primarily, of one month s free rent on a 13-month lease, although some offered free parking, waived application fees and/or whole dollar discounts. Page 14

19 Posted rent levels range from a low $1.28 per square foot at Randall Highlands community which consists of townhome units averaging 1,469 square feet in size to highs over $2.00 per square at The Residences at the Grove in Downers Grove, Elmhurst 255 in Elmhurst, The Residences at Hamilton Lakes in Itasca, Apex 41 and City View at the Highlands in Lombard, Regency Place in Oakbrook Terrace and Courthouse Square and Wheaton 121 in Wheaton. These higher-end communities, most of which are undergoing their initial lease-up periods, carry in town locations; are highly amenitized; and/or are situated east of I-355. Among the 22 selected apartment communities in the West Suburban CMA viewed as most comparable, all but four charge an extra monthly fee for enclosed parking. For a single enclosed space, lease rates range from $50 to $155, averaging $115 across the group. In addition, 19 out of the 22 developments feature a patio or balcony for each unit and all but one include an in-unit washer and dryer. Relative to community amenities, all provide a swimming pool/deck area, a clubroom and a fitness center, with most offering business centers. In all instances, tenants are responsible paying their own electric and gas service, while 19 out of 22 communities also require payment for water and refuse (see Appendix Tables A1 and A2). Future Competition The overall West Suburban CMA is expected to intensify competitively near- to mid-term. Not including the subject property, 5,560 new market rate rental units are in the planning pipeline or under construction at this time distributed among new developments and future phases at existing communities (see Exhibit 5). However, it is uncertain how many of these developments will actually move forward as of the 5,560 units proposed or under construction, 3,178 have not yet received approval, while another 654 units have been approved but are not yet started. In addition, among the 5,560 apartment units in planning throughout the West Suburban CMA, just 940 fall within the more localized Warrenville PMA, 700 of which have yet to be approved. Among all proposed apartment developments, the most proximate to the subject property is Interforum Holdings proposed Warrenville Residences community which will also occupy a location within the mixed-use development, albeit on the north side of I-88. Like Covington s conceptualized community, Warrenville Residences will consist of a wrap-style building with structured parking and high levels of amenities. However, this proposed 390-unit development is facing environmental issues related to the site s soil condition, which may or may not be resolved. RECOMMENDATIONS As summarized in the previous sections, the market potential for developing new apartments within the property is viewed as favorable based upon the number of positive attributes associated with the site s excellent location; adequate economic, demographic and demand support; a tight apartment market among stabilized developments; and strong absorption rates among area apartment communities currently in lease-up. However, given the likelihood of an intensifying competitive environment, Covington Realty Partners must think strategically in terms of unit types, sizes and mix. In this regard, the following bulletpoint summary provides a very specific set of planning guidelines: Page 15

20 5 Municipality/ Proposed Development Name APARTMENT DEVELOPMENTS IN PLANNING AND UNDER CONSTRUCTION WEST SUBURBAN CMA Current Number County Location Builder/Developer Status of Units Aurora DuPage TBD (Terminal Building) NW corner of Galena Blvd and Broadway David Karademas Approval Pending 20 TBD (School District Administration Building) 80 South River Street Invest Aurora Approval Pending 38 Metro 59-Phase II Station Blvd and Meridian Lake Dr Next Generation/Village Green Permits Issued/Under Constr. 228 Batavia Kane One North Washington Place 1 North Washington Avenue Sho-Deen Residential Permits Issued/Under Constr. 185 Bensenville DuPage TBD 213 North Walnut Street A&E Luxury Homes Permits Issued/Under Constr. 29 Clarendon Hills DuPage TBD 9-23 Walker Avenue Pine Grove Partners Approved 35 Downers Grove DuPage Downers Grove MC Metropolitan Center Drive Next Generation, LLC Approval Pending 234 Adriatic Grove Curtiss Street NU Living Approved 48 Burlington Station NW corner of Forest and Gilbert Avenues Holladay Properties Permits Issued/Under Constr. 89 Maple & Main Maple & Main Streets High Street Residential Permits Issued/Under Constr. 115 Elmhurst DuPage 100 North Addison 100 North Addison Opus Group Approved 164 Geneva Kane Mill Creek-Future Phases Keslinger and LaFox Roads Sho-Deen Residential Approval Pending 250 Glen Ellyn DuPage Crescent Apts (Frmr McChesney's Miller Site) NW corner, Crescent Blvd & Glenwood Ave Springbank Capital Advisors Approval Pending 150 TBD 350 Duane Street WP Properties Approval Pending 50 TBD (Giesche Shoes Property) 400 North Main Street The Opus Group Approval Pending 110 Lisle DuPage Marq on Main Main Street and Burlington Avenue Marquette Companies Permits Issued/Under Constr. 201 Lombard DuPage Yorktown Apartments III 2239 South Highland Avenue AIMCO Residential Approved 78 Woodmoor Finley Rd and Oak Creek Dr Donven Homes Approval Pending 288 (Uninc DuPage) Elan Yorktown 50 Yorktown Ring Road Greystar Development Permits Issued/Under Constr. 295 Naperville DuPage TBD 4th Avenue and Ellsworth Street Ellsworth Street LLC Approved 39 Enclave at Ashwood Park (Age-Targeted) NW corner of 111th St and 248th Ave Blue Napevillas Approved 60 North Aurora Kane Randall Oaks Randall Road, just north of Oak Street Sho-Deen Residential Approval Pending 261 Oak Park Cook Albion Oak Park NW Corner of Lake St. and Forest Ave. Albion Residential Approval Pending 265 TBD South Boulevard and Harlem Avenue Lincoln Property Approval Pending 263 The Emerson Clark Street, east of Harlem Avenue Clark Street Dev/Vlg of Oak Prk Permits Issued/Under Constr. 271 Oakbrook Terrace DuPage Lakeside Village of Oak Brook Royce and Renaissance Boulevards Interforum Holdings Permits Issued/Under Constr. 315 St. Charles DuPage Prairie Centre Prairie St, Lincoln Hwy, and Randall Rd Sho-Deen Residential Approval Pending 609 Prairie Winds of St. Charles North of Bircher Rd, west of Lowe's Prairie Winds LLC Approval Pending 250 Villa Park DuPage Garden Station 401 North Ardmore Avenue Golden Spike Development Approved 230 Warrenville DuPage Warrenville Residences Ferry Road, W. of Winfield Road Interforum Holdings Approval Pending 390 Total: 5,560

21 Individual floor plan designs should be as broad and varied as possible, consisting of a variety of convertible/junior one bedroom, one bedroom, two bedroom and three bedroom options. This expansive mix of unit types will allow the development to capture the full range of renter profiles with attentive focus directed to Millennials, also known as Echo Boomers or Generation Y, i.e. younger singles and couples without children, along with empty nesters, and non-traditional households such as divorcees, widows, middle-age singles, and singles living together as couples in a roommate condition. Unit sizes should cover a relatively wide range, but also step well incrementally between plans. In other words, size increments between individual floor plan offerings should not exceed 150 square feet in order to keep lease rate differentials between plans small and in concert with the gradual upward movement of household incomes. A mix of close to 60.0 percent convertible/junior one bedroom and standard one bedroom plans and 40.0 percent two and three bedroom alternatives will generally align the community with mix allocations seen among newer developments in the market. In meeting these criteria, Exhibit 6 provides specific guidelines regarding unit types, sizes and mix for a 240-unit prototype development, along with benchmark rent levels viewed as appropriate for market entry. As depicted, a total of eight plan types are suggested, which step well incrementally and offer a strong variety of alternatives. Among the suggested floorplan choices, a mix of 60 percent convertible/junior one bedroom, standard one bedroom and one bedroom den units and 40 percent two and three bedroom offerings is represented, which is consistent with the 22 newer, larger-scale comparable communities in the West Suburban CMA as highlighted below: UNIT MIX ANALYSIS: SELECTED NEWER, LARGER-SCALE COMPARABLE APARTMENT COMMUNITIES -- JUNE Unit Type Plan Size Plan Size Total Units (Sq. Ft.) Total Units (Sq. Ft.) Number Percent Range Average Number Percent Range Average (240 Total Units) Selected Newer Comparable Apartments (1) Studio/Conv/JR-1 Flat One Bedroom Flat , One Bedroom+Den Flat , Two Bedroom Flat ,050-1,250 1,136 2, ,527 1,180 Two Bedroom+Den Flat ,215-1,400 1,331 Three Bedroom Flat ,400 1, ,100-1,749 1,472 Total/Averages: , , , (1) Includes 22 selected, larger-scale developments in the West Suburban CMA constructed or completely renovated in the last 12 years with higher levels of community amenities and/or unit features/finishes. At benchmark rents, the community would support a current dollar monthly lease rate of $1,912 for a unit containing 900 square feet of livable area. This translates to a value ratio of $2.12 per square foot. Please keep in mind that this average rent level includes per floor premiums, but does not include view or corner-unit premiums; nor does it include other charges such as application/administration fees, pet fees, storage rental, utilities or enclosed parking. Page 16

22 6 PRODUCT CRITERIA AND A BENCHMARK RENTAL RATE STRATEGY -- CANTERA: A 240-UNIT PROTOTYPE -- WARRENVILLE, ILLINOIS Development Summary Product: Higher-Density, Luxury Apartments (Configured Around Structured Parking & Amenities) Total Units: 240 Total Enclosed Parking Spaces: 300+ Average Plan Size (Sq. Ft.): 900 Average Benchmark Base Monthly Rent (1) : $1,882 Per Sq. Ft. (1) : $2.09 Average Benchmark Monthly Rent (2) : $1,912 Per Sq. Ft. (2) : $2.12 Average Monthly Absorption (In Units): 9.5 Months to Reach Stabilized Occupancy of 95%: 24.0 Plan Detail Estimated Estimated Number of Units by Floor Benchmark Monthly Rent by Floor (1) Plan Type Number of Units Percent Distribution Bedrooms/ Baths Plan Size (Sq. Ft.) 1st 2nd 3rd 4th 1st 2nd 3rd 4th Average Conv/Jr. 1BR / $1,340 $1,360 $1,380 $1,400 $1,370 1BR / ,545 1,565 1,585 1,605 1,575 1BR / ,715 1,735 1,755 1,775 1,745 1BR/Den Den / ,925 1,945 1,965 1,985 1,955 2BR / 2.0 1, ,135 2,155 2,175 2,195 2,165 2BR / 2.0 1, ,300 2,320 2,340 2,360 2,330 2BR / 2.0 1, ,465 2,485 2,505 2,525 2,495 3BR / 2.0 1, ,715 2,735 2,755 2,775 2,745 Total/Wtd. Average $1,882 $1,902 $1,922 $1,942 $1,912 (1) (2) Average benchmark base monthly rents, which are presented in current dollars, reflect first floor units and do not include premiums, nor do they include other incremental sources of revenue such as parking, application/administration fees, pet fees and storage rental. Average benchmark monthly rents, which are presented in current dollars, include premium estimates for floor, but do not include premiums for view or corner-unit conditions, nor do they include other incremental sources of revenue such as parking, application/administration fees, pet fees and storage rental.

23 Based upon parking fees among comparable properties in the West Suburban CMA, and after analyzing other wrap buildings region-wide, one enclosed assigned garage space at the community will yield $120 monthly, while private outdoor spaces on the top of the parking garage will attain $60 per month. Ground level surface parking should be provided at no extra cost to the consumer. Because a number of apartment communities in the market are offering incentives at this time, especially those undergoing their initial absorption periods, is expected to do the same during lease-up, i.e. one month free rent on a 13-month lease or equivalent. At current dollar benchmark rents, the 240-unit development has been positioned to achieve an average absorption rate of 9.5 units per month, reaching stabilized occupancy of 95.0 percent (228 units) in 24 months. Absorption will likely be higher, say 11.5 units monthly, during the first 12 months of occupancies, before dropping to a rate of 7.5 units monthly once the initial wave of turnover begins. Please keep in mind that benchmark rent levels and absorption estimates assume a high level of unit features and community amenities as conceptualized by. For a general outline of these anticipated features and amenities, consult the following text table: ANTICIPATED FEATURES AND AMENITIES: CANTERA APARTMENTS -- WARRENVILLE, ILLINOIS -- Interior Features and Appointments Individually Controlled Heat/Air Conditioning Internet and Cable Connectivity Intercom and Video Security Condominium-Style Finishes Laminate Plank Wood Flooring in Kitchen/Living Areas Carpeted Bedrooms Ceramic Tile Bathroom Flooring Walk-In Master Bedroom Closets (most plan styles) Storage Granite or Quartz Kitchen Countertops European-Style Cabinetry Energy Efficient Stainless Steel Appliances - Gas Oven/Range - Dishwasher - Refrigerator - Microwave Garbage Disposal Full-Size Washer and Dryer In Unit Community Amenities Non-smoking Environment. Secured Package/Mail Center and/or Electronic Concierge Courtyard with Grill Area and Fireside Lounge Business Center with Technology Concierge Coffee Lounge and Social Area Clubroom with Catering Kitchen, Game Tables and Social Areas Fitness Center with Pilates/Yoga Area and/or Spinning Room Swimming Pool with Expansive Sundeck Wi-Fi Connectivity in All Amenity/Common Areas Dog Walk/Dog Park Pet Grooming Station Secured Bicycle Storage Tenant Paid Water/Refuse or Resident Billing System Individually Metered Gas, Electric and Cable Service Optional Parking: -- Enclosed Assigned Single Space in Garage: $120/month -- Outdoor Assigned Single Space on Garage Top: $60/Month Surface Parking: No Charge Separate On-site Leasing and Management Offices Page 17

24 SUPPORTIVE RATIONALE Rationale supporting the benchmark rental rate strategy and the forecasted rate of absorption is provided in the following paragraphs: As depicted in Exhibits 7 and 8, benchmark base (first floor) rents established for the development will position the project $62 per month over market when cast against the newest, most relevant apartment communities in the market, i.e. those constructed or completely renovated within the last four years and consisting of mid- to higher-density communities with extensive amenities and structured parking. This modest over market variance can be supported on the basis of the subject property s excellent location within the mixed-use development, i.e. within walking distance of employment, shopping, dining and entertainment. At the same time, Covington s community has been properly positioned below newer apartment developments which support either in town transit-oriented environments or are located east of I-355 with higher localized population densities. These include Elmhurst 255 in downtown Elmhurst, The Residences at Hamilton Lakes in Itasca, and Apex 41 in Lombard. The community will occupy a value position similar to, albeit slightly lower than, Courthouse Square in Wheaton, which is one of the more proximate, newer mid- to high-density apartment developments (with structured parking) located west of I-355. For instance, the average residence at Courthouse Square carries a base monthly rent level of $2,057 for 974 square feet of living space, equal to a value ratio of $2.11 per square foot. For base units at, i.e. the first floor, the average benchmark rent has been set at $1,882 for a unit offering 900 square feet of living area, or $2.09 per square foot. Courthouse Square is currently absorbing units at a rate of 9.4 monthly which compares with our forecast of 9.5 units per month. Page 18