Real estate developers have a reputation for being like late guests to a party who get carried away and end up spoiling the fun for everyone else. They haven’t ruined the downtown apartment bash, at least not yet.
Developers will complete a record 4,500 apartments in downtown Chicago this year and another 3,500 in 2018, a potential downer for landlords enjoying the best rental market in decades. But the market held up in the first quarter amid strong demand for apartments, according to Appraisal Research Counselors, a Chicago-based consulting firm.
The average net effective rent at top-tier, or Class A, downtown buildings rose to $3.01 per square foot in the quarter, up 1 percent from first-quarter 2016, according to Appraisal Research. That’s well below the 3 percent to 5 percent rent increases of the past few years, suggesting the market is decelerating, but not shifting in reverse.
The Class A occupancy rate, meanwhile, was 93.9 percent, down from 94.5 percent a year earlier but up from 91.7 percent in the fourth quarter.
The true test for landlords will come in the next several months, when the bulk of those 4,500 new apartments hit the market. About 2,000 will open in June, July and August, which could set off a competitive scramble for tenants, said Appraisal Research Vice President Ron DeVries.
“It’s kind of the calm before the storm,” he said.
GOOD NEWS FOR TENANTS?
“We’re probably going to see an increase in concessions just because you’re going to see so much product out there,” DeVries said. “Some of the owners are going to try to hold the line, but others will be more aggressive and try to fill up their buildings.”
Excluding new buildings, the rent picture is a little cloudier. Because rents are so high at new developments, those buildings tend to skew the average up. So Appraisal Research calculates an alternative rental figure that includes only “stabilized” Class A properties that have been open for at least a year.
By that measure, effective rents fell 0.3 percent from first-quarter 2016 to first-quarter 2017. Effective rents include concessions like free rent.
NO CRISIS LOOMING
Demand for apartments has been especially strong as downtown employers have increased hiring and companies like Kraft Heinz and Beam Suntory have moved their corporate offices downtown. And while the Chicago area’s overall population is declining, its city center gained an estimated 42,423 residents from 2010 to 2015, according to the U.S. Census Bureau.
The job growth and population gains have fueled demand for downtown apartments. One key measure of demand, absorption, or the change in the number of occupied downtown apartments, totaled 2,582 units in 2016, a record.
After a strong first quarter with absorption of 1,103 units Appraisal Research forecasts the market will absorb 2,803 units this year and 3,200 in each of the following two years. That’s based on DeVries’ belief that some of the buildings opening over the next few years will generate more demand for apartments. Further employment gains should help as well.
“They want to walk to work, walk to the bars, walk to the restaurants,” he said.
Nonetheless, even increased demand won’t keep up with the 4,500-unit supply increase this year and the 3,500-unit gain in 2018. DeVries expects the downtown Class A occupancy to drop to about 92 percent a year from now.
Roszak also acknowledges that the market could soften as it digests thousands of new apartments.
“It may take a little more time to absorb them,” he said. “Rents might be a little flat.”