Market Conditions: Is an Apartment Glut Coming to Chicago?

I posted two articles over the weekend in the comments about the slowdown in the rental markets in Los Angeles and New York City.

In LA, about 6,000 apartments are being built. Here in Chicago, according to Crain’s, it’s about 5300 apartments with the possibility of another 3,000 on deck by 2015.

Some are saying that there will soon be a supply/demand imbalance as the new apartments won’t be absorbed quickly enough.

Many developers and landlords say they’re not nervous, citing an improving job market and downtown Chicago’s growing appeal to well-paid professionals in their 20s and 30s who would rather rent than own. The risk of a glut is small because the market is good at regulating itself, they say, and lenders and investors know when to stop.

“No, there isn’t anything to worry about,” says Curt Bailey, president at Related Midwest, developer of a new 500-unit tower at 500 N. Lake Shore Drive.

The math shows that supply and demand already are getting out of whack. Developers will complete an average of 2,679 apartments downtown this year and next, according to Appraisal Research. The consulting firm’s quarterly survey covers an area bounded roughly by North Avenue, Cermak Road and Ashland Avenue, and focuses on larger buildings.

But in the last four quarters, a key measure of demand, absorption—the change in the number of occupied downtown apartments—has totaled 975 units. Annual absorption downtown has averaged 1,348 units over the last three years, about half the increase in supply forecast in 2013 and 2014.

Mr. Bailey of Related Midwest, meanwhile, has gone all in on the downtown residential market, with the recently completed Lake Shore Drive apartments and a 504-unit rental project under construction at 111 W. Wacker Drive The firm, owned by New York-based Related Cos., recently acquired the defaulted loan on the Chicago Spire site and has agreed to buy another development site next door to its Streeterville tower. Mr. Bailey won’t say whether he plans apartments or condos on the properties.

He dismisses talk of an apartment glut, saying the annual increase in demand for downtown housing—apartments and condos—has averaged about 3,000 to 4,000 units since 1990, more than enough to absorb the additional rental supply. And the city, he says, is only becoming a more appealing place to live.

Is the apartment market about to cool?

If so, will this push some developers to make the transition to condos more quickly?

How will rising rates impact the decision to go condo?

Or will developers be left holding the bag with both a weak apartment market AND a weak condo market?

The dark side of downtown’s apartment boom [Crain’s Chicago Business, Alby Gallun, August 26, 2013]

 

25 Responses to “Market Conditions: Is an Apartment Glut Coming to Chicago?”

  1. Ironically, the WSJ posted an article yesterday about salaries being stagnant and decreasing.
    Man, I would love to live in the same Wonderland as developers, where people don’t get laid off, get a 5% raise each year, college grads find a 60k a year job within a month of graduating and clearly everyone has enough disposable income to pay all their bills and still be able to fork over $2500 a month for a 1BD apt at 500 N LSD. People are a bit smarter now and are less willing to be housepoor so good luck filling all these new apartment buildings, where you need to make 80k a year just to qualify to live in a 400 sq ft studio.

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  2. I agree Lauren. There just aren’t enough high income people moving to Chicago to support all the Class A apartments that are being built. Apparently, that absorption is around 1000 apartments.

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  3. Please be patient as I work through the snags in the new website. It will take a couple of days to get some of the kinks worked out. For instance, it looks like you can’t register for the forum at the moment. That’s a little problematic. Things will get fixed!

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  4. Why would anyone want to pay that much for a studio?

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  5. Yeah, lots of pie in the sky developers out there and the banks are very willing to lend them the money. Are the new buildings more functional in terms of apartment layouts with no hallways and more creative uses of space? I would hope so if you want to attract the millenials.

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  6. The problem I see is that they are not anticipating what the condo marekt will want. The developers argue that, if the rental market cools, they can convert the buildings to condos. That is true in theory; however, from what I have seen, the units of these new buildings are much smaller than the prior generation (2000s) of condos. Even with the “new” top of the line appliances and finishes, I don’t think I would want to own a 500 sq foot 1 bedroom with very little closet space. That size does not allow most people to stay long term (get married, kids) and too many people got burned in the last condo downturn and don’t want to buy anything they can’t see living in for at least 7-10 years.

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  7. Rents are still increasing and vacancy decreasing according to all reports.

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  8. This town could certainly use an upgrade to its existing shitty rental stock. I think people would be willing to pay slightly more in some cases for a brand new apartment. I would worry about the old crappy apartments becoming empty than these new ones not getting leased. Isn’t 500 N. LSD over 50% leased now? Heck I read somewhere that the ridiculous Hubbard place is already 10%+ leased and the building isn’t even close to finished yet

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  9. @Sonies Alot of the shabby apartment buildings have given their units facelifts to compete with the new towers. Check out the websites for. Cityfront place, McClurg ct, 400 E Ohio, Onterie place. All have somewhat condo like finishes and you can still get a 1 BD for 2k. Not brand new units but you get to keep 5-700 in your pocket each month.

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  10. When I moved to the city close to ten years ago, the goal was to find a rental in the $600 to $800 range, which required having roommates. Even that dollar amount seemed crazy high compared to what I paid for rent incollege.

    I can’t imagine paying 3 times that or more for a rental unit even with a good paying job. My starting pay in the same job would be about 5-6% higher today than 10 years ago. If the millenials truly are paying that type of rents in the $2500-2700 range right out of college, they will never retire and will never save. Someday the people with all of the savings and assets will have to bail these people out in some way.

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  11. I don’t like the new web design.

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  12. I agree with sonies. The danger will be to the older buildings. I could see paying a premium to be the first person to live in a unit, but that premium goes away once a new person moves in.

    The problem with Chicago rentals is there are a lot of dumps. Middle class people don’t want to use a shared laundry room or have window air conditioners…or the dreaded formica counter tops…not to mention the refrigerators where the freezer is on top combined with the horror of not having an ice/water dispenser…. They are willing to pay a premium to have those things.

    For me, it was far cheaper to buy than rent. I hope many more of these luxury rental buildings are built so that the renters will move out of my building. Too many of them are loud and obnoxious smokers.

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  13. The new design doesn’t have enough space to delineate paragraphs in the article, but too much space in the comment section—making scrolling through a debate take a little more effort.

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  14. Also missing the most recent comments part or even the most recent post with comments part

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  15. While apartment absorption has averaged about 1350 units a year downtown over the last three years, apartment and condo absorption has averaged about 3000+ a year since 2000. Since virtually no new condos are being built in the downtown area, that means the potential new condo buyers will rent instead of buy, which makes sense with student loans needing to be paid off and people not wanting to be burned by a real estate crash. As a result, the condo buyers of the past will absorb the other 1700 apartment units.

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  16. “Also missing the most recent comments part or even the most recent post with comments part”

    It won’t have this anymore. You will have it only for the forum (when people start posting there- it will show the last 5 topics and the last 5 comments on the topics.)

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  17. So in terms of absorption, the new buildings cost significantly more than the existing rental stock. It seems that very few new grads are the ones renting these new units – I know people who live in K2 and I didnt see 21 year olds there. 26-27 year olds yes. How can a recent grad with an undergrad degree afford $2,500 a month or more in rent? It doesnt seem sustaintable for them or possible. There wouldn’t even be money left over to pay down student loans. Something fishy here is going on.

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  18. Fresh grads with a decent job will just share the 2bedroom or 1bedroom like $1300-1500 each. So that’s not bad at all.

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  19. I just don’t think there are many new grads (with a bachelor’s degree) paying $1,500 a month to share an apartment. Also, the 2 bedrooms in the new buildings are going for over $3,000. I saw them listed at $3,350 online. That would be $1,675. Financial suicide in my opinion even when living on $50,000 a year.

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  20. @Dave. Thats the whole problem. Most people under 35, have their loans in constant forbearance. Outta sight, outta mind I guess. And when they do pay, they make IO payments. My undergrad/grad IO payment is only 275. Real payment, where I am actually paying it down? 572. I cant wait to see what will happen to the condo market when Sallie Mae starts demanding real money instead of lease payments.

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  21. Student loans aren’t dischargeable in bankruptcy. How do people think they can’t pay them off?

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  22. People who don’t care about their financial futures don’t pay their students loans. It’s not as though they are going to go to prison for not paying their loans. A cousin of a friend of mine just doesn’t pay his student loans. He lives with his girlfriend, who pays the rent and all of the bills. He doesn’t work or go to school anymore. For the life of me, I can’t figure out why she stays with him. There are people who will forever be leaches and others who are willing hosts.

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  23. Oh the horror – a freezer on the upper part of a fridge! Since when did the old 1950s style “bend over and pull out the drawer” style of refrigerator become a mark of upscale living!

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  24. What college loans? Mommy and Daddy paid for college and probably are helping out with the rent.
    My parents paid for my college and when I moved to Lakeview with a roomie, my parents gave me some $$ every month. Of course, I used that money to save and now have my own condo in the area; however, most of my friends that live in more expensive buildings did not pay for college and parents might help out with rent or are very generous to their kids in other ways (expensive purses, clothes, dinners out on the town). Parents also help with the down payment on condo loans. This is why there are so few foreclosures in some safe areas of the city…mommy and daddy are footing the bill.

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  25. “It’s not as though they are going to go to prison for not paying their loans. A cousin of a friend of mine just doesn’t pay his student loans.”

    While it’s true you can’t go to prison, they will NEVER go away. And the interest will keep accumulating. You say he doesn’t work. Apparently he never intends to for the rest of his life. Because they WILL take payments out of your paycheck. In fact, they will also take your tax refund (if you get one.)

    There have been stories of some people trying to flee to Europe to avoid paying them. Basically, if you do that, you can never come back to the United States.

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