Downtown Chicago Apartment Rents Fall 4.3% in 4th Quarter
Some more good news for renters.
Crain’s is reporting that downtown apartment rents fell 4.3% in the fourth quarter, the largest quarterly decline since 2001.
According to the Appraisal Research Counselors, vacancies also dropped to 91.3% from 94.6% in the third quarter.
The Appraisal Research Counselors admit that the excess condo supply will be competing for renters with apartment landlords.
On the supply side, downtown developers will complete 1,676 new apartments this year, a record, with another 2,509 set to open in 2009, according to Appraisal Research.
Landlords will face more competition from the so-called shadow rental market: condominiums that are rented out rather than occupied by their owners. Condo developers will complete a record 5,900 units this year, and many will wind up as shadow rentals.
“With the record-setting 1,676 units coming on-line in 2008, the rise in condo rentals expected with record condo deliveries in 2006, as well as the weakening job market, absorption of new (apartment) units and maintaining net effective rents will certainly be a challenge,” the Appraisal Research report says.
If job growth slows further, that will add another wrinkle into the market. But even without a recession, the competition will be fierce for investors to find renters for their condo units.
“It’s certainly going to be a year of options for renters,” says Appraisal Research Vice-president Ron DeVries.
Downtown Apartment Rents Fall in the Fourth Quarter [Crain’s] (check out the nice chart in the article)
Wow, this is really good news for renters. Not only do they save every month versus renting, not only do they not find themselves holding a depreciating asset, not only will they be in a perfect place (nothing to sell) when prices return to historical levels, BUT they also will see rent reductions.
The precipitous drop in occupancy during the 4th quarter leaves downtown currently at 91.3% for a market that Appraisal Research Counselors estimates at 16,000 units. That means there are about 1,400 vacant Class A apartments downtown. There are an additional 1,676 apartments scheduled for completion in 2008 and 2,509 in 2009. This will represent an increased supply of over 25% to the market, since it is doubtful that any buildings will convert to condo to offset the new supply (and the opposite is actually more likely.)
OK, so what about the “shadow” market of condo rentals that is mentioned in the article? Prior reports indicate that 8,162 new condos were put under contract in 2005, 5,783 in 2006 and 3,783 in 2007, for a total of 17,728 condos. In additon, 5,814 new condos are in the pipeline and on the market unsold. This means a total of 23,542 condos added or coming soon to the market. If one assumes that 20% of purchases are rentals and that no condos contracted for purchase prior to 2005 are rentals (obviously conservative) that results in nearly 5,000 additional rental units, or about 30% of the entire size of the current apartment market. It is not a stretch to think this understates the total by a third.
The downward spiral continues and is no surprise considering the overbuilt speculative bubble we are escaping from.
G: Thanks for the analysis. This is great.
Yes- it will be VERY nice to be a renter downtown this year and next. Renters will have their pick of lake front views, marble baths etc. etc. at their whim.
The only question will be, how many of the investors will be foreclosed on? The rents will only go so low (from what I’ve seen.) Flippers bought units for $300,000 and now are having to rent them out for $1200 a month. They’re not coming close to covering their costs.
Some renters will get a knock on the door from the sheriff, I’m afraid.
(They are seeing this quite regularly in Miami already.)
What about the repartments? Do you think that any of the new constructions or failed conversions become apartment buildings?
Man, Sabrina, that “knock from the Sheriff” actually happened to me. Luckily, it was just a tax snafu that my landlord took care of, but it scared the hell out of me.
What happened to that legislation about renters rights in the case of foreclosure? You’d think the bank would be happy to have a steady renter as opposed to sending the property to auction. I know they don’t want to be landlords, but they may have to get used to it…
The only question will be, how many of the investors will be foreclosed on? The rents will only go so low (from what I’ve seen.) Flippers bought units for $300,000 and now are having to rent them out for $1200 a month. They’re not coming close to covering their costs.
—
The function of rent is not to cover carrying costs. The function of rent is to receive a source of income from property. Rent, like many other things, is subject to market functions. No where is it written that a land lord MUST turn a profit from his source of rent.
Stuckinthecity: I agree with you about not covering the rent. But that’s what I mean about how long can they hold on?
It’s money out the window if they’re not covering their carrying costs (which they’re not.) It’s a losing investment. Most don’t have the financial resources to sustain losses month after month (and possibly year after year) to ride it out.
That’s why we’re still seeing inflated rents on many of the units in condo buildings as investors hope that they’ll be able to rent it out at a high enough price to cover most of their carrying costs.
But they’re finding, unless they’re in a “prime” building, that isn’t going to be the case.
I’ve seen one bedrooms for as low as $1250 a month at 1720 S. Michigan. There is no way they’re covering their carrying costs with that rent.
Prices were originally below 200K at 1720 S Michigan, so w/ an interest only loan and no taxes yet, they may be covering their costs.
Of those units that have closed, I counted only 7 that were priced under $200k. The cheapest closed unit sold for $185,500. Five of the others were $195k or above.
Everything else closed for above $200k.
They would have had to put down 10% (I’m assuming.) So even on the cheapest unit, it’s going to be very, very difficult (with the assessment included) to cover the costs with only $1250 a month coming in. They should thank their lucky stars that they aren’t yet paying property taxes.
And that’s assuming they’ll get an all-interest loan (which isn’t being given out as often now- and most likely not for an investment unit.)
The cheapest one bedroom is $1250 but there are several at $1300 and some others at $1375 etc.
Unless they get a renter into the unit immediately (unlikely) they’re not going to cover their costs. It will take several months just to get a renter in there. That’s a “loss” of over $1000 each month.
Sabrina on February 20th, 2008 at 10:46 pm
Stuckinthecity: I agree with you about not covering the rent. But that’s what I mean about how long can they hold on?
—
I wonder the samething. I have two friends that “doubled down” on the housing bubble and are now holding the bag. Both are negative 500 / mo. Most Chicagoans still believe the CNBC hype that the bottom is near and we will continue on where we left off.
“Linda on February 20th, 2008 at 6:20 pm
What about the repartments? Do you think that any of the new constructions or failed conversions become apartment buildings?”
Yes, it will happen. That’s what I meant above by “This will represent an increased supply of over 25% to the market, since it is doubtful that any buildings will convert to condo to offset the new supply (and the opposite is actually more likely.)”
It might even happen that projects remain unfinished if renting proves as financially troubling as selling.
Gumshoe G, have you been talking with these developers on their exit plans… If so can you tell us what buildings this is going to happen to and when?
Stuckinthecity: It’s natural to continue to believe the hype after a bubble has burst. That’s what happened after the dot-com bust as well. Investors kept buying the tech stocks on their way down thinking that was just a bump and that in a year or two the stocks would ride back up.
They still haven’t.
Real estate “investors” won’t realize that they’ll have to wait 10 to 20 years to make a profit for another year or two. By then it will be too late.
And I would add that one major difference between the tech bubble and real estate is liquidity. Stocks are traded constantly in large quantities, so recoveries, if they’re going to happen, can happen quite quickly.
Real estate…not so much.
“Stocks are traded constantly in large quantities, so recoveries, if they’re going to happen, can happen quite quickly”
And each share of a given company is exactly the same. That’s never the case with houses. Even if they are idenitical homes next to each other or identical units on adjacent floors, they aren’t exactly the same, at least in the minds of the seller and the potential buyer.
True, but that doesn’t negate the impact of larger trends. As a condo shopper myself, I would jump if the “perfect” place were to show up in (or near) my price range. Until that happens, though, I’m happy to sit on the sidelines. I’ve seen a number of condos that I certainly could live in and even enjoy, but, given the market, I wasn’t willing to pay the price they were asking. If I thought the market was going to move up, I might have done so.
Yes, it’s anecdotal, but I don’t think I’m alone.
My response to Linda above included more of the quote than I intended and I see that it would be misunderstood as it stands.
“Linda on February 20th, 2008 at 6:20 pm
What about the repartments? Do you think that any of the new constructions or failed conversions become apartment buildings?”
Yes, it will happen. That’s what I meant above by “… it is doubtful that any buildings will convert to condo to offset the new supply (and the opposite is actually more likely.)”
It might even happen that projects remain unfinished if renting proves as financially troubling as selling.
The switch in development has already been happening. Lennar sold their planned 1,000-condo site in the South Loop last August to Avalon Bay, who plans to start construction on 984-apartment units this summer. A nearby site was originally planned for 600 condos but D2 Realty Services is building 600 apartments instead.
Michael,
I keep hearing about pent-up demand from used-home salespeople. I don’t think they realize it is composed mostly of people like you that do not see the benefit of sustaining bubble prices. Many people have stayed on the sidelines during this bubble because they understood that buying was a large financial risk compared to renting. There is no reason for them to buy until prices fall, and by quite a bit in most buildings.