Market Conditions: Are the Downtown Apartment Rent Increases Over?

Almost a bigger story than the recovery in the real estate market has been rising apartment rents in Chicago and the construction of thousands of new luxury rental apartments in the GreenZone.

Crain’s reports that occupancy rates and rental rates in Class A buildings appear to be softening just as 5,000 more apartments are due to hit the market over the next two years.

From Crain’s:

The overall downtown apartment occupancy rate dropped to 92.6 percent in the third quarter, down from 95.3 percent a year earlier and the lowest rate since the end of 2009, according to a report by Appraisal Research Counselors, a Chicago-based consulting firm.

Landlords used to having the upper hand over tenants are seeing that leverage slip away, at least at the high end. Net rents at Class A downtown apartment buildings fell to $2.53 a square foot in the third quarter, down 1.9 percent from a year earlier, according to the report. It was the first year-over-year rent decline in nearly four years.

“The market fundamentals are not supporting the level of supply that’s coming online, and the situation appears to be getting more out of balance as opposed to getting back into balance,” Appraisal Research Vice President Ron DeVries says.

A key demand measure, absorption—the change in the number of occupied apartments—fell to 901 units in the past four quarters in downtown Chicago, down from 1,198 in the prior 12 months and the lowest level since 2005.

Strangely, if you’re not a brand new building, apparently the bloom is off the rose even if the building was considered the top of the luxury chain just a few years ago.

But older buildings are losing tenants to their newer, sexier competitors. Exhibit A is Aqua, the 82-story East Loop high-rise with 474 apartments. It’s hardly frumpy: The building is only four years old and its wavy design has won over architecture critics.

But Aqua’s occupancy dropped to 86.3 percent in the third quarter, from 98.1 percent a year earlier and the lowest level since the building was leased up, according to Appraisal Research. The building is about 90 percent occupied now, says David Carlins, president of Chicago-based Magellan Development Group LLC, which developed the tower and owns a stake in it.

Aqua faces competition from a 515-unit tower called Coast that Magellan recently built just a couple of blocks away, and two high-rises in Streeterville, but Mr. Carlins says he isn’t concerned.

“Everything affects us to some degree, but it hasn’t been a draining of the building,” he says.

If he’s nervous about anything, it’s the potential for some landlords to overreact to the supply surge by offering rent concessions to fill up their buildings, forcing everyone to follow.

“We’re cautiously optimistic that they will keep their heads about them,” he says.

Class B rental buildings, meanwhile, are still seeing rental price holding. They were actually up 3.2% in the third quarter to $2.27 a square foot.

The article seems to indicate that many landlords are waiting for employees of Google’s Motorola Mobility unit, which is moving to Chicago next year, to occupy a bunch of apartments but how many employees will that be (who don’t already have a family and a single family home in the suburbs)?

Are they overbuilding luxury apartment rentals?

And if they do- does that mean good things for the condo market? (i.e.- will landlords simply convert them into condos since that market is still hot?)

Have high rise apartment rents peaked? [Crain’s Chicago Business, Alby Gallun, November 18, 2013]

29 Responses to “Market Conditions: Are the Downtown Apartment Rent Increases Over?”

  1. Back in the fall, during the “prime” Oct 1 moving season, we had a debate whether or not the rental market was softening due to anecdotal stories some of had from friends who were having an EASY time of getting a new rental and from others who were NOT seeing rental increases from their landlords.

    These weren’t in the downtown high rises, however, but were apartments in the outer neighborhoods like LP, Bucktown and Lakeview. But maybe the weakness starts downtown and extends out from there? That when rental increases and demand for high rises slows, it does for everything else?

    All I know is that there is little “urgency” when finding apartment rentals in the GZ right now.

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  2. October housing sales are out tomorrow morning so I’ll have a post tomorrow on that.

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  3. I definitely think Lenders and Developers completely over-estimated the amount of people willing and able to pay these ski high rents. My colleague was just showing me some pictures of Lake shore east apts he toured this weekend. Although the units are top notch and brand new, with amazing views, I just don’t see the purpose in forking over $2900 a month for something you’ll never own. I’d rather live in a $1800 a month unit and put the difference in a HY savings account.

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  4. As I previously posted NAR should report around a 7.3% increase in sales tomorrow.

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  5. Friend of mine has 1bd plus den at aqua. was rented out last few years to a bently driving preacher who fed ex’d him money order’s once a month to pay the 3500 rent. preach moved out in august suddenly. gave like 14 days notice, broke the lease. friend is having hard time finding new renter. unit still vacant.

    he has had offers though from buyers for what would be a nice profit. doesnt want to sell bc he doesnt know what he would do with the money.

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  6. Just curious, are November and December usually big months for moving and renting in Chicago? I only remember moving in Spring or Fall to a new apartment. It’s been a while though.

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  7. Vlajos,
    If you are able to, I suggest signing a lease during winter. I have always signed leases around mid-Nov and my rent has been anywhere from 100-250 cheaper than if I rented the same unit in June.

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  8. Vlajos, May 1 and October 1 are big least start dates.

    I signed a lease for June 1 and when my landlord renewed it, he made it so it expires on April 30, and not May 31.

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  9. Lauren, I own a home. I was just pulling from memory what months were big for leasing in Chicago.

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  10. “doesnt want to sell bc he doesnt know what he would do with the money.”

    Hooker and blow not good enough for him?

    But seriously, some times you just take profits and let the cash (basically) sit. He has to be moderately bullish on Aqua, specifically, to not take his profit and run away.

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  11. For some reason, the IAR hasn’t put out the October sales press release yet even though they are supposed to be out at 8 am (and it’s now nearly 8:30). So I’ll do a post on it tomorrow instead.

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  12. Anyone who did not expect the softening of the downtown rental market is blind to what is going on with Chicago real estate…..this coming from a commercial real estate lender. All markets go through cycles and this is just another example of supply and demand. The majority of the construction lenders will end up just fine as there is enough equity in these developments to withstand a shock in rental rates. Loans to the new owners of properties that recently traded at top-of-the-market cap rates could be in for some trouble.

    I heard today that 6 weeks is the current “market concession” and most are offering it. In the long term, the market will be fine, but kudos to any property owner who cashed out in 2013.

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  13. “I heard today that 6 weeks is the current “market concession” and most are offering it.”

    The big buildings are offering 6 weeks free rent?

    This would be the first rent concessions in several years, if true.

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  14. I just read a metro area market report. The apartment vacancy rate is 4%.

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  15. I haven’t come across any free rent in River North or Gold Coast. But, there are quite a few buildings that I toured when my lease was up last year in Dec, and this year the same units are $100-125 a month cheaper. And I only look at $1700 and under units.

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  16. Remember this is only talking about downtown. Net absorption ytd is over 2500 units in the city.

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  17. tfo, true. though I did see a unit for sale with his floorplan priced below what he paid so I’m guessing he was just blowing smoke about the unsolicited offer he received. I think it was 800k for unit plus parking spot. and he paid roughly 600.

    smells like a whopper, though typically he confuses facts vs outright lying

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  18. Very true. This from the mouth of the owner of one of these RiNo buildings in the comp set. (not a tenant/renter)

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  19. This is the easiest bubble to spot since pets.com. How many people are there who are willing and able to pay $2500 a month for a studio apartment?

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  20. Hardly think we have a bubble on the horizon. These rental numbers seem to dictate more of a steadying of the market and seasonal decline. Most of us landords are in it for the long haul and expect there to be upturns and downturns in the market. If you cant handle double digit variations on your numbers then you should look towards another investment. The idea of cashing out because there was an upturn in the market contradicts the strategy of rental property as an invesment. Personally, I find it hard not to be bullish on Chicago when the rest of the world is so very much so, there is just not alot of opportunities out there that exist in a major city like they do in Chicago right now. The market absorbed 500 LSD, K2, and AMLI with ease. The influx of premium rental buildings is is certainly a risk/concern as there may be some absorbortion issues in the short term but this is good for Chicago.

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  21. It seems pretty simple to me. As new, Class A, units come online they will inevitably absorb some of the tenants previously living at Class A buildings whose amenities, finishes, floor to ceiling heights, layouts, location, views, etc were substandard to begin with. Aqua is a perfect example. The building was designed as an econo-box, very low floor to ceiling heights, mediocre finishes, poor location… it just attracted big rents because it was the new kid on the block and there was little to no competition for new build apartments in the area.

    As the market expanded developers started competing with other new builds, the quality of units increased…. leaving buildings like Aqua behind as low Class A rental buildings. The same thing will happen to Coast/K2/AMLI/500 NLSD/Optima 1 once the next series of towers comes online (111 W Wacker/Wolf Point 1, 725 West Randolph, Optima 2)

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  22. [pete] “This is the easiest bubble to spot since pets.com. How many people are there who are willing and able to pay $2500 a month for a studio apartment?”

    How exactly is this a bubble? There will always be a market for high end rental apartments, the question is “how big of a market?”… and that is the job of these developers to determine before putting their asses (and their investors) on the line. If the market reaches full saturation there will not be a massive crumble causing city wide rents to collapse… but even if that did happen, that benefits the tenants.

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  23. Anyone else see the article in the Tribune over the weekend about the awful legal market? Clearly new legal grads aren’t renting these luxury apartments (so who is???). There’s probably only about 200 of them that have the financial ability to do so (and many of them took jobs in others cities.)

    I thought everyone here said the legal profession was doing great again? Lol. NOT!

    The percentage of recent grads with jobs is still AWFUL. It’s not going to get any better in the next 5 to 10 years. The profession is still contracting. They are STILL laying off associates, paralegals and secretaries. All of these law students aren’t needed even from the top schools.

    I don’t think anyone is surprised by the job placement numbers from John Marshall but I’m surprised DePaul is that low. The percentage with jobs from U of I and Northwestern, both top 50 law schools, is shocking though.

    Percent employed 9 months after graduation in a job that requires passage of the bar exam for the 2012 class:

    U of Chicago: 96.3%
    Northwestern: 80%
    U of I: 68.5%
    IIT Chicago- Kent: 66%
    Loyola: 63.7%
    John Marshall: 48.3%
    DePaul: 46.4%

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  24. Thats nice, but big lawyering isn’t the only thing you can do with a law degree. And there’s plenty of other new jobs out there like quant traders, IT consultants, banking whatever, where the smart people will go to make lots of money. Anecdotally I do know a handful of lawyers and one of them moved into hubbard place already lol

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  25. I know bankers, consultants, attorney’s, doctors, dentists, IT folks, etc who live in luxury high rises downtown.

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  26. “I know bankers, consultants, attorney’s, doctors, dentists, IT folks, etc who live in luxury high rises downtown.”

    Not possible. Only lawyers can afford to live in them. That’s why Sabrina bases her view of real estate on first year lawyer jobs.

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  27. “Thats nice, but big lawyering isn’t the only thing you can do with a law degree. And there’s plenty of other new jobs out there like quant traders, IT consultants, banking whatever, where the smart people will go to make lots of money.”

    You mean like the woman in the article who graduated in 2011 and was making $18 an hour in a temp position with $250,000 in law school debt? She is making soooo much money. Or the man in the article who was also a 2011 graduate but just wanted to be a LAWYER. No one would hire him so he opened his own practice. Do you think he’s rich yet?

    The biggest myth is that you can do something else with a law degree. Like what? You’re going to go into banking after getting a $200,000+ law degree? There is nothing stupider. If you don’t want to be a lawyer- go to business school (oh- and applications to attend those have dropped every year since 2009 too because most MBAs are a waste of money too.)

    Did you know you have to be a math major to be a “quant trader”? Many go and get a graduate degree to get into those jobs. They don’t go to law school.

    Gee- let me think about it. Quant trader (contributing so much to society) or lawyer. Quant or law. Quant or law.

    Better plan would be to move to San Francisco, get a job at a start up and hope and pray it goes public. Forget law school altogether.

    This discussion makes me laugh.

    The point of the article is that the legal profession is toast for years to come. No pay raises for going on 7 years now. Jobs disappearing overseas. Still too many lawyers versus legal jobs (by the way- another time that happened was in the 1920s. Coincidence that society created a glut of lawyers just before two big economic crashes? I don’t think so.) So they won’t be buying up real estate any time soon.

    If the technology jobs pick up steam, that could make up for some of the slack. Perhaps we’ll have a bunch of highly paid engineers.

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  28. Having recently bought a 2/2 in the Legacy, from the people I’ve talked to here: Lawyers, lot of surgeons, dentists, hedgies, architects, an interior designer, lot of web entrepreneurs, engineers, some 20 year olds splitting rent on million dollar units, penthouses are mostly old money wealth, a few professional athletes are renting (not naming them) and a very surprising amount of wealth fob asians and middle easterners buying/renting units for their kids. Lots of very expensive remodels going on.. I think they sold at least a dozen more units this past month, won’t know for sure until they dump the sold units on MLS but the freight elevator has shown many reservations lately.

    I know a few older folks that bought 2 cheaper units on my floor. They intend on renting out the units until they retire and then plan on moving in one unit and supplementing their lifestyle with the income from the other unit. Given the rental rates listed above, they are making ~4-5% after tax/assessments which doesn’t seem great to me but everybody has different risk tolerances I suppose.

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  29. A law degree can be useful for business but that’s about it. However the lawyers I know may just be good businessmen and the usefulness of the law degree may be overstated. A lot of lawyers find work in other fields but they rarely start out that way.

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