The Second Biggest Story of 2017: Will There Be an Apartment Bust?

wells-street-new-apartment-construction

We’ve chattered several times this year about the thousands of new apartments, many of them “luxury” that are being built all over Chicago.

Normally, this would be a good sign that the Chicago economy was strong and jobs were being created.

But the number of new apartments is well above current absorption rates while rents continue to rise.

In Logan Square, for instance, according to Curbed, there are 1500 apartments planned.

See more details here.

We know that “downtown” there are thousands of apartments under construction or soon-to-be under construction. Here’s the totals as we know them right now:

  • 2016: 3830 apartments
  • 2017: 4500 apartments expected
  • 2018: 4200 apartments expected

If everything is built, that’s a 39% increase in downtown apartments.

The 3830 apartments built this year was the highest rate since 2001 but, remember, the developers were busy building condos for most of the early 2000s so it’s been nearly 20 years since a lot of new apartment stock was built.

Still, there are already some cracks beginning to show in the rental market.

From Crain’s:

Landlords are starting to feel the impact of an historic building boom that is adding thousands of apartments to the downtown market. While rents are holding steady so far, the occupancy rate for high-end buildings fell in the third quarter to its lowest level in nearly seven years, according to a report from Appraisal Research Counselors, a Chicago-based consulting firm.

The occupancy rate at Class A buildings fell to 92.2 percent in the quarter, down from 94.8 percent in the second quarter and 93.7 percent in third-quarter 2015, according to the report. The Class A occupancy rate, which does not include buildings in their lease-up phase, hasn’t been that low since late 2009.

What’s going to happen with the apartment market in 2017?

Will some of these buildings be converted to condos, where there appears to be more demand?

Or will a hot economy fill up all of these buildings at their current rental rates?

27 Responses to “The Second Biggest Story of 2017: Will There Be an Apartment Bust?”

  1. I hope there is an apartment building over supply! All that means is lower rents for local residents.

    VA:F [1.9.22_1171]
    Rating: +3 (from 3 votes)
  2. Nope!

    You do realize in Chicago they didn’t build ANYTHING from like 2009-2014 right? That’s 5 years of supply that we need to catch up with, and a reason you see rents so high, this will balance things out. These large projects are done by massive institutions and can always hold out for longer than you would think. I mean buildings like the Xavier are nearly 100% leased so it wouldn’t surprise me to see these hot river north units with far better locations get scooped up eventually

    VA:F [1.9.22_1171]
    Rating: +2 (from 4 votes)
  3. These are targeted to the Millennial generation of white collar workers making $80k-$120k a year who are willing to spend half their income on fancy digs, dining out at fancy restaurants, experiences, etc. As long as these Millennials don’t wise up and start saving to buy, they will continue in the renter loop indefinitely.

    VA:F [1.9.22_1171]
    Rating: +9 (from 9 votes)
  4. With all the new class A material in the market, what will be the effect on the older Class B and Class C buildings? Will there be a renovation boom?
    Current renters seems to be able and willing to pay extra for Class A. There has to be a lot of downward rent pressure on Class B and Class C.
    Will Class B buildings try to return to their Class A glory in order to get Class A rents? Will Class C buildings get renovated or demolished & redeveloped?

    VA:F [1.9.22_1171]
    Rating: 0 (from 4 votes)
  5. b,

    I fit that income and relative age range; however, many in my situation are not buying condo’s simply BECAUSE of the oversupply that’s about to bust and lower rents (not just due to an extravagant lifestyle).

    The condo market pricing seems OK, but not great (especially bad in places like RN / GC / SV where there hasn’t been new constructions in some time & the new ones are all $1M+).

    So if I had $400K to buy a place, would I get value living there ~5 years? Perhaps. Or I can have less risk, more flexibility, and living an uber luxurious, over-amenitied rental units for the same monthly price.
    _________
    Side Rant:

    I have literally looked at every mid-high rise in RN & GC, focusing on ones built in the last 20 years and still feel there is not a lot to choose from in the very specific nooks of the city I would want to live in (plenty of rentals in those spots, not a lot of moderately priced condos though!)> 757 N Orleans has balanced their association and looks promising with their 1BR 1.1BA + Den units for under $400K with parking. A bit older, without a pool, but with a better gym down the road is 340 W Superior which as sold smaller 1BR + Den’s for $330K with parking (and about $50 more HOA’s at over $500). Grand Plaza has amazing amenities, but their 10/04 tier 900sqft units go for $335K, need updating, your HOA would be $700+, there’s only rental parking at $290/mo, and you’re surrounded by tourists. Ontario Place, the Sexton, 300 Grand, and other lofts haven’t had solid deals in some time. 4XX Huron are decently priced, but fairly boring. Is 200 Grand worth it as a cheaper Silver Tower? Could I handle being next to Soundbar at 630N Franklin with zero amenities but a low HOA? 150 W Superior has high fees as a boutique building, but is it still a better option than the bold blue beauty across the street? How about the infamous Invesco buildings (10 E Ontario, The Sterling, 111 W Maple, etc.), has the stigma left?

    I hate complaining about options and prices in Chicago as someone that’s paid for expensive housing around the world (London blew me away, ugh!), but I just wish we had some new(er) units that were not $1M. It appears it’s likely because of the regulation in which they would have to pay a fee for not having low income housing allowed or something of the sort. Regardless, I plan to rent for another year but build in flexibility in my lease to buy within 6 month (with 2 month notice).

    VA:F [1.9.22_1171]
    Rating: +5 (from 11 votes)
  6. As a millennial just a hair above that income bracket, it amazes me what my peers who make the same money, pay for rent. I was fortunate to buy very near the bottom and my PITA is peanuts (about 12% of gross). Several co-workers spend around 40%. I’m assuming their investments are bare and savings consists solely of their tax return. To each their own.

    VA:F [1.9.22_1171]
    Rating: +6 (from 6 votes)
  7. Luis – “my PITA is peanuts (about 12% of gross)”

    Congrats on getting that part of the plan figured out early in life! Now the trick is to set up a long term vision for continued success.

    Work on investments, consistent savings, and a plan to overfund your retirement now when possible. That strategy makes for some really easy decisions and a lower stress financials when you are in your 40’s and 50’s.

    If you are fortunate to add a spouse make sure that they come prepared. If not, it can still work but the two of you must work aggressively to pay down any of their debt prior to or just after the wedding.

    Your lifestyle later in life is worth a few sacrifices now. I assure you!

    VA:F [1.9.22_1171]
    Rating: +5 (from 7 votes)
  8. Luis,

    The 40% your co-workers pay is quite high (this is not NYC / SF / London). If your 12% is on gross, that is extremely low on the other end of the spectrum. So if you make say $120K, at 12% you would pay only $1,200 for housing (does this include utilities, insurance, HOA, etc.?) Assuming 20% down, $150 HOA, and $65 in insurance, it would take only a $200K condo to get at $1,200. I am not too sure there is any condo in RN / GC at that rate that I would want to live in, especially making over six figure, but hey, each to their own.

    Most would agree that 25%-33% of your income is a bit more reasonable. If you want to start a family or just have more flexible space, etc. this option tends to make a bit more sense, assuming you do not become ‘house poor’.

    jp3chicago,

    As someone in finance I understand maxing 401K’s and building a respectable portfolio, etc., but I also understand aging. The value of one’s entertainment and lifestyle at 27-35 is much higher than the next eight years. At age 50 I would want to look back at my 30th birthday at some shithole out of the green-zone and my studio in a dangerous neighborhood. Personally, I would rather spend a bit more now and motivate myself to project my career upward even more to balance out different spending levels based on my, well, energy level.

    I’m sure if it were up to some on here and r/personalfinance, the ideal life would be to consume nothing when young and save everything for old age. The principal is there, but the exaggeration is strong.

    VA:F [1.9.22_1171]
    Rating: +2 (from 8 votes)
  9. “The value of one’s entertainment and lifestyle at 27-35 is much higher than the next eight years”

    Not entirely true. I did not get married until 40 and my entertainment spend in the late 30s and early 40s was quite high.

    . At age 50 I would want to look back at my 30th birthday” that is on my near term horizon.

    “motivate myself to project my career upward”

    Amen and I’d agree that is the best advice on this board. Not all people have the ability or role where they can significantly change income over a career. But like how high water covers lots of stumps. Bigger take home pay solves some of the many small issues in life that otherwise can cause fights and stress!

    VA:F [1.9.22_1171]
    Rating: 0 (from 0 votes)
  10. Man people really way that much for rent? Yikes! I pay $1600 where I rent from a condo owner and my rent includes everything except electricity. I’m right in the S Loop across the General Logan statue so the location is not bad at all. If people really researched they could find better options by renting from a condo owner and not pay these exorbitant rents.

    VA:F [1.9.22_1171]
    Rating: +2 (from 2 votes)
  11. Rents for new buildings will climb, those that are >5 YO will see significant pressure to drop prices

    $3/sf is the current target

    VA:F [1.9.22_1171]
    Rating: 0 (from 0 votes)
  12. luis_carruthers on December 28th, 2016 at 5:30 pm

    Thanks JP3!

    Rob, I am at 1300 (12%) all in excluding utilities that are not included in HOA. I bought my place in RN for just shy of 200 towards the bottom. The unit below me recently sold in the mid 4’s. Most of the peers I mentioned are paying between 3-4 grand a month on rent. They all make very just above 100k. That is insane to me.

    VA:F [1.9.22_1171]
    Rating: +2 (from 2 votes)
  13. “I was fortunate to buy very near the bottom and my PITA is peanuts (about 12% of gross).”

    Luis- great planning. Good for you. The problem is- that doesn’t help anyone right now. Imagine you’re 22 and graduating from Northwestern and have an engineering job at GrubHub. You’re not buying at the bottom. You’re dealing with the current condo or rental market.

    You really don’t have much choice in what you spend- do you? Even Lincoln Square and Edgewater are expensive now. This is why there are rent protests in Logan Square. Nothing is “affordable” anymore.

    Is 40% of income the new norm for housing costs? It sure seems like it.

    VN:F [1.9.22_1171]
    Rating: +2 (from 2 votes)
  14. “I hate complaining about options and prices in Chicago as someone that’s paid for expensive housing around the world (London blew me away, ugh!), but I just wish we had some new(er) units that were not $1M. It appears it’s likely because of the regulation in which they would have to pay a fee for not having low income housing allowed or something of the sort.”

    Rob- You are right that there hasn’t been any new condo construction under $750k or so in River North/Gold Coast/Streeterville since the bust. That’s about 10 years with no new construction. So most of your options are “older.”

    But I wouldn’t look for any new affordable condos in the near future. Land prices have gone up. And with rental prices going up- even if they convert some of the apartment towers, the prices they would have to sell those units for will be higher so that all the parties could make money. The two-bedroom units would likely sell in the high $500,000s and $600,000s. 2/2 new construction in Lakeview in 3-flats are starting at $550,000 now.

    Maybe there will never ben “affordable” new construction in those neighborhoods again? The prices have risen too high. You’ll either have to buy in an older building or all new construction will be luxury.

    New construction at the lower end will be in the West Loop (where the prices are also higher, actually) or the South Loop. That’s if you want a mid or high rise.

    Also- regarding the regulation of them having to pay a fee for not including low income housing- that regulation was phasing out which is why everyone announced and tried to get approval for their buildings before it did so. It really isn’t a factor in if more affordable units get built or not going forward.

    VN:F [1.9.22_1171]
    Rating: +1 (from 1 vote)
  15. “With all the new class A material in the market, what will be the effect on the older Class B and Class C buildings? Will there be a renovation boom?”

    This is already happening. A national developer just bought a building on Delaware in the Gold Coast that was built in the 1990s. They are going to renovate the units so that they can get higher rents.

    http://www.chicagobusiness.com/realestate/20161005/CRED03/161009924/developer-doubles-down-on-gold-coast-apartments

    A joint venture between the Chicago-based developer and Alcion Ventures of Boston bought the 306-unit building at 1 E. Delaware Place from Waterton Associates. Golub aims to boost the property’s income by renovating and hiking rents, a strategy that has worked at Chestnut Place, a 30-story building it owns across the street, said Golub CEO Michael Newman.

    “We feel like we have a bit of a handle on the location and the market,” Newman said.

    VN:F [1.9.22_1171]
    Rating: +4 (from 4 votes)
  16. savings consists solely of their tax return.

    Assume you mean tax refund, as a tax return is the form one submits. Doubtful that anyone considers that part of their savings.

    VA:F [1.9.22_1171]
    Rating: -1 (from 5 votes)
  17. “Doubtful that anyone considers that part of their savings.”

    You exist in a bubble, then.

    VA:F [1.9.22_1171]
    Rating: +4 (from 4 votes)
  18. “Rob- You are right that there hasn’t been any new condo construction under $750k or so in River North/Gold Coast/Streeterville since the bust. That’s about 10 years with no new construction. So most of your options are “older.” ”

    Except in the Cabrini area, you are correct, but even there new construction sells extremely fast

    VA:F [1.9.22_1171]
    Rating: 0 (from 0 votes)
  19. I don’t doubt that many consider their tax refunds part of their savings. But a tax RETURN is not a tax REFUND

    VA:F [1.9.22_1171]
    Rating: 0 (from 4 votes)
  20. Rents will continue to rise because young people like living the “bling bling lifestyle”. It is an American psychological phenomenon; the more expensive something becomes, the more people want it and gravitate towards it.

    By Diversey and Pulaski there is going to be a huge luxury loft rental building going up. The rents for a 2 bedroom will be 2800 to 3400 per month and one bedrooms will be 1200 to 1700 per month.

    VA:F [1.9.22_1171]
    Rating: +1 (from 1 vote)
  21. “I don’t doubt that many consider their tax refunds part of their savings. But a tax RETURN is not a tax REFUND”

    I think he was just typing fast and meant tax refund, not tax return.And while I agree with you that people don’t consider it part of their savings, only because 95% of people who receive any sizable tax refund just go out and squander it all. It’s not uncommon for a family to receive a $5,000 to $8,000 yearly tax refund when you factor in overpayment of withholdings, child tax and earned income credits… I’ve read that a family of four earning less than $50,000 a year basically pays no federal income tax….but in households like ours on CC we pay all the taxes. It’s always good to know that my tax payments are basically funding the vacation to the Dells for the family a few miles away.

    VA:F [1.9.22_1171]
    Rating: -1 (from 5 votes)
  22. “By Diversey and Pulaski there is going to be a huge luxury loft rental building going up. The rents for a 2 bedroom will be 2800 to 3400 per month and one bedrooms will be 1200 to 1700 per month.”

    Builders build and lenders lend to builders who build. These guys don’t have any reason to go into the office every day unless they’re lending or building, and they’re making do with the projects that are available. And of all the $hit out there right now being developed, some lender and some builder decided that the Avondale luxury apartment gamble looked slightly better than the rest of the $hit out there.

    There’s a lot of loose lending going on. At least in the residential mortgage market, all you need to get a mortgage is a credit score from one borrower in the mid to high 600’s, a down payment the size of an average tax refund, and a steady job with verifiable income. That’s it. I’m not involved with a lot of commercial finance these days (in the past some stuff came across my desk) but if the market is anything like the residential market, then it’s loosey goosey out there.

    VA:F [1.9.22_1171]
    Rating: +1 (from 1 vote)
  23. “By Diversey and Pulaski there is going to be a huge luxury loft rental building going up. The rents for a 2 bedroom will be 2800 to 3400 per month and one bedrooms will be 1200 to 1700 per month.”

    lol, I want to know who the bank is that gave those people money and what kind of pie in the sky proformas they are coming up with from comparables in the area

    VA:F [1.9.22_1171]
    Rating: 0 (from 0 votes)
  24. Just one of my peeves – a few years ago, one of my friends said, “I hate when people say ‘tax return’ when they mean ‘tax refund'”, and I said, “Don’t be ridiculous, no one says that”, and now I see it EVERYWHERE. Including in articles from “financial experts”.

    VA:F [1.9.22_1171]
    Rating: 0 (from 2 votes)
  25. Sonies, when some luxury rentals were going up by Diversey and Narragansett in 2010 I thought no one is going to rent these luxury rentals. Not for the outrageous prices they were asking. Lo and behold, people are renting them. Also by Harlem and Wellington the old bowling alley is being converted to… Can you guess? Luxury rentals. Also by 6900 West Grand they are building luxury rentals too.

    The more expensive you make something, people will gravitate towards it. My concern is that if the economy even does have a “soft patch” then the entire house of cards will come tumbling down like in 2008.

    VA:F [1.9.22_1171]
    Rating: 0 (from 0 votes)
  26. people are filling up NEXT and The Xavier too around me for $3 a sqft

    I just don’t get it! If I didn’t own I’d be paying 50%-DOUBLE what I am now in rent for a comparable property, then again I was able to save up a nice 20% down payment but still… dayum!

    The rent is too damn high!

    VA:F [1.9.22_1171]
    Rating: 0 (from 0 votes)
  27. “lol, I want to know who the bank is that gave those people money and what kind of pie in the sky proformas they are coming up with from comparables in the area”
    I don’t know who lender is but iirc these are live/work loft units in mixed use redevelopment of former Field’s warehouse. These developers look brilliant to me – in 2014 they paid $8 mil (Macy’s ask started @ $40 mil) for 1.5 mil sq ft of building (so their basis is under $6 psf for building ignoring add’l land) on 22 acres at a great intersection. So this location is at worst B- or C+?. They’ve resold 70K sq ft to Cermak Foods who’s opened grocery in bldg. Iirc their 80 lofts constitute 10% of project, w/ sizes ranging from 800-3000 sq ft. They’ve got 700 indoor parking places. I believe this developers cost structure & diverse project uses (20% office, 10% retail, 40% whse, 20% pkg) will protect developer & lender from almost any downside risk. Worst case wouldn’t these new loft units get absorbed above $1.00 psf/mo. for largest units?

    VA:F [1.9.22_1171]
    Rating: 0 (from 0 votes)

Leave a Reply