Market Conditions: Is the Day of Reckoning Coming for Luxury Downtown Apartments?

Anyone in Chicago can see the cranes.

They are everywhere. Downtown, Hyde Park, Bucktown, Logan Square, Lincoln Park, and Lakeview.

Chicago has more construction cranes (over 40) than ANY other city in America.

Most of the buildings going up are luxury apartment towers.

Crain’s says 2,000 of these apartments will be completed this summer in the downtown neighborhood alone.

Who will rent them all?

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.

But don’t worry. Jobs are being created and demand is strong.

According to the US Census Bureau, the city center gained 42,423 residents from 2010 to 2015.

The market absorbed 1,103 units downtown in the first quarter. That is considered a “strong” quarter.

Strong demand is already filling one new building: Linea, a 33-story tower at 215 W. Lake St. in the Loop that just opened at the beginning of the month. Sixty-seven of the building’s 265 apartments are already leased, ahead of projections, said its developer, Thomas Roszak. He’s seen especially strong interest from couples with two incomes but no children.

“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 in 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.”

Are developers being overly optimistic about the next 12 months or is Chicago’s economy really that hot?

For downtown apartments, it’s the ‘calm before the storm’ [Crain’s Chicago Business, June 5, 2017]

6 Responses to “Market Conditions: Is the Day of Reckoning Coming for Luxury Downtown Apartments?”

  1. Perhaps we are approaching the top of the peak in this real-estate cycle. And what happens when pending financial crisis rears its ugly head? Unable to be kicked further down the road…

    How much longer until agencies downgrade Illinois bonds to official junk status? What affect will that have on the market?

    I understand that certain higher-paying industries could attract more millennials to Chicago where their income/COL goes much farther. But I’m not sure if Chicago will retain a unique hold, or grow those industries in the way San Francisco has on the tech boom since 1980, or NYC on the financial services boom.

    http://www.valuewalk.com/2017/06/illinois-broke/
    “Each Illinois taxpayer is on the hook for almost $50,000 in unfunded liabilities (pensions and post retirement health benefits)”

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  2. We’ll learn soon re whose predictions are correct abt absorption of luxury apts. in Chicago.

    But imo following quote from NYT article re philanthropy/’giving pledge letters’ is more important than how lux Chicago’s apt absorption shakes out. I’d like to point it out to hh, hd and others here who imo delusionally believe their success results solely from their efforts & character traits. I’ll bet neither has donated $ or time to assist others bootstrap themselves or their kids up.

    “..I recognized early on my good fortune was not due to superior personal character or initiative so much as it was to dumb luck. I was blessed to be born in an advanced society with caring parents. So, I had the advantage of both genetics … and upbringing.”

    Kaiser decided he was “morally bound to help those left behind by the accident of birth.” But he understood the complexities: “Though almost all of us grew up believing in the concept of equal opportunity, most of us simultaneously carried the unspoken and inconsistent ‘dirty little secret’ that genetics drove much of accomplishment so that equality was not achievable.”

    Most of the letter writers started poor or middle class. They don’t believe in family dynasties and sometimes argue that they would ruin their kids’ lives if they left them a mountain of money. Schools and universities are the most common recipients of their generosity, followed by medical research and Jewish cultural institutions. A ridiculously disproportionate percentage of the Giving Pledge philanthropists are Jewish..”.

    It occurred to me to hope an equitable punishment in the next life for anonymously posting visceral hatred & lies in places like cc is to be forced to choose between reading the quoted passage (particularly the last sentence) repeatedly for eternity and ___(use your imagination). jmo

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  3. ^Mic drop

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  4. Hey Elliott! Chicago is always immune to real estate busts. Look at the facts and see this. Real estate domestic cycle won’t peak for another 5-7 years (if it peaks at all, which it most likely won’t). Chicago doesn’t really have a certain industry aside from simply being a large financial hub. Market is going to obliterate bears and by the time everyone and their mother turns bullish, I’ll be a bear. As much as I dislike Chicago, it’s just starting recover from the daily murders and constant 24 hour violence. Bull run for 10-20 years. And I’m not even a Chicago fan. These are just facts.

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  5. southbound – your hope is foolish and ill founded. You should wish a happy prosperous and free future for all beings, those you cling onto with a manifestation for your fears and frustrations, and those you cling onto for your identify and perception of love. True love is love for all, not conditioned infatuation.

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  6. Mike – wow dude that’s heavy for 8:45 am. Can you pass me a joint so I’m able to interpret jibberish? But I do wish a happy, prosperous & free future for you and all beings. True love to all, peace, love and I’m out…

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