Since the big debate recently has been renting versus buying (and what a deal it is to buy), I thought we should take a look at what is happening in the downtown apartment rental scene.
I predicted a few years ago that we wouldn’t see a new condo high rise built in Chicago for 10 years. But I didn’t say anything about rental towers!
The average net rent at top-tier, or Class A, downtown apartment buildings rose to another all-time high of $2.57 a square foot in the quarter, up 2.6 percent from the first quarter and 5.8 percent from a year earlier, according to Appraisal Research Counselors, a Chicago-based consulting firm. The Class A occupancy rate hit 96 percent, its highest level in six years.
“It’s the Energizer Bunny,” Appraisal Research Vice-President Ron DeVries said of the market. “It just keeps going and going.”
Yet a building boom could sap some of its energy over the next couple years. Nine towers are under construction, and Appraisal Research estimates that developers could add more than 7,000 units to the downtown market by the end of 2014.
The ballooning supply is good news for tenants, boosting competition among landlords, which should prevent them from raising rents as aggressively as they have — 24 percent since the end of 2009, when the Class A market bottomed out. Demand right now is outstripping supply.
“We’re clearly in a shortage situation now,” Mr. DeVries said.
Remember, “downtown” is the area between Roosevelt and North Avenue (but I don’t remember how far west it goes.) Rents in Lakeview or Andersonville are not this high.
There are worries that the overbuilding we saw in the boom years simply went from condos over to apartments.
The downtown absorption rate, or the change in the number of occupied apartments, has averaged about 1,700 units over the past three years. By comparison, developers will add 2,700 units next year and 3,200 in 2014, according to Appraisal Research.
“Next year is going to be a challenge, no doubt about it,” Mr. DeVries said. But he expects rents to flatten out rather than fall.
Two of the hottest buildings are Sono East (which we have chattered about) and the new building on Wells in Old Town called 1255 Old Town. Both are already 60% leased.
The Wells building is commanding $3.03 per square foot! A one-bedroom in that building is renting for $2159 a month. According to Crain’s, it is the second most expensive rental tower in the city after Aqua. (Old Town is hot!)
But never fear. Motorola Mobility is moving downtown and will save the apartment market next year.
The recent leasing strength is a good sign for a market bracing for a flood of new apartments, Mr. DeVries said.
“It’s so robust right now that our consternation over next year is a little bit less,” he said.
The market could get another boost when Google Inc. moves its Motorola Mobility business — and more than 2,000 employees — from Libertyville to the Merchandise Mart in River North next year. Though it’s unclear how many will move from the suburbs downtown, landlords hope some will choose to rent.
The move comes at a good time for Amli Residential, a Chicago-based developer that expects to complete a 409-unit tower in River North just a few blocks away next year.
“It’s clearly a positive,” said Amli CEO Greg Mutz.
Though Mr. Mutz said the development boom could limit rent increases, he’s confident the market will be able to handle the increase in supply.
“I don’t see things going haywire one way or the other,” he said.
Is a bubble brewing in the Chicago apartment market?
Downtown apartment rents hit another all-time high [Crain’s Chicago Business, Alby Gallun, August 20, 2012]