Market Conditions: Downtown Rents Hit Record Highs But 7000 New Apartments Expected By 2014
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!
From Crains:
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]
“Is a bubble brewing in the Chicago apartment market?”
no – because these buildings are being built as CONDOS – they are are just being rented out until the market changes. Developers understand that as soon as the market turns (which COULD be 2014), these will be turned into condos. They can’t lose – even if the condo market isn’t hot until 2017, they rent out the units for 3 years for a premium, and sell as condos.
Sorry Clio, but the downtown high rise I live in is owned by the GE pension plan. They want a long term stream of payments, not a quick flip in which they are left with a pile of cash and no place to put it.
“Developers understand that as soon as the market turns (which COULD be 2014), these will be turned into condos.”
You are assuming a huge surge in demand (obviously.) But what will cause this?
1. Massive job creation?
2. Higher incomes?
3. Demographic changes?
The current inventory is 1529 condos (as of the second quarter.) The highest level of inventory was 6,000 condos in 2007 (and we saw what happened then.) There are 7,000 more apartment rental units expected to come onto the market in the next 2 years plus the 1,000 they built this year. So that is 8,000 apartments (that could be converted into condos at a later date.)
They are selling, conservatively, 200 units a quarter right now. Let’s just say the market picks up enough that they’re selling 400 a quarter or 1600 a year.
Sounds like an awful lot of inventory to me (to rent OR to buy.) And it’s all at similar price ranges. It’s not like anyone is building a rental tower where the rents AREN’T going to be $2000 and higher a month.
“You are assuming a huge surge in demand (obviously.) ”
Zero change in demand for housing. Just a change from the desire to rent to the desire to buy.
“Zero change in demand for housing. Just a change from the desire to rent to the desire to buy.”
Right. So what will cause it to change in 2 to 5 years? Clio is arguing that suddenly these will all be condos in just a few years time. We’ll likely have much higher interest rates by then. Property taxes will also probably be significantly higher. What will be the motivation for a 30 year old to buy an expensive 2/2 condo in downtown Chicago when they can just rent it for 3 years instead? It will have to be a complete change in the current mindset.
Oh- and I forgot about the mortgage deduction. What if they get rid of it (when they get rid of loopholes in DC while trying to balance the budget?) Simpson/Bowles got rid of it- right?
Another reason to rent.
“There are 7,000 more apartment rental units expected to come onto the market in the next 2 years”
The article says 7,000 units are ‘possible’ not expected. Unless there are projects that have broken ground and fully funded that number is anyone’s wild guess.
Bears make money, bulls make money, pigs get slaughtered.
“Right. So what will cause it to change in 2 to 5 years?”
Dunno, but the things you listed would probably have little effect on the rent vs buy decision. Those would probably increase overall demand.
“1. Massive job creation?
2. Higher incomes?
3. Demographic changes?”
“We’ll likely have much higher interest rates by then. Property taxes will also probably be significantly higher. ”
so you ARE predicting higher incomes and massive job creation then?
And the old “taxes are going to surge” is so old and tired and wrong. If growth picks up again like you say it will, taxes aren’t going to surge
“Oh- and I forgot about the mortgage deduction. What if they get rid of it (when they get rid of loopholes in DC while trying to balance the budget?) ”
yea i’m sure romney would love committing political suicide in his first term, or Obama would love to stick it to the one tax break the upper middle class gets… not going to happen… you actually think those idiots will actually balance the budget? bahahaha!
“The Wells building is commanding $3.03 per square foot!”
Is that really unprecedented? I remember rents around that level for brand new buildings around 2000 (and in 2000 dollars if anyone cares).
Anyway, more on topic, viewing from my balcony i can see 5 cranes building skyscrapers. 1 is a hotel, 1 is condos and 3 are rental towers.
Soon there will be 2 more towers being built of commercial space nearby. Assuming these get tenants, I just don’t see how my taxes are going to surge since theres about a billion dollars worth of property being built in my neighborhood.
Right now in some areas it is cheaper to buy than rent and I am sure when that is the case more frequently, people will start to think about buying again, because the ‘moveability’ premium is vastly overrated on this site, since most people want stability in their lives.
I have a question CCers: ” I live at a condo building where some renters are not paying neither their rents nor the assessments for the units that are going through foreclosure. I was wondering is there a way to make these people pay their assessments? ” I don’t see why the rest of us should pay for their utilities, amenities, and so on. Thank you.
“What will be the motivation for a 30 year old to buy an expensive 2/2 condo in downtown Chicago when they can just rent it for 3 years instead?”
Let me take a stab at this one. While there are outliers of course, the majority of 30 year olds just aren’t as realty savvy as the Chatarati.
You have the 30 yo ladies who feel that since Mr Right hasn’t shown up, they should buy a home that they can have their child-substitute pet without the hassle. And then there are the 30 something guys who are told its a sign of being grown up to own property so they go out and buy something.
I admit I fell for that last one, though I’ve never claimed to be savvy.
Ha Icarus… I admit the first one describes me. I wanted a place I could live in for the long term without worrying about the rent going up or being told what I can and cannot do in terms of decorating, appliance choices, and upgrades. Also, if an appliance breaks, I can immediately replace it without having to deal with a landlord who might take a week or more to replace the broken appliance. When I’m a little old lady, I will just have to worry about my assessments and taxes.
When the housing bubble burst, it started the “renting” bubble. Partly out of fear, and partly out of necessity. So, like lemmings, you see the builders chasing the next bubble by building lots of rentals. Like all bubbles, it will burst, and that will swing the pendulum back the other way towards buying. Lather, rinse, repeat.
“in 2000 dollars if anyone cares”
So you were paying ~$1.80 psf in Jim Baker dollars?
Dead on.. and don’t look for economic factors to back it. It is all a state of mind.
When the housing bubble burst, it started the “renting” bubble. Partly out of fear, and partly out of necessity. So, like lemmings, you see the builders chasing the next bubble by building lots of rentals. Like all bubbles, it will burst, and that will swing the pendulum back the other way towards buying. Lather, rinse, repeat.
This seems like an interesting scenario. The normal seller pool for downtown condos is people who have lived in their condos for 3-5 years, however all of those people are currently too underwater to sell which is why inventory is at record lows. What happens to these people if one of these buildings decides to go condo and overnight the market is flooded with hundreds of newer construction units?
I agree there is a rental bubble. All these new rental units are adding to the overall housing inventory in Chicago. We don’t need more inventory at this point. Once the rental bubble bursts, we’re going to be stuck with too many condos and rentals. Since people want new, I have no doubt that over the first few years, the rental buildings will be successful, but when it comes time to turn these units into condos, there will still be too many condos.
I have also noticed they aren’t building the rentals to condo quality. My friend lives in a rental unit in the Aqua. He has very low, popcorn ceilings. I was shocked. Another friend lives in another new downtown building. The kitchen has basic appliances and counter tops…plus carpet throughout. Before they sell as condos, it will need to be remodeled.
“Before they sell as condos, it will need to be remodeled.”
Isn’t that part of the game? They remodel at the time of the conversion so they are “new” again?
I think it’s actually 1225 Old Town. 1255 in google brings you to one of the Sandburg buildings which definitely isn’t fresh news. 🙂
I have never heard anyone describe North Avenue to define the northern limit of “downtown.” I think Division would be justifiable (which would also be equidistant from Madison as your southern border, Roosevelt).
Low household formation, excess inventory, flat wages, and high unemployment equals cheap housing rental or owning for years to come.
“Isn’t that part of the game? They remodel at the time of the conversion so they are “new” again?”
Absolutely. Developers offer a plethora of packages. They offer relatively low prices as compared to new construction with apartment finishes. (Which really aren’t all that bad) Then they offer the up-sell to benefit you….a varying degree of packages for you to differentiate your unit form the next. Game is the perfect word for it.
“Low household formation, excess inventory, flat wages, and high unemployment equals cheap housing rental or owning for years to come.”
None of this is accurate in this micro market. You have fresh faces in the downtown neighborhood every year. They are fresh out of law or business school, a few doctors if they are lucky and they have the income to spend. The only thing that is different right now is the barrier of a down payment.
“I have never heard anyone describe North Avenue to define the northern limit of “downtown.” I think Division would be justifiable (which would also be equidistant from Madison as your southern border, Roosevelt).”
I also agree…as the Gold Coast is a market to itself, BUT Old Town is hot right now. Certainly the same type of clientele in a similar social-economic situation.
“I have never heard anyone describe North Avenue to define the northern limit of “downtown.” I think Division would be justifiable (which would also be equidistant from Madison as your southern border, Roosevelt).”
I definitely have. 312’s northern border is North Ave and if you look at rental car prices, they are significantly cheaper when you get north of there. Also, while Division and Roosevelt are both 1200, Roosevelt is actually only 1 mile from Madison (to Division’s 1.5mi), so Chicago and Roosevelt are actually equidistant from Madison. Cermak (22nd) is actually equidistant (2mi) as North Ave.
Actually, Roosevelt is a mile south of Madison though it is technically 12th St, therefore it is not equidistant from Madison as Division.
“I have never heard anyone describe North Avenue to define the northern limit of “downtown.”
I’ve heard dozens of transplants and suburbanites refer to anywhere within the city limits as “downtown”.
“I have never heard anyone describe North Avenue to define the northern limit of “downtown.””
Then you’ve never heard anyone from Appraisal Research. Their “downtown market area” is North to Cermak, the lake to 90/94.
“None of this is accurate in this micro market. You have fresh faces in the downtown neighborhood every year. They are fresh out of law or business school, a few doctors if they are lucky and they have the income to spend. The only thing that is different right now is the barrier of a down payment.”
Exactly, how many kids from Wisconsin, Iowa, Ohio, Michigan, Indiana, Kansas….do you see each year moving to the North Side? Prices will be limited to how much they earn (salary) and how much they can save up for a downpayment. This isn’t NY, SF, LA where we have foreign investment and trust fund kids. The Chicago market is dependent on salaried income, not investment income.
“I’ve heard dozens of transplants and suburbanites refer to anywhere within the city limits as “downtown”.”
Yeppers. Mostly, in my experience, ‘burbanites of the native and transplant variety.
“This isn’t NY, SF, LA where we have foreign investment and trust fund kids.”
Sure, there are enough trust fund kids and foreign investors *renting* in those three cities to drive rental rates higher. Nothing to do with development constraints, rent control and lack of existing inventory in the relatively narrow preferred locations.
Does anyone know the total size of the rental market in Chicago? Its hard to tell how much a net add of 2500 to 3600 apartments will affect rental prices without the total size. The thing is rents are so high they could drop a decent amount and rent vs buy would still be in the buy department.
“Oh yeah I live downtown”
“oh really? where abouts?”
“Bryn Mawr and kedzie”
/facepalm
@Sonies -it’s usually the other way around.
Co-worker from Bangalore: Where do you live?
Icarus: I’m in the Irving Park neighborhood in the city.
Co-worker: Oh, you stay downtown!
“Does anyone know the total size of the rental market in Chicago?”
The whole city? There are a bit over 1,000,000 households, and it’s about 45% owners (now, post bust). So the rental market–including public housing and section 8–is about 550,000 units.
“Downtown” the population is ~135,000 (2010 census); if we assume a somewhat smaller average household (pretty safe), there are about 75,000 households. 7000 new apartments is a lot, for the market.
““Bryn Mawr and kedzie””
Hey, that’s in the Northside College Prep attendance area! Great school; your kids should just go there!
“7000 new apartments is a lot, for the market.”
Purdue graduates about 7500 a year so I am more concerned with a shortage than oversupply. Those grads need a place to live.
I would say the biggest reason people are renting downtown rather than buying is that they can’t get financing, and not through any fault of their own, but because the banks just won’t lend on buildings that have the kinds of arrears that most of them are dealing with now.
“Purdue graduates about 7500 a year so I am more concerned with a shortage than oversupply. Those grads need a place to live.”
They can afford $2000/mo + student loan payments on Starbucks wages? I need to get a job at Starbucks!
anon (tfo) – Article says absorption rate is 1700 / year. So 2yrs = 3400 and 7k new apartments represents an increase of 3600 apartments over the normal growth of the market. So its not as big as it seems on the surface but still a good sized increase.
“Right. So what will cause it to change in 2 to 5 years?”
Don’t bet against America.
Don’t fight the Fed.
American Invsco never dies, like a vampire
Cycles: condo conversion boom in 1979-81, then again starting in the 1995-2005, it’ll happen again at some point.
“Also, while Division and Roosevelt are both 1200, Roosevelt is actually only 1 mile from Madison (to Division’s 1.5mi)”
Oh man, that cuts out 1 mile from what I *thought* I was running/jogging.
“7k new apartments represents an increase of 3600 apartments over the normal growth of the market”
It’s still 10% more total HHs than are in the market now.
And I don’t (and won’t) rely on ARC’s predictive capacity. I will rely on their reporting of statistics, so I believe that absirption *has* been 3400 over the past two years.
“Purdue graduates about 7500 a year so I am more concerned with a shortage than oversupply. Those grads need a place to live.”
That reminds me of the downtown condo developers’ arguments (to sucker in financing), that the Chicagoland area has a zillion baby-boomer empty-nesters so that 20,000 new condo units aren’t even enough!
anyone know how well the Domu website is doing? I know they spent millions to develop it.
I have heard this for so long, I have given up.
“I live down town”
Response….”So does my daughter…right next to Wrigley”
My Response…”No, I live down town…think big buildings…60th floor?”
Response…”Oh, I know that area, I can see those buildings from my daughters rooftop deck…would you like to meet her?”
“Oh yeah I live downtown”
“oh really? where abouts?”
“Bryn Mawr and kedzie”
/facepalm
“Oh man, that cuts out 1 mile from what I *thought* I was running/jogging.”
Dan, you run?
I’m so intrigued by this little tidbit.
Don’t know why.
Where do you run?
I just moved to the Northwest Side.
Gyms are not as plentiful as in Edgewater where I was taking a lot of classes like Spinning and TRX.
I need some new workout ideas.
Have been doing Zumba with weights at home but don’t want to tick off the neighbors with all the jumping around!
I googled the distance between 1 S. State Street (corner of Madison) and 1201 S. State Street (corner of Roosevelt)and Google concludes it is a 2 mile trip south on State Street. I believe it is a 1.5 mile trip on State Street.
Southbound – I don’t know what you are looking at.
https://maps.google.com/maps?saddr=S+State+St&daddr=S+State+St&hl=en&ll=41.876208,-87.627468&spn=0.024733,0.037937&sll=41.872069,-87.624786&sspn=0.012367,0.018969&geocode=FQkRfwId8ufG-g%3BFdjYfgIdCunG-g&dirflg=w&mra=me&mrsp=1&sz=16&t=m&z=15
“I believe it is a 1.5 mile trip on State Street.”
“Southbound – I don’t know what you are looking at.”
I’m as perplexed as Fred. Good summary here:
http://gapersblock.com/airbags/archives/measuring_a_chicago_mile/
I’m perplexed? I thought I had a firm understanding…
“I’m perplexed?”
You know how Southbound got Google to say its two miles, why Southbound thinks it’s 1.5 miles or both? Do tell!
Ohhhh, sorry I misunderstood what you were perplexed about!
bob told me there is no inflation…….. and I believe everythin bob says!
bob says no rent inflation here!
I’m gonna sit back with bob eating my popcorn….
The Bernake says there is no inflation
The Bernake doesn’t buy his own groceries and must use his “fed card” to buy gas
The rent is too damn high!
I miss that guy. He’s up there with the SNL “Fix It!” dude.
http://www.youtube.com/watch?v=_mDsaJDxSrA
“I miss that guy”
What’s to miss? He’s running for mayor next year:
http://www.rentistoodamnhigh.org/
Get out, really? Well good for him.
anon (tfo) (August 21, 2012, 11:08 am) “And I don’t (and won’t) rely on ARC’s predictive capacity.”
From article: “Appraisal Research ***estimates*** that developers ***could*** add more than 7,000 units to the downtown market by the end of 2014”
Then why are you relying on their 7k new adds number?
“Then why are you relying on their 7k new adds number?”
Fair enough.
But there’s no such thing as “net add”, wherein one deducts absorption to get some “excess” number of added units. Every inclemental unit needs to be absorbed, and may affect the asking rents. Adding ~5% to the inventory in two years is still a lot.
“Sorry Clio, but the downtown high rise I live in is owned by the GE pension plan. They want a long term stream of payments, not a quick flip in which they are left with a pile of cash and no place to put it.”
Tipster – Don’t be so naive. Who gave you that line the rental agent at your property? In the end a pension fund is really no different than any other investor. They seek returns. Simply put they want to get money back from the investment made in that property. They will take it in any way shape or form and if said project is successful earlier than planned I’d bet that you can guess what happens next. That same developer talks them into the next building!
If the rental market has taken over the downtown area, would that affect a condo’s valuation? I am looking to buy a condo in Museum Campus area, yet I see a flood of rentals on the market. Would this be a good thing or a bad thing for Condo owners long term? In other words, I am OK with maybe 2% growth over the next7-8 years, however a flood of apartments leaves me wary when it may be time for me to sell.
Any insights??
“If the rental market has taken over the downtown area, would that affect a condo’s valuation?”
In the long run there has to be a correlation between the price of condos and apartment rents. If the supply of rentals is increasing then there will be downward pressure on rents and condo prices. Building this many rental buildings seems rather dumb. Must be the cheap money, which won’t always be cheap.
On the plus side…it does appear that the employment situation in Chicago is improving and that should help home prices in the absence of tons of new supply: http://www.chicagonow.com/getting-real/2012/08/further-evidence-that-the-housing-market-is-turning-the-corner/
for those wondering about the north to roosevelt thing, the city defines the “Central Business District” as north to roosevelt, halsted to the lake. It’s not about distance from Madison/0 (which others have correctly determined as 1 mile south to roosevelt vs 2 north to north ave), as much of river north has a lot more business in it than the south loop
“for those wondering about the north to roosevelt thing, the city defines the “Central Business District” as north to roosevelt, halsted to the lake.”
But that isnt the area that ARC covers–they go south the Cermak.
tfo was that you scammin admission fees at the nort center fest?
“tfo was that you scammin admission fees at the nort center fest?”
You found me out. I actually live int eh 7700 block of Birchwood.
My comment was waiting for moderation so I repost it today:
“I have a question CCers: ” I live at a condo building where some renters are not paying neither their rents nor the assessments for the units that are going through foreclosure. I was wondering is there a way to make these people pay their assessments? ” I don’t see why the rest of us should pay for their utilities, amenities, and so on. Thank you.”
I live at a condo building where some renters are not paying neither their rents nor the assessments for the units that are going through foreclosure. I was wondering is there a way to make these people pay their assessments? ” I don’t see why the rest of us should pay for their utilities, amenities, and so on. Thank you.”
Bascially other condo owner do not have to pay for the deadbeats. The condo association has a legal right to take over the unit and rent it out to cover its losses including legal fees. Additionaly when the unit is sold back assesements need to be paid. In large +300 unit building this problem is easier to manage than in a 3 unit building.
Marea,
You have a problem with the unit owners, not the renters.
If the unit owner allows the tenant to live for free, there is nothing you can do about it.
You should have bought a house. Or better yet, you should have rented from one of these unit owners.