Market Conditions: Luxury Downtown Apartment Rents Fall to 2013 Levels
Crain’s is reporting on the third quarter rental market and, as expected, it’s not good for landlords.
The downtown occupancy rate fell to 87.1 percent in the third quarter, down from 93.8 percent a year earlier, according to the Chicago office of Integra Realty Resources, a consulting and appraisal firm. The rate has never been that low in the 22 years since the firm’s executives began tracking the downtown market.
Prices are down on downtown apartments anywhere from 18% to 23%.
If the vaccines “turn out to be successful, I think things could turn around on a dime,” he said.
Buildings are giving away 3 to 4 months worth of free rent.
This new Gold Coast apartment building at the corner of Clark and Division called The Clark, at 1201 N. Clark, recently started leasing.
It is directly above the Division Red Line stop, across from the Jewel and next to the Walgreens.
It has studios up to 2-bedrooms.
The building has a rooftop terrace with grills.
It’s offering 4 months free rent.
Here’s the rental offer, net concessions:
- Studios: $1252
- One Bedrooms: $1555
- Two Bedrooms: $2722
I think this is on an 18 month lease. Most buildings are asking for 18 months to get the 3 to 4 months free.
You can see The Clark pictures here.
Third quarter absorption downtown was -531 units which means more units came on the market than were rented.
According to Crain’s, Integra forecasts -1300 units for 2020, the first year of negative absorption since 2005.
And there are thousands of more apartments still to come on the market next year. That means that apartment inventory is going to remain very high for the next several years.
Renters can ask for the moon right now and probably get it.
Will developers end up converting some of this excess inventory into condos instead?
There aren’t any entry-level new condo buildings out there for buyers.
Downtown apartment market falls further but suburbs stay strong[Crain’s Chicago Business, by Alby Gallun, November 18, 2020]
“ Will developers end up converting some of this excess inventory into condos instead?
There aren’t any entry-level new condo buildings out there for buyers.“
LOFL
So in your infinite wisdom, you think there is tremendous demand for shitty < 600sf 1BR condos?
I thought everyone wanted to be in Chicago especially the under 30 crowd who these are marketed to? It should be unpossible that owners need to offer free rent to close deals.
Or this is one of the finer details of The HAWT Market Theory ™ I just don’t understand
You should put your money where your mouth is and lead a conversion. Turn you into a bonafide big time real estate developer! With all of your wisdom, it’s sure to be a success
Yes. I think AMLI 808 should convert their “Micro” apartments into condos. Doesn’t everyone enjoy 450 sqft and sharing a common lounge with your 250 neighbors? Sounds lovely, huh?
Seriously, with Parkline, Cascade, Wolf Point West in the pipeline and One Bennett Park, NEMA, Essex and others with thousands of empty apartments, I think the occupancy will go 50% before it begins to improve. Many white collar entry level jobs will not return to the office and nobody wants to spend 24 hours a day in 450 sqft studio.
You can see video tours of seven units at The Clark at YoChicago’s YouTube channel:
https://www.youtube.com/YoChicago1/search?query=The%20Clark
“You can see video tours of seven units at The Clark at YoChicago’s YouTube channel:”
Sabrina – I think you used the wrong name making this post
We’ve given up on renting our 2BR, 2BA condo in one of the low-rise buildings in Dearborn Park I. Before, this would rent quickly, with many responses. Since listing in August? Crickets.
We’re fortunate in that this syncs up with our gut SFH rehab in McKinley Park: We’ll move back to the South Loop during construction, and hopefully the rental market will start turning around some point next year when we’re ready to move back to McKinley.
Building condo buildings is harder from a financing perspective than building a rental. I have always thought *some* of the new product is destined to be condo one day – – yes the units are smaller but the amenity packages on new rental are way better than pretty much all but the lux new build condo buildings. They will have to offer the units for less since the assessments will be relatively high in order to maintain all that stuff, but it will happen when we are on the other side of this pandemic and people can use those common amenities again. I think the overall trend of young people wanting to be near work, wanting a smaller unit but more common amenities for socializing and networking, has not changed. A lot of folks still prize walkability and most Chicago suburbs do not offer that. . . . most folks I know who moved to the suburbs during COVID were going to do so anyway – – COVID just sped up the timeline. They will be back in the City when they are empty nesters and there is always another wave of recent college grads and young professionals who will want these units. What is really going to delay the recovery in the urban core is all the businesses that are gone. I ate nearly every workday lunch at Pret but they pulled out of Chicago. In fact return to office will also be delayed by this – – a vaccine is only the first step. All the ancillary businesses for a successful business district have to get financial help to reopen. It’s gonna take a few years.
Owning a condo is dumb without the tax breaks. There’s no financial incentive to own a condo versus renting – especially since people tend to not own condos for more than 6 years so you end up getting crushed on real estate fees and transfer taxes.
It’s just more efficient to outsource building management to a rental company than a condo board. Apartment owners get good financing too. The only thing you lose is the ability to customize a unit but most people are terrible at making those decisions and lose money.
People gain a huge advantage getting to put their down payment in the stock market and having liquid assets versus tying it up in property.
I was previously renting my 1bedroom/1bath mid-rise condo in Dearborn park for $1650. Unfortunately my tenant moved out at the end of August and its been Vacant ever since. I’ve since dropped the rent to $1,390 and still not a single call. I might use this opportunity to remove carpeting and install hardwood floors while waiting for it to rent when the COVID19 vaccine finally is availabe (hopefully in spring 2021)
“People gain a huge advantage getting to put their down payment in the stock market and having liquid assets versus tying it up in property.”
You do realize that it is possible to get 100% LTV mortgages with no PMI with pledged mortgages, right?
Yes it requires more than 20% down, I think BofA it’s 39%, but then you can let the money work in the market with all of the advantages you stated. Of course there is a risk of getting a call to have to put up more collateral if the market declines significantly, but that can be minimized by just putting up more of a down payment too.
With mortgage rates as low as they are this is a great strategy to load up on mortgage debt especially up to the tax limit (750k) or even above that.
Put 292,500 with BofA/Merill, get a pledged mortgage up to 750k, invest in something quite stable like SJNK, yield differential covers your mortgage interest.
I for the life of me cannot figure out why more people don’t do this. Yeah SJNK freaked out in March and freaked out in 2016, but you could protect against head fakes like that with options too.
@B everyone likes new/clean. Definitely get rid of all carpet. Any engineered wood or vinyl wood flooring type would help, paint it up, relist with new pics
@B, we put engineered vinyl in our $200k studio. I was hesitant as I thought it would be perceived as crappy compared to hardwood. Surprisingly, everyone who’s seen it comments how lunch they love it. Maybe its just the Studio/1BR mkt, but I don’t think people know the difference or care. Really easy to install and should hold up really well.
Bob, agree with you there, but what does “protect against head fakes with options” mean? premium is expensive, besides the ask for normies to be buying and rolling puts? or are you saying timing SPY puts to perfectly match the lower beta exposure of short term junk bonds? not trying to ask a trick question, but how is this equal compensation for the mortgage spread?
I definitely agree with the liquidity argument though.
Looked at a really nice 1 BR on a high floor of an LP high rise condo with a balcony. Seller wants $274,000. I asked the agent if their client would consider renting it out instead, as times are kind of chaotic and it’s hard to commit long-term. No, they won’t. So the condo just sits there empty (the owners already moved) and it’s been on the market for months.
At what point do Class A apartment operators move from increasing free months to decreasing rent prices and capping rent-free to one or two months? 4 months free seriously? I don’t think I’ve ever heard of a Chicago apartment building offering this (was in college during the aftermath of the GFC). Operators that can afford these types of concessions have some serious reserves in the bank and/or friendly Banks/Investors that have renegotiated terms.
If I was betting, I would guess some incentives will be pulled if occupancy trends maintain current levels into late-spring (which I expect) in lieu of reduced rent prices (net effective remaining roughly the same). Liquidity will ultimately dictate this.
“We’ve given up on renting our 2BR, 2BA condo in one of the low-rise buildings in Dearborn Park I. Before, this would rent quickly, with many responses. Since listing in August? Crickets.”
Condos are really going to have to be competitive in this market. If the buildings are giving away 3 to 4 months “free” on an 18 month lease, condo owner landlords are going to have to match that.
“So in your infinite wisdom, you think there is tremendous demand for shitty < 600sf 1BR condos?" Cirrus is selling pretty well in Lakeshore East, from what I understand. It has 2/2s under $800,000 and small one bedrooms for $399,000. The cheaper units are moving because it's the only building with them and buyers want "new." That's a price point no other new building has downtown. If it's working there, why not elsewhere? Believe it or not, while sales are slowest in the downtown, they ARE actually still happening. Gasp.
“At what point do Class A apartment operators move from increasing free months to decreasing rent prices and capping rent-free to one or two months?”
Some of the big landlords have talked about this in prior articles. It takes a LOT to get them to actually LOWER the rent and not just do the free rent.
Because once you officially lower it, that’s where it stays.
So if you sign an 18 month lease at $3,000, but you get 4 months free, when your lease comes due in 18 months, the landlord will say, “re-sign for $3,100 or move” or whatnot. They have MUCH more leverage to just continue with what it’s actually at.
Once you lower it to $2700, is the landlord going to be able to raise it $300 or more in 18 months even if the market has come back? That’d be a big raise.
The apartment market has to stay this horrible for a lot longer. But given that there are 2 vaccines, that’s unlikely.
Still, there’s a LOT of inventory. It’s going to take awhile to put pressure on rental prices.
By the way, I’ll have the October housing numbers when the IAR puts it out but they’ve said it’s delayed so it should be next week.
Stay tuned. Should be another great monthly report.
“ Cirrus is selling pretty well in Lakeshore East, from what I understand. It has 2/2s under $800,000 and small one bedrooms for $399,000. The cheaper units are moving because it’s the only building with them and buyers want “new.” That’s a price point no other new building has downtown. If it’s working there, why not elsewhere? Believe it or not, while sales are slowest in the downtown, they ARE actually still happening. Gasp.”
So you think Cirrus is a shitty building compared to the Clark?
Your costs of units is wrong. 1BR start at $480k. All 2 Br are over $800k, And there’s only 1 floor plan that’s under $900k. Since you can’t get the price correct, I’ll hold off putting any weight on what you “understand”
If you think there’s a bunch of demand for shitty sub 600sf condos, why not go out and build some?
Interesting that the higher cost units are lake views?
“Bob, agree with you there, but what does “protect against head fakes with options” mean? premium is expensive, besides the ask for normies to be buying and rolling puts? or are you saying timing SPY puts to perfectly match the lower beta exposure of short term junk bonds? not trying to ask a trick question, but how is this equal compensation for the mortgage spread?
I definitely agree with the liquidity argument though.”
Well if you look at my example, SJNK, it’s remarkably stable except during times of extreme uncertainty regarding another financial crisis as happened in March of this year & back early 2016 (due to Saudi led oil crisis which was an insane temporary policy they later reversed on).
But if you’re using it for my example SJNK went from 27 mid February down to 22 mid-March, a 19% decline. Assuming hypothetical example of 292.5k down for 39% of 750k your mortgage is no longer collateralized at 39% it’s now at 31%. The minimum at all times at ML at least is 30% so you would’ve dodged a bullet if you didn’t hedge here but just barely, very close to getting a margin call on your mortgage & in trouble if you couldn’t meet it.
I call it a head fake because it was a dip purely driven by order flow and irrational fear (Fed isn’t going to let the bond market freeze up) and you could’ve been financially ruined very short-term by bad luck alone in that situation & was back to normal, back to 25 by early April, back to 26 by late July and back to 26.50 lately (yes 26.50 isn’t 27 but this thing has a monthly payout so still ahead). This is part how the rich get richer is they use volatility to force smaller traders to liquidate margin positions at the worst possible time.
But you can hedge this with deep out of the money puts, don’t even have to be at ML can be at another broker (ie: Robinhood) where transaction costs are much cheaper. Boom if you ever get that margin call at ML due to another SJNK headfake you have your offset at RH and can transfer the funds over. You got what is essentially an interest free mortgage after deductions by playing the spread between an ie: SJNK and your much lower mortgage rate with protection from the hedge fund a-holes who make strategies out of trying to take advantage of the small guy.
Not SPY puts at all or even equities related. I clearly used a fixed income product as this strategy is using the rate differential between two different near-fixed payment products (bonds) and can be hedged as stated above.
If you’re using equities instead in your pledged mortgage account you are opening yourself up to substantially more risk & there are plenty of horror stories about that. Bear markets are pretty good for that with these mortgages which is why there’s a lot of caution out there in the press and perhaps they aren’t as widely used.
But the thing is no-one is forcing you to use equities so don’t be greedy with this strategy just count your blessings that you, in effect, can get what amounts to an interest free mortgage with very low risk (if hedged properly) using a stock market agnostic strategy like this.
you have to pay interest on the collateral loan though bobbo, for a small amount like that you’re looking at 4%+ LIBOR, not to mention the put premium you are talking about for insurance purposes…
which would drastically cut into your strategy, not to mention the amortization schedule with all the interest up front, and you’re not really coming out ahead for all the work you’re doing by putting your down payment into a junk bond ETF that yields a laughable 5%
would be a lot easier and a lot less risk to just do a 7 or 10 year arm instead to lower your rate and then refinance later
New conventional loan limit increased to $548,250 from $510,400 for 2021. Pretty significant increase.
“you have to pay interest on the collateral loan though bobbo, for a small amount like that you’re looking at 4%+ LIBOR, not to mention the put premium you are talking about for insurance purposes…”
Are mortgages via the pledged route at a LIBOR+ or instead regular rates?
Its a question I don’t know the answer to, but if LIBOR+ then yeah this strategy wouldn’t work. But if regular rates all the interest up-front is the point and you could periodically extract equity to maintain at 100% LTV. Given BofA owns ML if you can get BofA fixed mortgage rates this would work.
For transaction fees on the hedge you could use RH as I stated. It’s one of the few legitimate uses for the broker that I’ve found thus far (who cares if they sell their order flow to hedge funds if you’re using RH for this).
And yes you would have to hedge as on further reading today you need to put up additional collateral at 33% not 30% as I thought previously.
My math shows ~4% after tax yield on the downpayment via SJNK, with a 2% after tax debt service on the mortgage. And with this strategy you could periodically extract equity every few years and put it to better use. As equity is essentially illiquid money locked into the after tax rate on the mortgage (2%).
ARM might have been a better strategy in retrospect but hindsight is 20/20. This strategy is market neutral and interest rate neutral.
“Are mortgages via the pledged route at a LIBOR+ or instead regular rates?”
Survey question: How much time have you spent lately in negotiating language to address changes to (or the potential doing away with) LIBOR in your docs? The past couple of years, it’s been a hot button issue, but I’m getting the sense that it’s near resolution (for now)?
“Your costs of units is wrong. 1BR start at $480k. All 2 Br are over $800k,”
They raised prices from the original listing because of DEMAND.
Try and keep up JohnnyU. I know it’s hard to do from the suburbs.
“New conventional loan limit increased to $548,250 from $510,400 for 2021. Pretty significant increase.”
Prices are on the rise. It’s needed.
“They raised prices from the original listing because of DEMAND.”
Sure, thats the ticket
If they we’re able to raise prices, what does that have to do with a Shitty 600sf condo @ the Clark?
Thats right absolutely nothing
“Try and keep up JohnnyU. I know it’s hard to do from the suburbs.”
Its kinda difficult between you constantly moving the goalposts and spewing nonsense after you’ve downed a couple bottles of boxed Rose from your cat piss filled garden apartment (aka a normal weekday night)