Market Conditions: No End in Sight to Chicago’s Luxury Housing Boom
Remember all those apartments they’ve been building downtown?
We’ve chattered several times about whether or not they could be absorbed, especially at the record high rents most of the buildings were commanding.
Well, apparently, we were worried for no reason as much of the new inventory that came on the market last year, appears to be leasing.
From the Chicago Tribune:
While only about 3,000 apartment units are expected to be completed this year, developers next year could challenge the record number of downtown apartments — 4,350 units — built in 2017, Integra Realty Resources executives said Tuesday during the firm’s annual apartment and condominium forecast luncheon.
The firm projects that about 4,200 units will be completed in 2019.
The rate of downtown apartment construction is being closely watched amid concerns of an oversupply. Yet even amid the frenzied pace of construction, 2017 also brought a record for absorption: 3,385 units, a 31 percent increase from 2016. Absorption measures the change in the number of leased apartments compared with the previous year.
But what about condo construction?
While that has picked up since the bust, it’s still just a smattering of luxury buildings.
It doesn’t look like developers will change that tune in 2018 or 2019 and build much of anything more “affordable” (i.e. under $1 million).
After condominium development ground to a halt during the last recession, some of the first big condo projects in Chicago are under construction or marketing units for sale. That comes after just 1,800 condos were marketed for sale in the past seven years, said Gail Lissner, an Integra managing director.
One of the big new projects is 1000M, a 74-story tower designed by Helmut Jahn at 1000 S. Michigan Ave. Developers began marketing 323 units for sale in the fourth quarter of 2017.
“We think the market was ripe,” said Jerry Karlik, a principal at New York-based JK Equities, one of the tower’s developers.
“With rental prices hitting $4 per square foot in luxury buildings, we think it’s the right market for a premier condo building,” Karlik said. “It’s an underserved area, and there hasn’t been much built since the last (real estate) cycle.”
Is Chicago’s economy so hot that there could be both a boom in apartments and a boom in condos over the next several years?
Another 7,000 apartments expected in downtown Chicago over the next 2 years [Chicago Tribune, by Ryan Ori, February 20, 2018]
The cost of construction is too high in Chicago to build anything but luxury apartments and condos. Additionally, Chicago has arcane rules for what can be used to wire hours and install pipes in your house. While the rest of the country allows newer, better, cheaper technology for installlation, Chicago politicians are getting too much money from the unions to lower the cost of building a new home.
Record apartment absorption two years in a row and strong leasing in winter 2018. Looks to be another strong year unless the bubble bursts.
New will always sell or lease. What happens to older buildings?
Jenny, apartment occupancy in Chicago is around 95% overall.
“New will always sell or lease.”
Depends on the pricing (and location, etc.). I was just getting used to the idea that new construction high rise condos were in the $500/sq. foot range; most of the newer boutique condos in River north, west loop are $600, $700 or more (particularly for units above the lowest floors) and even $1000/ square foot for a few of the buildings.
Not sure there’s enough demand at those price levels?
I also read somewhere that downtown chicago added 20,000 new jobs last year? This is before MCD and other HQ’s being built right now
Interesting. I occasionally walk by the “Spoke” development on Chicago Avenue (near Chicago blue line) and they’ve been leasing units since fall but at night there are almost no lights on. They’ve also been unable to lure a retail (built out as grocery store) anchor tenant to the development.
Anecdotal, but interesting nonetheless.
“The cost of construction is too high in Chicago to build anything but luxury apartments and condos”
For a non-downtown location for a small builder, it’s not about the cost of the construction itself, it’s the cost of the land, and then delay and carrying costs in connection with permitting etc. Labor and materials are *slightly* more expensive than the cheapest urban markets, but that’s not the hold up.
But having land costs of $200k+/unit drives building bigger, more expensive units. If you can get a buildable lot for $25k, it makes all the difference.
“They’ve also been unable to lure a retail (built out as grocery store) anchor tenant to the development.”
Do they even want to rent it or do they have Burke on speed dial to give them a Tax adjustment for the lack of occupancy (like Trump Towers never occupied commercial space)
I think the new construction apartments are cannibalizing good tenants older high rises where people are renting out their old condos. Anecdotal I know, but I do hear the horror stories from people who cant find tenants, been dropping rents or fighting delinquents in their post war north side older units. I also see a lot of “for rent” signs, the kind you get at Ace Hardware in windows lately, not sure if thats indicative of the mom and pop landlords losing prime tenants.
marko, there is no proof of that in commercial real estate reports. Rents are rising in the city overall and occupancies are holding around 95%.