Rents keep rising in the Chicago downtown apartment market. According to Appraisal Research Counselors, a Chicago-based consulting firm, the average net rent at top-tier, or Class A, downtown apartment buildings went up to an all-time high of $2.57 a square foot. This is an increase of 2.6 percent from the first quarter of 2012 and an increase of 5.8 percent from a year earlier, according to Ron DeVries. Just as impressive as the rise in rents is the current Class A occupancy rate which hit 96 percent; its highest level in six years.
The rise in rents and occupancy rates over the past two years have come as people have opted to rent in lieu of the burden of owning in a down condominium market. Having seen or heard of many condominium owners who have been walloped as property values fell precipitously, would-be buyers would rather wait than worry. While this is proving to be a giddy time for apartment and building owners, the current trend is not forecasted to last forever. Given the data being tracked by Appraisal Research Counselors, there is a concern amongst investors that the increased rents may not last.
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 huge increase in supply is good news for tenants, who will see competition among landlords for the first time in several years. The increase in competition should prevent them from raising rents as aggressively as they have, which have risen 24 percent since the end of 2009, when the Class A market bottomed out.
While real estate is a dynamic market, it is slow-moving on the supply side due to the lead times necessary to get a property from plans and permits through construction and occupancy. So, there are questions as to whether the new and proposed buildings will turn this current shortage of rental units into a glut. Given that the downtown absorption rate has averaged about 1,700 units over the past three years, builders and developers are generally optimistic that the new supply of rental units will not flood the market, but be met by rising demand.
No matter happens in the middle of 2013 and 2014, downtown landlords are thrilled with the current leasing strength and keep saying their prayers that it will hold up as the new supply of apartments arive.
Michael Hobbs, SRA PahRoo Appraisal & Consultancy
Twitter: @PahRoo
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