July delivered some high numbers all around in new construction for Chicago. McGraw –Hill says new apartment construction was up 53% in July 2013. Coupled with rents rising steadily over the last few years, one could ask, “Is Chicago new apartment construction getting ahead of itself?” According to a recent report done by Appraisal Research Counselors; the next two to three years are expected to deliver over 8,000 new apartments in Chicago.
Vice president of Appraisal Research Counselors, Ron Devries, who also wrote the report, said that 5300 new units will be made available by end of 2014, and the additional 3,000 will come in 2015. His concern is that historically, the city has only absorbed an average of 1,348 units per year for the last three years.
In an interview with Crain’s, he said the absorption rate just isn’t there and that fundamentals have been forgotten.
“There are clearly going to be winners and losers. We thought that the market was going to be a little more disciplined, but there are still a large number of units that are getting financed.”
Since 2009, while condominium sales weren’t exactly “selling like hotcakes,” rents have soared to a 27% increase, especially in downtown premium buildings. Some developers don’t seem to be phased by the projected surplus.
Curt Bailey, president of Related Midwest gave a different perspective, saying that when both the rental and condo market, when considered together, have produced 3000-4000 new units per year consistently since 1990, meeting the projected demand.
Some might ask, how did new apartment construction in Chicago compare to single family homes? Click here to see chart, courtesy of Chicago Agent Magazine.
While new apartment construction went up by 53% in July, new single family homes increased by 40% in Chicago. Just from January to July of 2013, new apartment projects account for $4 billion and projected to have a total value of over $7 billion by the end of 2013.
So what happens if the market shifts again and rents either plateau or even begin to fall? Consider this, in the event of a shift in the market/rental demand, a new apartment building can always convert to condo if need be.