Apartment Development Activity Ramps Up Across Suburban Chicago

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More than 9.5 million people live in the Chicago area, making it the third most populous metropolitan statistical area (MSA) in the country. Like many other markets in the Midwest and Northeast, the ongoing population shift from north to south in the United States continues to pose a challenge. Consequently, population growth during the next five years in Chicago is projected to lag behind the national average.

The good news is that Chicago employers are expected to generate the largest job growth locally in 15 years in 2014. Indeed, Marcus & Millichap forecasts a net gain of 79,900 jobs this year, a 1.8 percent annual increase. If realized, this would top 2013’s 1.7 percent expansion. The increased job creation is expected to attract new residents to the region, boosting population.

During the past decade, the western suburbs have recorded the largest population gains, especially in Aurora, Naperville and Joliet. Renewed urbanism is playing a major role in growth within the city of Chicago, as young professionals and empty nesters return to the urban core. An influx of young workers and an exodus of retirees have lowered the median age in the metro to 36.1 years, which is below the national average of 37.4 years.

Diverse Economy

The economy of metro Chicago is one of the largest in the nation, and is growing 1.8 percent annually. Chicago’s centralized location, educated workforce and relatively affordable cost of living, as compared to the coasts, attract many businesses. Today, 29 Fortune 500 companies are headquartered in the metro area in industries ranging from finance to manufacturing.

The Windy City’s financial services segment is buoyed by a large commercial banking industry that contains more than 300 banks, including the headquarters of several large financial institutions. The number of corporate headquarters in Chicago is second only to New York City, and Chicago’s workforce of more than 4.3 million individuals is employed in a wide variety of industries.

Chicago’s designation as one of Google’s seven national tech hubs will attract new startups to the city, amplifying its already strong employment prospects. This momentum in rising employment, particularly among tech firms, will boost Class A apartment occupancy.

Development Trends

In the suburbs of Chicago, approximately 860 apartments came on line during the third quarter of 2013, which represents a 0.2 percent increase in inventory. That is the largest quarterly increase in inventory in the suburbs during the past 10 years. Some 1,490 rental units have been placed into service during the past 12 months.

Avant at the Arboretum in Lisle was the largest complex delivered in the third quarter of 2013, adding 310 units in the Southeast DuPage County submarket. It was also the first project completed in the submarket in nearly five years. Construction will remain strong as there are more than 2,100 apartments underway, with 837 units due for completion in 2014.

There are an additional 5,000 units in the planning pipeline. Builders completed 2,376 apartments in the Chicago suburbs in 2013, including 2,200 market-rate units. To put those figures into context, a total of 1,300 rentals were brought into service in 2012.

In 2013, vacancy dipped 20 basis points in the suburbs, with the tightest vacancy in North Cook County at 3.2 percent. Net absorption of almost 1,700 units cut third-quarter suburban vacancy 20 basis points to 4.1 percent.

In Chicago’s suburbs, average rents ticked up 0.4 percent to $1,051 per month during the third quarter, which raised the 12-month increase to 2.4 percent. The highest rents posted were $1,220 per month and located in the Naperville submarket.

Vacancy at the end of 2013 was estimated to be 3.7 percent, down 60 basis points year over year.

Strong Investor Appetite

Transaction volume among suburban Chicago apartment properties rose 19 percent during the past 12 months ending in August 2013, following a 36 percent climb one year earlier as improving operations attracted investors. Buyers were most active in the West Cook County submarket.

During the past 12 months, the median price of $64,600 per unit remained virtually unchanged from the preceding 12-month period. Top-tier assets with 200 or more units traded at a median price of $129,000 per unit. In 2013, a price disconnect between buyers and sellers impeded transaction velocity at the lower end of the quality scale.

— Steve Rachman, Regional Manager, Marcus & Millichap. This article originally appeared in the February 2014 issue of Heartland Real Estate Business magazine.

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