Recently employed residents are forming new rental households in metro Chicago, generating positive net absorption, a decline in vacancy and a rise in apartment rents. Additional payroll growth will stimulate new demand and reduce marketwide vacancy to its lowest annual level in 5 years by year’s end to about 4 percent in the city and suburbs.
Over the longer term, the market’s stature as a primary destination for college graduates should sustain a vacancy rate of approximately 4 percent, though the delivery of new rentals may more significantly offset demand growth in the quarters ahead. The potential influx of college graduates, many of whom will occupy rentals and remain there for an extended period as they pay off student loans, has attracted developers.
While the pipeline of planned projects in the suburbs is also expanding, the greatest potential effect of supply growth will register in the city, where completions will rise this year and additional projects wait to proceed.
Steady hiring in the first quarter has sparked demand. Across the metro area, 8,000 jobs were added during the period, raising the number of positions created in the past 6 months to 14,400. The private sector continues to set the pace, with an additional 8,100 workers hired in the first 3 months of 2012 and 16,000 positions added during the past 6 months.
A total of 350 jobs were created at a new Walmart store on the South Side, and the retailer plans to open additional stores in the metro area. Further additions to trade, transportation and utilities employment will occur this year. Coyote Logistics will add 400 local workers in the suburbs.
How much is getting built?
In the city, only 139 units were completed in the 12-month period ending in the first quarter, down from nearly 1,700 rentals completed during the prior 12 months. Recent completions include 48 units at the Douglas Green property in the City West submarket in the fourth quarter of 2011. An additional 700 units under construction are slated to come on line this year.
Developers are working on approximately 4,300 rentals units in the city, with roughly 2,400 units scheduled for delivery in 2013, plus an additional 1,200 apartment units whose opening dates haven’t been announced.
In the suburbs, 161 units were delivered between the first quarter of 2011 and the first quarter of 2012. No projects were completed in the first quarter, but the 101-unit Rockwell Gardens in the Glenview/Evanston submarket was placed into service late last year.
Few projects are under way in the suburbs, but the planning pipeline totals about 5,000 units, an increase from 4,200 units in the final quarter of 2011.
Only the Kane County submarket, where 1,000 proposed rentals represent 10 percent of existing stock, faces the prospect of significant supply growth. No start dates have been set, however. Also, the potential addition of 700 units would expand stock in McHenry County by 13 percent.
Rents on the Rise
Minimal construction and a steady flow of new residents into rentals lowered the apartment vacancy rate in the city by 20 basis points to 4.7 percent in the first quarter. Since peaking in early 2010, resurgent demand has shaved 220 basis points off the vacancy rate. Average asking rents advanced 0.6 percent in the first quarter to $1,198 per month and have gained 1.4 percent in the past year.
Effective rents are 1.9 percent higher than a year ago after a 0.7 percent increase to $1,114 per month in the first three months of 2012.Vacancy is projected to fall 40 basis points this year to 4.4 percent. Following a 1.4 percent increase in 2011, asking rents are forecast to rise 4.3 percent in 2012, joined by a 5 percent jump in effective rents.
Vacancy in the suburbs ticked down 10 basis points in the first quarter to 4.3 percent as developers largely remained idle and tenant demand was respectable. Meanwhile, asking rents in the suburbs rose 0.8 percent in the first quarter to $997 per month, while effective rents advanced 0.9 percent to $931 per month. Asking and effective rents increased 2.4 and 2.6 percent, respectively, in the past year.
Minimal construction and respectable demand growth are expected to lower the suburban vacancy rate 50 basis points this year to 3.9 percent. Asking rents are forecast to rise 3.8 percent and effective rents are forecast to increase 4.8 percent this year.
Buying Activity Heats Up
A significant increase in institutional investor activity has occurred in the city during the past several months, compressing cap rates for large, best-in-class assets to the mid-5 percent range. Many owners of vintage Class B apartment properties in the city also are generating considerable interest from small, private investors when these assets are listed for sale.
Class B properties in Lincoln Park, the strongest of the city submarkets, typically trade at cap rates varying from the high-5 percent to low-6 percent range. Cap rates start to gradually rise north of Lincoln Park, depending on the age of the asset and proximity to public transportation.
Outside the city, Class B properties in ring suburbsor adjacent to employment nodes generally trade from 7 percent to 8 percent. Overall, access to acquisition financing has broadened and will continue to sustain a healthy flow of deals this year.
— Gregory LaBerge is regional manager of the Chicago office of Marcus & Millichap Real Estate Investment Services.