Chicago's Hot Apartment Market Has Owners Eyeing Exit Strategies

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Modest economic growth in the Chicago metro area will support further improvements in apartment vacancy and rents this year. Staffing levels grew in the first half of 2013, though the pace of hiring eased from prior periods. Vacancy will remain lower than normal in the near term, though temporary imbalances between supply and demand will occur over the next two years.

This trend is especially likely in the city, where the number of new luxury units aimed at upwardly mobile young households and affluent older households is increasing. New sources of demand, however, will also emerge, including echo boomer and new immigrant households.
Properties listed for sale typically elicit multiple offers, placing upward pressure on prices and compressing cap rates. Northside neighborhoods remain a targeted area, and the best assets in those submarkets can trade at cap rates from 5 to 6 percent. Investors continue to look for underperforming assets and are giving greater consideration to eventual exit strategies.
Interest in Class C and Class D assets in blue-collar neighborhoods on the west side and south side is also gaining traction. Recent transactions have established $30,000 per unit to $35,000 per unit as the strike point to execute deals, and financing has become increasingly competitive.
The uptick in the 10-year U.S. Treasury yield during the second quarter and Fed actions regarding future stimulus will impact the market in the months ahead. Higher interest rates could raise the floor beneath cap rates and initiate a migration down the quality scale to Class C assets, and may also limit refinancing activity.
New Supply Sprouts Up
In-city apartment completions will greatly increase over the remainder of the year. More than 2,900 apartments are under construction and scheduled for delivery in 2013.
The 518-unit Coast at Lakeshore East will come on line in the Loop late this year, but nearly 1,500 apartments await completion in the Streeterville/River North submarket in the fourth quarter.
The completions will expand the submarket’s stock 5 percent. Net absorption, however will stay ahead of completions throughout the year, supporting a 70-basis point decrease in vacancy to 4 percent. Last year the Streeterville/River North submarket posted a vacancy rate of 4.2 percent.
Meanwhile, the suburban vacancy rate is expected to fall 60 basis points to 3.7 percent.
In the city, average effective rents were unchanged in the first half of this year at $1,353 per month. The
delivery of additional luxury rentals in the second half of the year will support significant rent growth. Effective rents are on course to rise 6.5 percent, besting last year’s 6.4 percent gain.
Effective rents in the suburbs reached $1,047 per month at mid-year and are up 1.8 percent year over year. Top-performing submarkets include North Dupage County, where effective rents surged 7.4 percent year over year. By the end of the year, the suburban vacancy rate will decrease 60 basis points to 3.7 percent, accompanied by a 3 percent jump in effective rents.
Property Sales Soar
Transaction velocity has jumped 30 percent in the city during the past 12 months. An increase in deals of less than $20 million accounted for the gain, and fewer institutional-grade and luxury properties changed hands during the period.
Regardless of the increase in interest rates and the Fed’s intention to wean economic stimulus, unfulfilled investor demand and limited supply will trigger additional listings and an elevated level of transactions in the second half.
The number of suburban properties sold climbed 15 percent during the past year, but the dollar volume increased 30 percent. Large investors were more active than in the prior year, generating an increase in sales in the $10 million and above category.
Suburban properties sold in the past 12 months carried a median price of $64,200 per unit, a nominal increase from the median price registered in the preceding 12 months. Large, top-tier assets commanded prices greater than $90,000 per unit.
— Kyle Stengle, vice president of investments, director, Marcus & Millichap National MultiHousing Group

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