The U.S. apartment sector staged a strong recovery in 2010 well ahead of expectations, despite modest job creation and stubbornly high unemployment. Net absorption surged, with occupied stock rising by nearly 200,000 units, double the number of apartments constructed and the highest level on record since 2000. Several factors contributed to high levels of absorption, including the release of pent-up renter demand as households de-bundled in the wake of the recession. In addition, apartments benefited from private-sector job growth in the critical 20- to 34-year-old cohort, expiration of the homebuyer tax credit, displaced foreclosed homeowners entering the renter pool, immigration and lower unit turnover. Renting also became a lifestyle and economic choice for many households as the effects of the housing collapse and recession persisted. Continued recovery in 2011 depends more heavily on improvements in the job market, which should gain momentum as the year progresses.
Building on that momentum, operating conditions in the suburban Chicago apartment market will strengthen considerably this year, building on improvements in vacancy and rents recorded in 2010. Apartment construction will sink to one of the lowest levels in the past decade, minimizing competition for tenants at a time when renewed job growth will accelerate the formation of rental households. A 2 percent increase in financial services and professional and business services employment will spur demand for apartments throughout the Chicago area, especially in higher-priced inner-ring suburbs, such as Evanston and Oak Park, and in-city submarkets like the Gold Coast. As vacancy falls closer to the 5 percent threshold in 2011, rent growth and a more rapid burn-off of concessions will commence in the second half.
The performance of properties in the inner-ring suburbs also will strengthen this year, as apartments in these areas draw both residents from outlying sections of the metro who desire housing closer to workplaces and those renters shut out of tighter in-city submarkets. Driven by low interest rates and the expanded availability of acquisition financing, the investment market will gain momentum in 2011. Buyers will bid aggressively on high-quality properties in the city and first-ring suburbs, encouraging an increasing number of owners to list assets. Cap rates fell across the market in 2010 but will likely remain near their current ranges through this year. High-quality assets in city locations often command first-year returns of less than 6 percent, while noncore city assets and properties in the suburbs primarily trade from 6.5 percent to 8.0 percent based upon current operations. Distressed listings received considerable attention in 2010, but deals involving these assets will diminish as the year progresses and owners facing difficulties begin to restore property operations.
Employment Forecast: Expansion of the trade and professional and business services sectors will contribute significantly to the creation of 52,500 jobs this year, a 1.3 percent increase in total employment. Approximately 20,000 positions were eliminated in 2010.
Construction Forecast: Only 700 new rentals will come online in 2011, down considerably from the completion of 2,420 units last year.
Vacancy Forecast: The metrowide vacancy rate will decrease 60 basis points this year to 5.5 percent on resurgent demand and minimal construction; vacancy also fell 60 basis points in 2010.
Rent Forecast: Asking rents will rise 2.3 percent to $1,070 per month in 2011, following a 1.3 percent increase last year. Concessions will decline to 6.1 percent of asking rents as effective rents climb 3.2 percent to $1,005 per month; in 2010, effective rents advanced 2.4 percent.
Investment Forecast: Investors seeking distressed assets will continue to find opportunities on the southern and western sides of the city. Prospective buyers will require a long-term outlook for rehabilitating properties, restoring stable operations and implementing rent increases.
— Steven Weinstock is the regional manager of the Oak Brook, Illinois office for Marcus & Millichap Real Estate Investment Services.