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Renter Demand Keeps Pace with Apartment Developers’ Building Bonanza

Chicago’s diverse economy and ample employment opportunities are driving growth metrowide, which bodes well for apartment owners and managers.

Encouraged by the positive economic outlook, developers are expected to deliver nearly 7,500 new units this year, the largest supply increase since 2000. That said, high levels of construction will not be at the expense of other performance metrics such as occupancy, rent and price growth.

Job growth is accelerant

In the first half of the year, Chicago-area employers added 34,500 workers to their payrolls. Hiring was led by the leisure and hospitality sector and the construction industry, which expanded 4.2 percent and 5.3 percent respectively over the 12-month period that ended in June.

Kyle Stengle, Marcus & Millichap

Kyle Stengle, Marcus & Millichap

Consistent employment expansion has also boosted household incomes, with the median household income reaching $65,300 at the end of the second quarter. With the median income above the nationwide average, demand for luxury rental units is rising tremendously.

These factors, in addition to the Millennials and Empty Nesters flocking to the area, will support rental affordability and demand even as rents continue to increase. This is a positive indicator of the overall health of Chicago’s economy.

Employers in metro Chicago remain on track to hire a total of 60,000 employees this year. Developers, encouraged by the positive growth outlook, have expanded the construction pipeline significantly, with an emphasis on luxury apartment complexes.

Developers flock to city

Construction efforts are heaviest in the city core, where a total of 4,800 units will come on line this year. In the suburbs, 2,660 rentals are scheduled for delivery in 2016.

The level of construction in both the city and the suburbs is well above the long-term trend, and construction is overwhelmingly targeted toward the upper end of the renter pool, where high rents warrant the cost of development.

In the city, the Streeterville/River North and The Loop submarkets are garnering the majority of builders’ attention. In the suburbs, construction activity tends to be concentrated in Central Cook County, which is expected to account for approximately 40 percent of apartment unit completions in the suburbs this year.

Despite the high level of construction, renter demand across the metro area is keeping pace, leaving vacancy levels nearly unaffected.

Occupancy, rent trends

Although the apartment vacancy rate in the city is expected to increase 20 basis points this year, this will be offset by a projected rise of 10 basis points in the suburban occupancy rate.

Given these trends, the overall occupancy rate in metro Chicago is expected to inch up 10 basis points to 96.4 percent by year’s end. Though occupancy increases may start to decelerate in the short term, it will not be to the detriment of rent growth.

The average effective rent in metro Chicago is anticipated to rise 5.4 percent this year, though there are notable differences between the city and the suburbs. In the city, the average effective rent reached a new high of $1,672 per month in the second quarter. By the end of this year, the average effective rent is projected to reach $1,700 per month before the growth rate begins to slow.

In the suburbs, the average effective rent rose to $1,143 per month in the second quarter and is expected to climb to $1,180 monthly by the end of 2016. With bountiful supply, high occupancy and rents still rising, investors are pouring capital into Chicagoland multifamily properties.

Healthy sales velocity

Transaction velocity in the city increased 45 percent over the 12-month period that ended June 30. Activity remains strongest in the Lakeview and South Shore areas. In the suburban markets, deal flow rose 14 percent during the same period, with activity focused on the North Lakefront and Far North Chicago submarkets.

Although prices for Class C properties in the city have decreased recently, prices for Class A and B assets in the city and across all classes in the suburbs have increased significantly.

Class A and B assets in the city posted average price increases of 16.6 percent and 10.7 percent respectively during the 12-month period that ended June 30. In the suburbs, the average price surged 14 percent during the same period.

As new properties are delivered in the urban core, it is likely that institutions will become more active as developers provide acquisition opportunities by selling newly completed complexes to fund new projects.

In the suburbs, investors will seek out properties along major transportation arteries that are pedestrian-friendly and provide easy access to amenities, particularly areas benefiting from lower taxes.

Bright outlook

Metro Chicago’s diverse economy and strong employment growth have driven developers to expand the pipeline with an emphasis on luxury rental projects to levels previously unseen since 2000.

Although construction levels are high, the vacancy rate metrowide continues to shrink, which supports continued increases overall in average rents and prices. For these reasons, the outlook for multifamily property operations is encouraging.

— By Kyle Stengle, first vice presidents, investments, Marcus & Millichap. This article first appeared in the October 2016 issue of Heartland Real Estate Business magazine.

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