Chicago — The Windy City’s multifamily market is on pace for another year of rent and occupancy growth.
The city’s strong local economy added 40,000 jobs in 2007 and is expected to add another 30,000 in 2008. That growth, coupled with a severe slowdown in the for-sale residential markets, will sustain demand, leading to a slight decline in vacancy. In 2007, metrowide vacancy rates fell below 5 percent for the first time in six years, ending the year at 4.7 percent, and that momentum is expected to continue in 2008. Vacancy rates are forecast to decline 20 basis points further in 2008, to 4.5 percent. Rents are expected to rise 3.2 percent this year, to reach $1,010 per month, according to Marcus & Millichap.
The bulk of new development is occurring in the emerging South Loop area, where cranes are swaying over several new residential towers. “In the last five years, the South Loop has really exploded,” said Bill Montana, a senior investment adviser in the Chicago office of Hendricks & Partners, a multifamily advisory investment firm. “It’s still affordable to build there, and the retail and services associated with residential living have all come in within that time.”
South Loop coming of age
AvalonBay, known more for its developments on the coasts, picked the South Loop to build its first project in the Chicago market. It bought the 3.5- acre property, on the corner of Clark and Polk streets, for $21 million from developer Lennar Corp., which had planned to build condo towers on the property.
The development, dubbed Avalon on South Clark, will feature two 42-story towers of 500 units each, with a twoacre park located between the towers. AvalonBay hopes to start construction on the first phase later this year and expects to complete construction in 2013.
The South Loop, known more for its unused warehouses and parking lots, has filled with residential services in the last decade. A new retail center is being developed next to the AvalonBay site. A Target store was completed two years ago one block south, and another major retail complex is being constructed on Roosevelt Road, across from the Metro rail lines that border the property.
“The South Loop is really coming of age,” said Jon Cox, a senior vice president of development at AvalonBay. “The retail is now there, the services are there, and there’s been a lot of new construction over the past 10 years.” AvalonBay has aggressive plans to develop in other corners of the metro area. The company is looking at sites in the close-in suburbs of Oak Park and Skokie, and is evaluating a West Loop site under its control. “The bull’s-eye is downtown and the close-in suburbs,” said Cox. “The farther-out suburbs are very difficult to develop in because of the high land prices.”
AvalonBay is hardly the only developer enthused about the South Loop. Equity Residential and Lincoln Property Co. are working on City Lofts, a $71 million, 278-unit apartment tower at 1401 S. State St., due to come online in August.
AMLI Residential is building a 24-story, 440-unit tower at 900 South Clark. The first units are slated to come online in June for the 2.2-acre site. Rents will range from $1,046 for studios to $2,832 for three-bedroom units. All of the units boast 9-foot ceilings, and tenants can choose from loft-style and traditional apartments.
Chicago developer Terrapin Group is working on a 298-unit condo building at 720 S. Clark St. The 29-story tower, dubbed Burnham Pointe, is slated to open this summer and may convert to rentals upon completion. “At this point, we’re considering all of our options,” Michael Ezgur, a principal at Terrapin, told the Chicago Journal in late April.
An increasing shadow market of condos converting to rentals, combined with a large supply of new units delivered this year, is expected to mute the market’s rent growth in 2008.
From 2001 to 2006, condo converters drove the local multifamily market, but sales of new-construction condominiums and townhomes in the downtown area fell 9 percent last year, the first decline since 2003. At the end of 2007, there were 2,887 unsold condos and townhomes either completed or under construction downtown, up 44 percent from December 2006, according to Appraisal Research Counselors, a Chicago-based real estate advisory firm.
“There’s a huge phantom market of rentals, so you’re starting to see a little bit of weakness,” Montana said. “Concessions are squeaking back into the market downtown because you have anywhere between 700 and 1,200 condominium units for rent.” Concessions are averaging about a month free on a year lease, Montana said.
Developers are expected to complete 2,407 units in 2008, up from just 532 units last year. Still, that total only equals about 0.5 percent of the city’s overall rental stock.
“Fortunately, the numbers [of new units] are not great and the new development is occurring at a time of low vacancy,” said Sam Chandan, chief economist of market research firm Reis, Inc., in a research report. “The increases in construction are not likely to produce volumes great enough by themselves to threaten the good health of the market.”