Source: Hendricks & Partners

IN THE LONG RUN, THE Chicago area apartment market is well-poised for sunny skies. But local owners will have to fly through a gathering storm to see the sunshine again.

Concessions have once again taken hold in the city's apartment market, as owners continue to see lower occupancy rates due to mounting job losses. But the muted pace of new construction—and expected job growth beginning in 2010—should position the market for another great run in the long-term.

The overall vacancy rate hovered at 5.4 percent, with some submarkets topping 8 percent in the fourth quarter of 2008. But at the beginning of the second quarter of 2009, that number is likely closer to a 7 percent overall vacancy rate, with some of those same submarkets at around 10 percent.

When the single-family foreclosure crisis began, many multifamily players expected a possible boost to apartment occupancies. But renters were just as prone to job losses as their homeowner counterparts.

As a result, concessions—which had all but been eliminated in the early part of 2008—crept back into the marketplace in the fourth quarter of that year. This trend is expected to continue throughout 2009 as job losses will likely top 50,000 locally, meaning Chicago will hit the same unemployment levels it did during the recession of 2001, according to

The uptick in downtown vacancy rates continues to be influenced in large part by the increase in apartment and condo developments coming online. By the close of 2009, an additional 6,000 condo and apartment units are set to be delivered. The shadow market of condo developments reverting to rentals will continue to increase, putting pressure on Chicago's downtown apartments.

In sharp contrast, suburban apartment development continues to be anemic, with fewer than 500 units coming online in the collar counties this year. The lack of new stock has helped buoy operations of existing properties in the face of growing job losses.

Some of the new communities to recently debut in the suburbs include M&R Development's 112-unit Regency Place Apartments in Oak Brook Terrace, as well as its 294-unit Residences at the Grove in Downers Grove. Whiteco Residential's 200-unit Oak Park Place also opened earlier this year. Additional developments are in the planning stages for cities including Oak Park, Evanston, Lisle, and Hoffman Estates.

Transaction Velocity

Historically, Chicago has been a lowvolume sales market, typically averaging only 15 to 20 sales per year of 100-plus-unit apartment communities. That's a fairly small number given the size of the overall market.

By the mid-2000s, things began to change and there was an increase in sales. There were about 38 sales of 100-plus-unit communities in 2007—a record-setting year in terms of dollar volume, with some very large deals trading hands. In sharp contrast, 2008 saw approximately only 12 sales of multifamily communities of 150 units or greater, with a majority of those transactions completed in the first half of the year.

There were also a number of larger properties that came to market during 2008—only to not sell or be pulled off the market altogether. Investors needed time to digest all that was happening on the credit side of the equation; lenders also needed to determine their game plans. Meanwhile, institutional investors all but closed shop for the last half of '08.

The city witnessed a few closings in the early part of 2009, but these were spillover transactions that had been under contract since last year. There are five larger suburban deals on the market today with Denver-based REIT Apartment Investment and Management Co. (AIMCO) owning three of them. These communities range in class and age, and it will be interesting to see what investors are willing to pay for these assets, which include AMLI at Chevy Chase in Buffalo Grove and Railway Plaza in Naperville.

Holding Steady

Chicago hasn't seen the levels of foreclosure activity that other parts of the country are now experiencing. But the city has not been completely immune.

Most of the multifamily foreclosure activity to date has been limited to smaller apartment buildings—and mostly in the city limits. There are, however, several larger suburban communities that are working their way through the foreclosure process and may eventually land back on the market as well.

The credit markets continue to be tight, but through various agencies— Fannie Mae, Freddie Mac, and the Federal Housing Administration—most apartment owners and investors still have options, albeit with tighter underwriting standards. There are even signs that some life insurance companies are considering actively lending in the city again.

This may be a tough year operationally for most Chicago-area owners. But as job growth begins to pick up again in 2010 and into 2011—coupled with the current slowdown of new apartment construction—the market is well-poised for long-term growth.