The Windy City's apartment market hasn't blown completely off investors' radar, but it could be awhile yet before Chicago posts any remarkable improvement in its market figures.

Economic expansion failed to materialize in 2004, which has hindered the Chicago market's recovery. The flight to homeownership remains a strong trend, and a deluge of affordable condos is being released into the market. While the for-sale market will continue to sap some demand for apartments in 2005, the expanding employment base and limited new supply will counter that effect with enough demand to boost property owners' numbers. Development continues on some significant projects as well.

Outside the city, Chicagoland submarket performances will run the gamut, with some areas continuing to suffer from a lack of demand. Overall, sales velocity is expected to slow in 2005, but considering that the fundamentals are improving overall, the market should not see a decline in values.

CABLE CAR CULTURE: Commuters who live in San Francisco will be increasingly relying on mass transit.
CABLE CAR CULTURE: Commuters who live in San Francisco will be increasingly relying on mass transit.

Although Chicago's economy lagged behind the nation in 2004, it outperformed many other Midwestern metro areas. After posting job growth of less than one percent last year, the 2005 outlook is encouraging: Economic indicators are getting stronger, and employment growth this year is forecast to reach 1.5 percent, or 61,500 jobs. While some sectors are expected to lose employment, other industries are expected to grow. Gains in the professional and business services and education and health care sectors will lead the economy, adding almost 40,000 positions.

The effects of a rebound in tourism and convention business will lead to healthy employment growth in the hospitality and leisure sector, in addition to pumping tourist dollars into retail businesses. Office employment is also rising and is expected to expand by 30,000 jobs, or 2.9 percent. Other encouraging factors include increases in net in-migration and household growth in 2005.

Chicago Goes Condo Condo activity covers the full spectrum from conversions of older office, industrial, and apartment buildings to new lake-view high-rise projects that feature multimillion-dollar units. While most of the activity is centered downtown, the suburbs and city neighborhoods have their fair share of condo construction and conversions as well. It's estimated that 12,500 condo units are under way in the Chicago metro area, with an additional 11,500 units in the planning phase of development.

A number of factors have contributed to this latest condo craze, including record-low mortgage rates, extremely high home prices, changing lifestyle preferences that favor urban locations, and changing demographics, which are fueling demand from younger first-time buyers and retiring baby boomers.

Not only do condos make financial sense to first-time home-buyers and empty-nesters, they also pencil out for developers and investors—particularly where conversions are involved. In general, the cost of acquiring, upgrading, and converting multifamily properties to for-sale condos is far less expensive and time-consuming than new development, which allows the owner to offer the product at a lower cost to home buyers.

Conversion specialists aggressively bid up prices because they can pay substantially more than what a complex is worth as a rental property. They are not concerned about cap rates, which can dip below 5 percent, because they are expecting to flip the individual units after a short period of rehab or redevelopment.

For long-time apartment owners selling into the Chicago market, all of this has meant a significant profit. Looking at the supply-demand equation, apartment properties that are converted to condos are removed from the existing rental housing stock, thus reducing supply.