Multifamily Midwest

Multifamily tenant demand to exceed completions in 2013

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Investors in Chicago’s multifamily market expect tenant demand to increase in 2013 as the city adds new jobs and residents this year.

Investors in Chicago’s multifamily market expect tenant demand to increase in 2013 as the city adds new jobs and residents this year.

Nationally, U.S. vacancy should decline 10 basis points to 4.3 percent by the end of 2013, resulting in 4.7 percent effective rent growth, according to Marcus & Millichap’s 2013 National Apartment report. Forecast completions will trend higher, totaling nearly 150,000 units, roughly matching net absorption.

Locally, investors are anticipating a strong market, similar to 2012.

“You’re going to start to get deliveries of some new buildings toward the latter part of the year, but I don’t think the market should change,” said Anthony Rossi Sr., president of RMK Management Corp. “All the basic signs are still positive. The occupancy rates still remain very high. Rental rates are good. There are not a lot of concessions in the marketplace, so there’s no reason to believe anything is going to be any different.”

Lee Kiser, principal of the Kiser Group, said he thinks 2013 is going be a very strong investment market for apartments.

“There are a number of factors that have made apartments the golden child of investment real estate, none of which I see significantly changing during 2013,” he said. “For instance, there’s a generation of shell-shocked first-time homebuyers who, given the economic collapse and what happened to them personally, simply prefer to rent. That demand is outpacing supply, even in heavy construction pipeline areas like downtown Chicago.”

Marcus & Millichap’s report predicts tenant demand will exceed completions this year, further tightening vacancy and cementing Chicago’s place among the Midwest’s leading apartment markets. Roughly 80 percent of new market-rate rentals slated to come online in 2013 are in the city of Chicago as developers add stock for an expected influx of new residents.

Steven Fifield, chairman and CEO of Fifield Companies, said Chicago currently has about 2,800 units under construction downtown. He estimated that the city has absorbed 1,800 units per year for about the last five years, adding that he thinks the number will rise to 2,000 units per year over the next couple of years.

“Most of us who are delivering product are basically assuming it’s going to take us about a year-and-a-half to lease our buildings up,” he said. “Maybe 70 to 75 percent of these buildings opening this year will be leased up this year and the balance will be leased up next year. So we basically see the market as being in equilibrium. It’s not a short supply but it’s not an oversupply.”

City vacancy will rise periodically during 2013 as new properties come online, but the rate will end the year below 4 percent, according to Marcus & Millichap’s report. In 2013, vacancy will slip 20 basis points to 3.6 percent. During 2012, a 70-basis point decline was recorded.

Barbara Gaffen, co-CEO of Prime Property Investors, said she is a bit apprehensive about the number of new units planned for the city in the coming years.

“I do think there’s room for growth,” she said. “However, I’m a little hesitant about the thousands of units that are coming online. You’re seeing six potential deals just in the River North area alone. I don’t know that all of those are going to happen. I think it probably would be better if we didn’t add that many units.”

Rossi, however, said he believes Chicago can absorb 2,000 to 3,000 units per year without any major issues given present employment and population growth.

“If you look at the inventory of rental housing today, it really isn’t much different in total numbers from what you had 20 years ago,” he said. “We’ll see what 20114 holds, but right now with the job growth and the deliveries that are scheduled for 2013, I think we’ll be fine.”

Kiser said he thinks the market can support the current number of new units in the city.

“If you’re looking at the studies put out on the market, it would suggest that even the downtown market can support the current pipeline,” he said. “If that weren’t the case, nobody would be getting the construction financing to build these projects.”

Additionally, Marcus & Millichap’s report anticipates that asking rents will rise 4.0 percent to $1,141 per month in 2013. Effective rents will also advance 4.0 percent to $1,072 per month.

Gaffen said she does not believe rents will rise as drastically as they did the last three years.

“When the economy was bad, rents were really low,” she said. “We’re kind of back to where the numbers were prior to 2007 and 2008. Now that they’re back in line with where they were previously, I think rent growth will be more typical.”

Employment growth

After adding 31,000 jobs in 2012, Chicago employers will follow up with an additional 44,000 posts in 2013 to expand total employment 1 percent, according to Marcus & Millichap. Hundreds of jobs will also be relocated to the city in Motorola Mobility’s move from Libertyville to the Merchandise Mart. In the latter half of 2012, local officials secured a commitment from consultancy KPMG to create 500 jobs in the next five years, and several tech firms pledged to add 2,000 jobs by 2015.

Fifield said many of the employees entering the Chicago market will be apartment renters living on the near north side.

“A lot of companies are moving downtown because the young college grads that they’ve recruited over the last several years all want to live downtown. They want to live where all the action is,” he said.

Randy Fifield, vice chairman and principal of Fifield Companies, said many of these new renters will want the convenience of a downtown apartment.

“You can ride your bike to work. You can walk to work. You can walk to all of the fun things without needing to have a car,” she said. “The buildings that are being built today also are filled with gyms, theaters, business resource centers and a lot of amenity programs that you don’t get if you rent a failed condo.”

Steven Fifield said apartments also are becoming workplaces for some renters.

“We just bought a building in the West Loop where we discovered that 20 percent of our tenants work out of their apartments,” he said.

Renting an apartment also is an attractive alternative to owning a home for some.

“There are people who were used to buying that are now trying out renting because it’s safer,” Randy Fifield said. “They can try it for 12 months without a mortgage or an assessment and without getting stuck with the big price tag of buying something.”

Suburban submarkets

Aside from the strong performance of downtown, suburban submarkets, meanwhile, continue to generate positive results and vacancy will closely track downtown trends in 2013, according to Marcus & Millichap. Low vacancy persists in outlying Kane, Lake and McHenry counties, but class A rents have risen to more than $1,100 per month and may encourage tenants to weigh homeownership.

Development remains more subdued in the suburbs, where investor interest in class A properties is growing. Quality, institutional-caliber assets in primary first-ring communities on the northern and western edge of the city often command cap rates in the high-6 percent range, but investors remain discriminating in valuing other suburban properties.

Marcus & Millichap’s report notes that location, physical condition and quality of tenancy remain primary considerations that can greatly affect prices and often drive up cap rates 100 basis points or more from the best-in-class benchmark.

In the city, meanwhile, many of the top properties have changed hands over the past two years, shifting investor focus to older properties with desirable attributes, including access to public transportation and retail. Aided by expanded access to capital, local investors remain active in deals for smaller properties in high-tenant-demand neighborhoods on the north side.