CRE Midwest

Big city job numbers will shoulder apartment demand in Chicago

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Chicago’s designation as one of Google’s seven national tech hubs will attract new start-ups to the city, amplifying its already strong employment prospects, which is good news for Chicago’s multifamily market, according to an apartment research market report by Marcus & Millichap Real Estate Investment Services.

Chicago’s designation as one of Google’s seven national tech hubs will attract new start-ups to the city, amplifying its already strong employment prospects, which is good news for Chicago’s multifamily market, according to an apartment research market report by Marcus & Millichap Real Estate Investment Services.

Google is also expanding its workforce in the River North area, and will open an office in the West Loop during 2016. This rising employment momentum, particularly with tech firms will boost Class A apartment occupancy, according to Marcus & Millichap.

Steven Fifield, chairman and CEO of Fifield Companies, said many of the newer Class A luxury apartment buildings are attracting such white collar workers and college graduates with discerning tastes.

“We’re renting to a well-educated, fairly highly compensated renter and they have very high expectations,” he said. “It’s not enough just to put washers and dryers in every unit and do granite countertops in the kitchens. Now we’ve moved on and put granite or quartz countertops in the bathrooms.

“We’re kind of serving a different niche, maybe a slightly higher income niche, people who want the convenience of being able to walk to River North for the clubs or to walk to work,” he added.

Still, with a wave of luxury units coming online downtown, where rents can top $3,000 per month, risks will remain, according to Marcus & Millichap.

Lee Kiser, principal of Kiser Group, said he believes there is simply too much supply today in the trendiest neighborhoods near and in downtown Chicago. Kiser said there are 5,000 units in the construction pipeline that are supposed to be delivered this year in the Loop and the core urban market of Chicago.

“All of the units coming online, as well as the buildings that have come online during the past three to four years, are all in that luxury rental market and I think that there is a cap on the tenant supply for that market,” he said.

According to Marcus & Millichap, the pace of apartment construction will ease in 2014 as 4,200 rentals are completed. This is down from more than 6,100 units last year, but well above the five-year annual average.

Fifield said absorption in Chicago has been averaging about 1,500 units per year for the last five years, a figure that he expects will increase to 2,000 units per year.

“We expect those new projects to readily get absorbed in spite of what appears to be a good supply of new buildings,” he said. “I believe that absorption is picking up because there is continuing to be a confluence of people wanting to live downtown and there are more jobs coming downtown.”

Fifield also said developers have year-and-a-half to two-year budgets for leasing.

“We don’t expect to lease these things up overnight,” he said.

In its report, Marcus & Millichap predicts strong job growth will generate rental demand, pushing vacancy down 30 basis points this year to 3.8 percent. In 2013, the vacancy fell 60 basis points. Also, Chicago employers will generate the largest job growth in 15 years as 79,900 jobs are created in 2014, a 1.8 percent gain, according to Marcus & Millichap. This will top last year’s 1.7 percent expansion.

Kiser argues, however, that in downtown, there will be a softening of rents, especially at the luxury end of the market, because there is so much new supply coming in. But in the neighborhoods of Chicago — the ones outside the downtown core — there hasn’t been nearly as much new multifamily construction. That should keep rents rising in these areas, Kiser said.

“For multifamily it’s a tale of two cities, and always has been. It’s just going to be more evident in 2014,” Kiser said.

“There simply isn’t any new supply being added in the neighborhoods and occupancy is at a record high and I think there will be continued pressure on rents in the neighborhoods,” he added. “We’ve seen double-digit growth in the neighborhoods over the last couple of years. I would anticipate that we’re going to hit very high single-digit or double-digit renewals in the neighborhoods in 2014.”

The Marcus & Millichap report predicts a 2.6 percent increase in the average effective rent will place rents at $1,237 per month, a new metro high. Last year, rents jumped 3.5 percent.

Fifield said there has been no reduction in rents downtown.

“There has been no dip in rents. Nobody has reduced asking rents,” he said. “Occasionally you’ll see developers taking certain units that aren’t moving as fast and putting bigger concessions on, but the concessions are kind of inconsistent. They’re not widespread and universal.”

The Marcus & Millichap report also notes that the high-salaried employees needed to fill luxury properties can also afford homes, which could restrain demand for luxury units.

“Friends I have in the industry who own residential real estate companies say they’re seeing condo sales coming back in very strong numbers meaning people are buying again,” Kiser said.

Marcus & Millichap also points out that investment activity in Chicago will escalate this year, but intense bidding at the top end of the market will price many buyers out of the best locations. As a result, institutional investors will move to the north and northwest from downtown, targeting stabilized properties, while private buyers move to B/C-plus locations searching for assets with rent growth potential. Many of these properties will receive multiple bids, requiring buyers to act quickly and make solid offers to compete.

With investors eager to gain entry into the market, owners who do not have a long-term hold strategy may want to consider selling ahead of a further rise in the cost of borrowing, according to Marcus & Millichap’s report.

“Right now, investor demand is still high,” Kiser said. “For core market, they’re still trading at record cap rates. The effect on rent has not yet been felt. It’s just beginning to be felt. It just started some flattening with fall renewals in 2013, but the full effect is going to come more toward the end of this year. Because that effect has not been that strong yet, investor demand for the core product is still at an all-time high.”