On Real Estate
1:20 PM PST, November 16, 2012
If you're one of the growing number of apartment renters in downtown Chicago, take a minute to look down at your feet. Chances are, if you're in one of the fancier buildings, you're paying $2.58 each month for the square foot (or so) that those tootsies occupy.
That monthly average third-quarter rent for so-called "A" buildings has been climbing upward for the past few years, when being a tenant suddenly started looking good again to a lot of people who no longer were sure that homeownership is such a good thing, according to Ron DeVries, vice president of Appraisal Research Counselors in Chicago, which studies the downtown housing market.
DeVries said rent in those prime downtown buildings is about 7.6 percent higher than it was a year ago. However, landlords are starting to see more competition and may rethink that upward trajectory next year. An edited version of our conversation about the Chicago apartment scene follows:
Q: That per-square-foot figure refers to Class A buildings. There are also what are known in the business as Class B buildings. What's the difference?
A: The A's are the newer properties . They tend to have more amenities. Each unit will have a washer and dryer, and the buildings are well-located. B properties generally were (built) in the wave of construction that occurred before those A's were built — the precursors, before they routinely started putting in washers and dryers. Downtown, per-square-foot rents for B buildings are $2.20. Everything in our survey is built after 1980s. We're not talking about 100-year-old buildings here.
Q: There's been something of an apartment building boom. Is that still going on?
A: We're looking at deliveries (of ready-to-occupy apartments) next year of about 2,700 new units. Looking back, we had about 2,500 added in 2010. In 2014, there will be another couple thousand units. Overall, occupancy of rentals downtown (which the company defines as the area along the lakefront, from McCormick Place to North Avenue) is at 95 percent.
Q: Why is renting hot again?
A: People are disenchanted with ownership, with the risk that has become apparent — the risk of losing a down payment or your equity investment. People don't feel pressure to go out and buy something, there's no perception of a missed opportunity for not buying (as they seemed to perceive during the housing boom).
Q: What's ahead for apartments? Are rents going to continue to spiral upward?
A: Rents are certainly up now over a year ago, and we've got more units coming on the market next year. I think in the first half of next year, you're going to see normal upward pressure (on rents asked) and then owners are going to re-evaluate toward the end of the summer and make decisions. I'm estimating average rent increases of 4 percent to 5 percent. I certainly don't see significant concessions (offers of free rent) for new tenants happening in the first half of the year. The last couple of buildings that have come on the market, they've had phenomenal lease-ups without any concessions. Historically, when the market got soft, they'd drop rents or give you a month free; that wasn't uncommon when a new building would hit the market, in order to generate a quicker lease.
Q: What's the rental picture in suburbia?
A: We're seeing more moderate rent growth (in the larger apartment buildings that we study). Downtown has been doing very well in spite of the employment market; people just want to live downtown. The city is almost cannibalizing demand from the suburbs and the city neighborhoods. But the suburban market is more employment-driven. In a weaker job market, the suburbs are hit worse than downtown. In order to see healthier gains in rents, suburban (buildings) need improvement in the job market. Demand there has gone up, but it has expressed itself through greater occupancy (not higher rents).
Still, suburban construction is going on, all over the Chicago map, with a couple thousand units under construction now.
Q: Your firm also studies the condo market downtown. How's that looking?
A: We're seeing some change there, some brief signs of life. The resale market is picking up a little bit. We're even seeing some smaller (condo) projects being constructed here and there. As the smaller projects succeed, you'll see (developers) start to do bigger deals. But the big deals are a ways off yet. We need to create some momentum.
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