Thanks to a record 3,830 new apartment units being delivered to downtown Chicago this year with an additional 4,500 and 4,200 flooding the respective pipelines of 2017 and 2018, many real estate experts predict leaner years ahead for landlords. With the prospect of supply outpacing demand considered all but an inevitability at this point, the question turns to what’s in store for vacancy rates and rents? A new report released by Chicago-based Appraisal Research Counselors and analyzed by Crain’s explores just that.
Though current vacancy levels are hardly call for alarm, downtown apartment occupancy in the third quarter of 2016 has dipped to 92.2 percent—its lowest in seven years. Considering the amount of supply coming online, the tenant vacuum could likely increase if prices aren’t adjusted. As things already stand now, a number of new downtown towers are reportedly offering up to two months complimentary rent to cure vacancy woes.
While the prospect of tougher years ahead may be disappointing to landlords, the news could bring relief to downtown renters who have seen prices steadily climb in the post-recession era. Though the average per foot rate for fancy “class A” buildings has slipped to $2.91 off this year’s record high of $3.03, rents are well above the approximate $2.15 average in 2009 immediately following the global financial crisis.
In other words, despite the apartment market facing potential challenges in the near future, rents and occupancy levels still haven’t made the major downward correction that many experts expect. Given the cyclical and seasonal nature of the market, the real litmus test is expected to take place this spring, during what is traditionally considered lease-signing season.
It also remains to be seen if and how the changing rental scene will effect Chicago’s slow to recover condo market. Could a softening of the apartment segment spur new construction and conversions that cater to residents who would rather own their homes? Or will renting become even more attractive as prices are dialed back and landlords continue to offer juicy incentives?
- For downtown apartment landlords, a tough year ahead [Crain’s]
- Previous Chicago real estate market reports [Curbed Chicago]