Amidst Corporate Expansions, Multifamily Demand Outstrips New Supply

The recent decision of Salesforce to open a 500K SF office in Downtown Chicago is not just good news for the central business district’s office market. It is also a signal that employers will continue adding fuel to the multifamily market in 2019 and 2020.

The Salesforce move will create at least 5,000 jobs, and many of these will be filled by people new to Chicago. Solstice and Yello, among many others, have also decided to expand their Chicago workforces, fueling even more household formation.

“Elevated property taxes and high costs, however, are making homeownership unaffordable for many, boding well for apartment demand,” Marcus & Millichap wrote in its report for the fourth quarter. “In particular, young professionals entering the workforce have a 65% propensity to rent.”

Increased demand for rentals pushed down the region’s vacancy during the 12 months ending in June, the firm’s researchers found. That was the first time the market saw a vacancy decline in two years due as a historic building spree pushed vacancy up.

Developers have created more than 17,000 apartments since 2016 and they don’t seem inclined to slacken the pace. Still, Marcus & Millichap believes demand will have outpaced supply by the end of the year, pushing down vacancy even more and spurring further rent growth.

Builders will complete about 9,200 units in 2018, a bit of a pickup from 2017, when 8,800 apartments were delivered. The year’s largest new project is the nearly 500-unit Alta Roosevelt located downtown.

But the year will see net absorption of more than 11,500 rentals, and that will cut vacancy 40 basis points this year to 5.4%, according to the firm. Last year, vacancy rose 50 basis points.

Vacancy improvement was greatest in Class-A spaces, declining 80 basis points during the previous four quarters to 5.3%.

That enabled landlords to keep raising rents at a very steady rate. Data shows the average overall effective rent will end the year at $1,463 per month. That equals a 4.4% increase, almost on par with 2017’s 4.5% increase.