Chicago Multifamily Construction Slows As Pandemic, High Interest Rate Impacts Linger

Rapid-fire apartment construction has slowed in the Windy City following a pandemic-led boom, according to a new report, but that isn’t bad news for the city’s multifamily landlords, who are enjoying higher rents and occupancy than other metros as a result.

The number of new apartments completed in Chicago has slowed from a high-octane pace between 2020 and 2022. 

In that period, developers completed 25,323 new apartments in the metro area, or an average of 8,441 per year, according to a RentCafe report. The city is projected to add 6,159 new apartments in 2023, a roughly 27% decrease from the average over the previous three years.

The slowdown is caused by various factors, including the lasting impact of the pandemic, rising interest rates, and regulatory and zoning challenges, RentCafe senior writer and researcher Veronica Grecu told Bisnow in an email.

Grecu said the addition of approximately 25,000 units in the past three years was “exceptional.” The projected decline this year still represents a substantial number, she said, adding it signifies that while there is a slowdown, the market hasn't come to a standstill.

The pandemic disrupted the supply chain, upped the costs of building materials and labor, and delayed some projects that were underway, she said. Increased interest rates impacted the homeownership market and made financing more expensive for developers, while regulatory and zoning challenges extended the time and cost of obtaining permits and approvals for new projects.

“While the metro is far from being oversupplied, some areas in the metro saw a higher volume of construction during the pandemic development boom,” Grecu said. “This means that, in those places, the supply of apartments is able to keep up with demand. For instance, more than 40% of the apartments delivered between 2020-2022 are concentrated in Downtown Chicago.”

The pace of new apartment construction in Chicago pales in comparison to other high-performing metros across the country. The New York City area is projected to add about 33,000 new apartments in 2023, while the Dallas and Austin, Texas, metro areas are estimated to complete about 23,500 new units apiece.   

Chicago faces competition from its neighboring cities for renters as well. Grecu said renters are moving within the state and out of state in search of jobs and better options that fit their budgets, especially as remote work becomes a staple of the modern job market.

“For example, Milwaukee, WI, is getting hotter (it emerged as the second most competitive apartment market in the U.S. in peak rental season),” Grecu said in an email. “We’re seeing increased competition in other markets in the Midwest such as Grand Rapids, MI; Omaha, NE; and the Twin Cities and the suburban area. Of course, at the metro level, many Chicago renters are choosing to move to the suburbs where the cost of housing and living tends to be lower.”

In RentCafe’s rankings of the top 20 U.S. metros by new apartments completed between 2020 and 2022, Chicago was solidly in the middle of the pack, listed as the 13th best metro for new apartments in that period. As the construction pipeline has dried up this year, the city barely cracked RentCafe’s rankings of the top 20 U.S. metros for new apartments in 2023, slotting in at the bottom spot in the list.  

Over the past 12 months, there has been a decline in annual rental growth, too, with the rate dropping from 4.9% in 2022 to 3.4% in 2023, per a late July market report from Matthews Real Estate Investment Services.

That said, Chicago surpassed the national rent growth average of 1.2% for the first time in a decade, while the occupancy rate for multifamily properties over the last 12 months sits at a solid 94.7%, per the Matthews report.

“The strength of the Chicago multifamily market can be attributed to the scarcity of new residential properties, particularly in suburban settings,” Matthews associate Jimmy Donahue wrote in the company’s report. “This lack of supply has contributed to the market’s historical resilience and stability.”

While that is good news for landlords, it is causing some investors to search for properties elsewhere.

At Bisnow’s Chicago State of the Market event last month, Waterton Chief Investment Officer Rick Hurd said investor interest in Chicago multifamily had cooled because there aren't as many distressed, value-add properties to pick up cheaply as in fast-growing Sun Belt cities like Austin. 

“You don't have the supply here,” Hurd said. “I think there's 15,000 units under construction. It may seem like a lot, but it's only 2% of the total supply. Then you look at Austin today. There's 40,000 units under construction. That's 15% to 16% of total supply. Those are the markets we're going to transition to start looking to buy, where there is going to be real distress from developers.”