Chicago Multifamily Demand Still Outpacing Supply, But Just Barely

In the metro Chicago apartment market, the prospect of overbuilding always seems to be around the corner. Yet though this concern has been raised in this cycle since 2012, as the end of the 2010s approaches, the dreaded excess of units hasn't happened just yet. 

Is that because developers are making a rational reaction to market forces, or has it been just dumb luck? 

That will be a subject of discussion (maybe even debate) at Bisnow's Multifamily Annual Conference Midwest, a full-day event at Zhou B Art Center in Chicago.

A quickening pace of job growth in 2018 after a slowdown in 2017 bodes well for household formation and thus apartment demand in Chicago, according to Marcus & Millichap's Q3 2018 Multifamily Market Report. 

Apartment absorption picked up considerably during the first half of this year, particularly in urban areas, the report says. But there is still a race between supply and demand. Despite the increase in demand, there has been a lot of new supply, and that means vacancy hasn't moved much recently.

Net absorption of 8,350 units this year will slightly outpace completions, Marcus & Millichap predicts, resulting in a marketwide vacancy decrease (10 basis points) to 5.7% at the end of this year.

Lendlease Executive General Manager of Development Tom Weeks, whose company is planning four more residential developments at Southbank in the South Loop — having just completed one, The Cooper at Southbank — said the company isn't concerned about the prospect of overbuilding, even Downtown, which has been the nexus of a lot of multifamily development lately.

"Though we are always mindful that there are ebbs and flows in the economy, we are confident for numerous reasons," Weeks said. 

"More people are viewing apartments as homes, including growing families and downsizing empty nesters who want a prime location with more space — and usually more privacy — than a traditional apartment provides. So, we designed The Cooper to appeal to a wide pool of renters in various stages of life, which is reflected in the broad variety of floor plans, as well as the amenities we're offering." 

Besides that, demand for apartments (especially new units) is often a function of a relatively close workforce. Weeks pointed to recent announcements like Walgreen's plans for an 1,800-employee office in the newly renovated Old Post Office and the transformation of vacant riverfront parcels as evidence of the evolution of the South Loop into an employment hub for Chicago, and that is helping multifamily.

"Rents in the newest buildings remain at record levels, and occupancy has held fairly steady despite new supply, all of which speaks to a healthy multifamily market as the population of Downtown continues to rise," Weeks said.

There has been less new development of suburban apartments during this decade than Downtown, and fundamentals there are strong. 

Suburban vacancy remains tight, having held in the low-5% range or below since 2010 amid few completions and healthy tenant demand, the Marcus & Millichap report says.

More recently, low suburban vacancies have sparked an increase in construction in some places. About 5,600 apartment units are underway in the suburbs, with significant deliveries planned for central Cook County and the far northwest Chicago suburbs.

"New suburban properties are very competitive in today’s rental market," Essex Realty Group principal Jordan Gottlieb said.

"The vast majority of new suburban developments are within a short walk to a train station," Gottlieb said. "Also, these properties are usually very close to a grocery store and dining/entertainment options in a given suburb."

The Parker is one such example — the 46-unit property at 500 North Northwest Highway in Park Ridge is adjacent to a Jewel and a short walk to Trader Joe’s and Downtown Park Ridge, where there are several dining and entertainment options.

Essex Realty Group was recently engaged to sell The Parker on behalf of its developers, CA Ventures and Orchard Development Group.

"Suburban developers are also amenitizing their properties as though they are Downtown," Gottlieb said. "The majority of larger suburban developments include outdoor pools, gyms, clubrooms, dog washes and more, putting them in line with their Downtown counterparts. Even smaller developments include gyms, grill areas and dog runs."

Another recent trend in metro Chicago multifamily has been the deconversion of condos back to rental units. Interra Realty Managing Principal David Goss said he doesn't anticipate an oversupply of apartment units due to the deconversion trend.  

"Most of these are located in neighborhoods where there isn’t the new construction we see Downtown or the surrounding areas," Goss said. "Also, one of the things that makes a building a good candidate for deconversion is the presence of a high number of renters. These properties are most ripe for deconversion.

"While the nature of the landlord may change with a deconversion, the absolute addition to the rental stock is not as great as one would think," Goss said. "The vacancy rates for high-quality neighborhood and suburban properties has not changed significantly, if at all."

Find out more about metro Chicago multifamily at Bisnow's Multifamily Annual Conference Midwest, a full-day event at Zhou B Art Center in Chicago on Oct. 24.