On the other hand, an increase in the supply of condos will make first-time homebuyers out of some renters, thus producing an adverse effect on apartment demand. In addition, a number of new condo units are purchased by speculative investors that turn around and rent out the units(known as the “shadow rental market”). Because of the reduction in rental stock, the bottom line is that when job formation gains momentum, apartment occupancy rates will rebound a little quicker.
Projects in Progress Development in 2005 will total 1,800 rental units, about 300 more than were delivered last year. Most multifamily construction is still focused on condos, with an increasing number of senior housing projects. Large complexes are still being constructed, though, including Covertree Glenn Valley Lakes in Round Lake and the Shoreham apartments on S. Water Street.
Located downtown, the Shoreham will feature 550 units in a 47-story upscale high-rise. With ultra-modern architecture, the Shoreham—estimated to cost $113 million—will be built on a former golf course site. Shoreham’s luxury units will be part of a 28-acre development known as Lakeshore East, which will include apartments, townhomes, and retail and office space.
Also in progress is the much-talked-about Park Boulevard Apartments, part of a 36-acre community redevelopment site bounded by 35th, 39th, and State streets. Early plans call for 399 residential units where Stateway Gardens once stood. Developed by Stateway Associates, the project also involves Mesa Development, Walsh Investors, Kimball Hill Homes, and Neighborhood Rejuvenation Partners. Located on the western edge of the Bronzeville neighborhood on Chicago’s South Side, the entire development will comprise single-family and multifamily housing, public space, civil facilities, and retail establishments and is expected to be built between this year and 2009. This development, which will bring back a grid pattern to the streets that was popular before the days of high-rises, will be part of a low-rise and lower density model established by the Chicago Housing Authority.
A soft economy means that vacancy will see only a slight drop. The lackluster job market and still-affordable housing market will preclude large gains in occupancy this year. As a result, vacancy will drop just 30 basis points, to 6.9 percent. Property owners will remain focused on improving occupancy rates in 2005 and will be hesitant to raise rents.
Rents will increase by only 2 percent this year, to an average of $972 per month. The highest asking rents per month are in the Loop ($1,570), the Gold Coast ($1,440), and Lincoln Park ($1,120). Lincoln Park, just north of downtown, also features the lowest vacancy rate at just 3.1 percent, with Joliet coming in next at 3.3 percent. Although they rank high in rent, both the Loop and the Gold Coast reflect higher vacancy rates at 8.4 percent and 8.0 percent, respectively.
Watching the Windy City
Despite the lackluster market conditions in 2004, multifamily investors pushed forward, and the median price rose by 4 percent to $70,000 per unit. Thanks to the condo-conversion craze, properties with more than 100 units recorded the highest gains, increasing to $90,000 per unit—a 38 percent jump. Value appreciation was the driving factor for buyers in 2004, but there will be a shift back to cash flow as the primary motivator due to rising interest rates.
As a result, buyer interest will be highest in solid locations, such as the Schaumberg/Hoffman Estates and Glen Ellyn/Wheaton submarkets, where rising single-family home prices and limited development activity should contribute to improvement in property operations. Investors should do their homework before purchasing in certain areas, such as submarkets south of Interstate 55, where demand is constrained by minimal job creation. It’s doubtful that occupancy rates will improve during the year, and concessions will remain substantial.
In general, the long-term outlook for rental market demand is very positive. The aging of two demographic cohorts will boost demand for apartment: The echo boom generation will soon be entering its prime renting years, and many empty-nest baby boomers will opt to rent rather than own as they adjust their lifestyle. Also, higher interest rates will curb the exodus of renters to homeownership. All of these factors will help to boost tenant demand and net operating income, supporting higher values and a strong investment market.
–Linwood C. Thompson is managing director of Marcus & Millichap’s National Multi Housing Group. He is based in the firm’s Atlanta office.