Rents Tick Up in Downtown Chicago

Rents Tick Up in Downtown Chicago CHICAGO, IL - The downtown apartment market stopped sliding in the first quarter, but a large supply of new units continues to make life difficult for landlords. After falling for three quarters, the average effective rent at upscale, Class A downtown buildings inched higher in the first three months of the year, to $2.12 a square foot, according to a report by Appraisal Research Counselors, a Chicago-based real estate consulting firm. That's up from $2.11 in fourth-quarter 2008, but still down 7.4% from $2.29 in the prior-year period. The average Class A occupancy also rose slightly, to 90.9% from 90.6% in the fourth quarter, according to the report. The occupancy rate was 91.9% in first-quarter 2008.

Demand for apartments typically falls during a recession, as renters lose their jobs or double up to save money. But demand has held up surprisingly well in downtown Chicago even though the area has lost nearly 158,000 jobs over the past year, exceeding the 130,000 job cuts during the last recession.

The bigger problem for landlords has been rising supply, as developers lease up new apartment buildings and more condominium owners rent out units they can't sell.

"We're adding new supply of apartments and condo rentals faster than demand is growing," says Appraisal Research Vice-President Ron DeVries.

Downtown developers will complete 955 apartments this year after finishing 1,974 in 2008, the biggest annual total in at least 10 years, according to Appraisal Research. Another 1,907 units will hit the market next year.

Compounding the problem is the large number of condos for rent. More condo owners struggling to sell their units are renting them out instead, as are a growing number of condo developers unable to sell out their projects.

The surging supply of condos and apartments is "too much," says David Schwartz, co-founder and managing member of Waterton Associates LLC, a Chicago-based apartment investor that owns the 2,346-unit Presidential Towers. "It's going to delay any recovery."

It's unclear how many downtown condos have gone rental, but 3,471 were leased through the Multiple Listing Service in the year ended March 31, slightly higher than the 3,402 in the prior year.

With nearly 4,500 downtown condos due to be completed this year — 43% of them unsold — the number of condo rentals is likely to surge in the coming months, especially in the South Loop, where the glut is the greatest.

The good news is that the recession has not depressed demand for apartments as much as one might expect.

One reason: People who would normally buy a condo either can't because they don't qualify for a loan or won't because they're worried about falling condo prices. So they're renting instead.

The number of occupied downtown Class A and B apartments actually rose by 1,160 units, or 7.7%, from first-quarter 2008 to first-quarter 2009, according to Appraisal Research.

"It's surprising how strong the market has remained in light of all the job losses that we've seen," Mr. DeVries says.

Effective rents at downtown Class B apartment buildings fell to $1.91 a square foot in the first quarter, down 1.6% from the fourth quarter and 5.5% from the year-earlier period, according to Appraisal Research. Effective rents factor in the value of concessions like free rent.

Class B occupancies fell to 90.8% in the first quarter, down from 91.6% in the fourth quarter and 92.2% in the prior-year period.

While the apartment glut poses a challenge to landlords in the near term, the long-term outlook for the market remains strong, says John Jaeger, first vice-president in the Chicago office of CB Richard Ellis Inc. The so-called echo-boom generation is reaching its early 20s, prime renting years, and downtown Chicago offers a vibrant, walk-to-work lifestyle that many renters seek, he says. "Investors who are patient are going to be rewarded with really strong rent growth if they can hang on," he says.

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