After a bleak winter of uncertainty and challenges, the Chicago area rental market has not only shown signs of life in recent months, but in many ways and in many geographic pockets, the region has witnessed a return to pre-pandemic levels of rent growth, occupancy, and general optimism. And investor interest in multifamily properties remains strong as apartment buildings in Chicago neighborhoods routinely trade at big prices.
But what about stories of suburban flight? Or concerns with living in a high-rise during the pandemic? There has been much discussion about the challenges that have impacted the multifamily market, but the reality, real estate professionals proclaim, is that there are always going to be people who want to live in the city. Even more so, there are many residents who want to be in the heart of the urban core.
Interest in new, upscale rentals continues despite ongoing pandemic conditions
“Here’s the headline: demand for urban, new luxury apartments has never been stronger,” says Aaron Galvin, CEO and co-founder of Luxury Living Chicago, which oversees leasing for 3,000 upscale rental apartments across the city. “It is all the way back and we have already exceeded where we were pre-pandemic on leasing percentage, occupancy percentage, and even rent prices.”
Galvin’s bullishness on the high-end, urban rental market seems almost defiant in the face of the ongoing nature of the pandemic and the uncertainty caused by it, however, at this point, the rental rebound offers optimism and reflects the durability of Chicago real estate, he suggests. And just like many other industries, the multifamily market has had to roll with the punches and evolve with the times.
A key strategy that helped keep multifamily landlords’ rent rolls steady was the use of concessions coupled with longer term leases. The trade for a month or two of free rent and discounted, or entirely reduced fees, was a longer lease period, which provided both the renter and landlord additional time and a stronger sense of security.
“People were getting a once in a lifetime deal, but at the same time, the fact that the millennial or Gen Z demographic, which makes up the majority of the folks who are living in newer downtown buildings, were committing to 18- to 24-month leases gave us a lot of confidence heading into 2021 that the narrative about the death of cities was overblown,” Galvin says.
However, at this point, many of the generous concessions have since burned off and occupancy rates have stabilized. During the peak of the pandemic fallout, average occupancy rates hovered in the mid-80s range, Galvin indicates. But currently, percentages are now upwards of 95% to 100% leased, he adds.
For all intents and purposes, the pandemic marks the end of the last development cycle, Galvin suggests, which saw the delivery of roughly 40,000 new Class A units between 2013 through 2023. And for much of this cycle, these new apartments were absorbed each year, he adds. The pandemic and economic fallout caused by it is expected to have an impact on new deliveries for the following years, however. Galvin predicts that we may see as little as 1,600 total rentals delivered in the next two years. But by 2024 and 2025, those numbers could return to pre-pandemic levels of witnessing upwards of 4,000 new apartments each year, he suggests.
Going forward, we can also expect to see some changes in apartment floor plans, amenities, and outdoor offerings. The massive shift toward working from home will continue for countless professionals over the following years, and those renters will need extra space in their apartment for a home office. Galvin suggests that newer buildings will likely feature more units with dens and more of a balanced mix between one- and two-bedroom apartments.
Additionally, now more than ever, renters want more outdoor space and communal areas. And in addition to wanting a nook or den for a home office, more buildings will bolster their coworking offerings.
“Green space has never been more important,” Galvin says. “Outdoor space is the number one most requested feature right now for apartment seekers, and I don’t think that’s going to change.”
Multifamily sales remain strong both in the city and suburbs
Another key aspect of the rental recovery has been the strong demand and sales for multifamily assets, particularly recently remodeled or new construction product. Recent sale prices on properties throughout popular lakefront communities from Rogers Park to South Shore continue to hedge higher and higher, while trades on assets in high-demand areas like Lakeview and Wicker Park push into new per-unit sales record territory.
But there was definitely a period of uncertainty during the first couple of months of the stay at home order, and some investors paused deals to see what would eventually happen. But once leasing and rent rolls continued to prove strong and government assistance was announced to help struggling renters cover rent payments, buyers and sellers went almost immediately back to the table, says Jon Morgan, co-founder and Managing Principal of Interra Realty.
“We had a pipeline going into March right at the start of the pandemic that was around $80 million dollars in under-contract stuff and most of it was paused or temporarily canceled,” Morgan says of the early weeks of the pandemic. “But all of it returned shortly thereafter and we wound up getting it all closed.”
Some buyers who put deals on hold at the start of the pandemic ended up paying more in the end on a property after returning to the table, Morgan says. While those weeks seemed uncertain and putting down millions on rentals was a huge risk, many who went through with deals instead of stepping away ultimately ended up playing their cards right while others were starting over during an extremely hot and competitive market.
And as of late, there’s also been a big push out in the suburbs as the rental market continues to grow outside of the city. “In previous years, the suburbs may have represented 10% to 20% of our total sales velocity,” Morgan says of Interra’s brokerage activity. “But for this year, it’s probably going to represent closer to 20% of our total sales velocity.”
Low interest rates and access to capital have been key drivers of the current residential real estate boom, but the desire to buy and hold hard assets is another important component in the multi-family market, Morgan suggests. The pandemic showcased the volatility in the stock market and more abstract assets such as cryptocurrencies, but a fully-leased multi-unit apartment building offers a greater sense of security for many investors.
“I think as long as interest rates stay at all time lows, investor activity and appetite is going to remain here for a while until you start seeing rates get back up into the fives plus,” Morgan says. “And that could be some time when you look at economic indicators.”
But how would the market fare if another big wave of COVID panic and mandates hit Chicago? And how are investors weighing other issues such as property tax concerns and the omnipresent pension crisis in their calculations on multi-unit properties? And with prices reaching new heights, how much more room for growth is there in the short term?
“What we’re finding is that the more sophisticated investor is getting opinions and they’re basing their offers off of real estate tax counsel opinions,” Morgan explains. “And I think investors kind of move past [the pension issue] typically, because they look at the economic growth, the fact that new companies are still coming here, and they look at the economy as a whole.”
This article also appears in the August 2021 issue of Illinois Real Estate Journal