As the Chicago area continues to create high-paying white-collar jobs, the demand for housing has kept up. How has the multifamily sector performed during the first half of 2019, and does the outlook for the rest of the year suggest that developers and brokers will be busy?
Chicago’s year-over-year urban vacancy rate fell 70 basis points to 5.8 percent in the first-quarter of 2019, according to Marcus & Millichap research, with net absorption of approximately 5,900 units. In the suburbs, the vacancy dropped to 4.8 percent in that same time span, with several northern submarkets posting decreases of nearly 100 basis points.
According to David Wolf, president of ON Collaborative—the development marketing division of Coldwell Banker—the condo side of the multifamily sector was somewhat lethargic at the end of 2018. However, those owners came out in full force to start this year.
“The market was slow on the for-sale side during the second half of last year,” said Wolf. “We found that most of that was pent up demand that ended up converting to sales in January, February and March.”
Chicago leasing activity, according to Marcus & Millichap, was most pronounced in Streeterville and surrounding neighborhoods. James Derrico, project manager and leasing consultant at Spaces, also witnessed an uptick in neighborhoods west of the Kennedy like Wicker Park, Bucktown and Logan Square as renters look to explore parts of the city that have recently undergone a lot of renovation. However, he notes that there are pockets of activity throughout the city.
“There are also some places on the North Side, like Uptown and Andersonville and portions of Lakeview, getting action,” said Derrico. “There are new high-rises going up in those areas that haven’t seen a new development in two decades.”
For example, Spaces is now leasing Hazel Place, a 15-unit rental community in the Buena Park area of Uptown. The three-story brick building was renovated last year with modern amenities like keyless smartphone entry, smart lighting and Nest thermostats. The Marcus & Millichap data shows that average effective rents in the CBD jumped 5.9 percent to $1,892, supported by strong gains in Class A rents. Meanwhile, in the suburbs, rents increased 3.2 percent, to $1,239 per month.
For owners, the suburbs are still about single-family homes. According to Wolf, to the extent that millennials are fleeing the urban core, they are doing so into houses, not condos. The main prospect pool for suburban condos—such as The Butler in Oak Brook, which ON Collaborative markets—remains empty nesters and downsizing boomers.
“We’re not seeing a lot of young professionals buying suburban multifamily or condo,” Wolf said. “Most of the young professionals that are moving from the city to the suburbs, or upsizing from a starter home in the suburbs to a bigger home, are doing it in single-family homes.”
South Side neighborhoods including Bronzeville, Pilsen and South Shore remain targeted spots for value-add investors, offering yields in the 8 and 9 percent range. While significant upgrades are necessary for many of these properties, their upside keeps bidding competitive. Marcus & Millichap data also suggests that foreign buyers are chasing higher yields in suburbia, increasing competition in locales such as Downers Grove, Mount Prospect and Oak Park.
Whether rental or for-sale, the world of multifamily development has been ruled by a bloodless, yet ruthless, amenity war. Nowhere is this more striking than in new, Class A properties in or close to the CBD.
“Upscale facilities and the amount of amenities being offered is a big factor for a lot of clients making their decisions,” said Derrico. “But with luxury properties it’s a whole other game. Some of the amenities that they are putting in those properties are pretty fantastic and unheard of.”
Rental buildings like Old Town Park and The Sinclair have full blown spa services like reservable massage rooms, saunas, steam rooms and gyms that rival Equinox. One Bennett Park, Nema Chicago and Essex on the Park employ concierge services like Hello Alfred that allow tenants to schedule in-home grocery deliveries, maid service and even turn down service.
“These are all included in the tenants’ rent, which is pretty insane, but it’s a really great draw for clients who are looking for a building that is amenity-forward,” Derrico said. “I would think it has to cap out at a certain point because buildings can only offer their tenants so much, but a couple of years ago we were saying we wouldn’t see the things we’re seeing now, so who knows.”
JK Equities’ 1400 West Monroe, which ON Collaborative markets, will deliver 42 condo residences to the West Loop by the end of 2020. Amenities there include a secure package management system, smart technology entry, a dog wash area, cold storage for grocery deliveries and a dry-cleaning pick-up/drop-off area. Luxury finishes include polished concrete floors, zebra wood paneling and a preserved moss green wall imported from Italy.
“There is and always will be an amenities race because you have to stand out from the competition; you have to offer something unique to buyers,” said Wolf. “But there is financial constraint. You have to think about the impact on the association and the monthly assessment for the owners.”
Looking to the back half of 2019, there are roughly 3,400 units slated for delivery in Chicago’s downtown core this year, approximately half of which are located in the South Loop. Marcus & Millichap projects Chicago apartment deliveries (urban and suburban) to total 7,800 in 2019, less than the 9,000 completed in each of the last two years.
According to Wolf, the biggest challenge right now to any for-sale new construction project is where they are in the pre-sale stage. While there is still interest among buyers, they may display hesitancy this late in the development cycle to buy a pre-construction condo and wait a couple of years for the property to deliver.
“Some of it is timing and some of it is people being used to having whatever they want when they want it,” Wolf said. “And some of it is people out there who don’t want to tie their money up and would rather wait to see what happens with the market before making a decision.”
On the rental side, Marcus & Millichap predicts that stable rent growth will derive from steady apartment demand, pushing the metro’s average effective rent up to $1,539 per month. Additionally, Derrico predicts that 2019 will have the same broker bonuses and tenant concessions that are common later in the leasing cycle.
“The incentives that the luxury market offers in the fall and winter months should hold somewhat steady for the fourth quarter and the late portion of the third quarter,” Derrico said. “Usually during those quarters they offer higher commissions to agents and great concessions for clients and I can speak from personal experience that you won’t find a better deal during that time of the year.”