Hans Nordby, managing director of CoStar Group, and Brandon Frankel, market analyst for Chicago with the same company, both say that supply has not yet outpaced the demand for new multifamily units across the Midwest.
And it’s not even close.
This is despite the rising number of multifamily units that developers have added to markets across the country in 2014 and this year.
“The multifamily market has been voraciously strong for the last couple of years,” Nordby said.
How strong? Nordby said that developers by the time 2015 comes to an end will have added about 240,000 new multifamily units across the country. This is the highest amount of new apartment units that CoStar has seen in 20 years.
But vacancy rates in 2016 and beyond in this market will still be low because so many consumers today are becoming renters by choice, Nordby said.
“Demand has been right up there with new construction,” he said. “Vacancy rates nationally are just too tight. We do expect that all the major markets will see vacancy rates in multifamily rise in 2016. But that’s because they are now at an unsustainably tight level.”
Nordby predicts that multifamily vacancy rates will rise to the mid-5-percent range during the next five years. That, he said, is actually a healthier rate than what the country is seeing today.
Vacancies to rise in downtown Chicago?
According to numbers sent by CoStar, the national apartment vacancy rate should be at 3.72 percent by the end of 2015, down from 4.04 percent last year and 4.19 percent in 2013.
Chicago remains one Midwest market that is particularly attractive to renters, according to CoStar. CoStar predicts that the multifamily vacancy rate in Chicago will fall to 3.71 percent by the end of this year.
However, a big change will be coming in 2016. CoStar predicts that the Chicago market will see 5,000 new multifamily units in 2016. CoStar said, too, that from 2017 through 2019, the market could see another 3,000-plus multifamily units a year.
Demand might not be able to account for all of these new units. CoStar says that the Chicago market would need to see three consecutive years in which it absorbs more than 5,000 units a year. That three-year mark of absorption has never occurred during the last 15 years.
The downtown multifamily market of Chicago will probably see the highest vacancies. It already does. According to CoStar, by the end of 2015 the multifamily vacancy rate in the downtown Chicago market will hit 8.66 percent, up from 7.38 percent at the end of 2014. The potential for overbuilding in downtown Chicago, then, is strong: CoStar says that it anticipates 3,000 new multifamily units to hit the downtown Chicago market in 2016.
Frankel said that developers in Chicago held off on adding new multifamily units to the city for several years after the economic downtown. That has changed, and they are adding new apartment stock quickly, he said.
“If we talk about overbuilding, we have to talk about downtown Chicago,” Frankel said. “Half of the new apartment supply in the Chicago market in the next year is coming to Chicago itself. And almost 3,000 of those new units coming to Chicago are coming downtown.”
A new atmosphere for apartments
Those apartment units coming to the market now certainly boast amenities that their predecessors lacked. Frankel said that developers today are focusing on the common areas of their new apartment projects.
This means the addition of party rooms, club rooms with large outdoor spaces, lounges, media centers and larger swimming pools.
“People are now getting a better chance to meet their neighbors,” Frankel said. “The units themselves might be smaller, but the common spaces are becoming a new focus.”
Frankel said that the newly built JeffJack Apartments in Chicago’s West Loop neighborhood is a good example. The development includes an outdoor dog run and a rooftop indoor pool that comes with a movable wall of windows. This allows the pool to turn into an outdoor version when the weather cooperates.
73 East Lake in the Loop boasts a yoga studio as part of its onsite fitness center, while Aqua, also in the Loop, has a game room that includes a basketball court. It also has a charging station for electric cars in its garage.
