This time last year, the Chicago CBD was brimming with new multifamily developments. There simply wasn’t enough supply to satiate the demand of renters who wanted to live downtown. A lot has changed in the past year, however, and the rental market in the Loop and surrounding neighborhoods is up against the ropes.
There are a number of obstacles in front of Chicago’s downtown multifamily market. The pandemic is only the latest, though certainly the most impactful, at least in the short term. Higher property taxes get passed on to tenants in the form of higher rents. Many cite the city’s Affordable Requirements Ordinance as a deterrent to new development. The fact is before anyone had heard of COVID-19, the downtown market was beginning to drag at the start of the year, at least in terms of new supply, for these reasons and due to rising construction costs.
Now, however, supply won’t be an issue as many are opting to relocate to the suburbs when their leases expire. The latest research from Integra Realty Resources has shown that downtown multifamily occupancy has dipped to 89.2 percent—the lowest this metric has reached since 2002. That figure will likely decline further during the third quarter.
“We certainly believe in the viability of the downtown market,” said Ron DeVries, MAI, senior managing director at Integra Realty Resources. “There are many compelling reasons to live downtown. It’s just that right now, a lot of those reasons, don’t exist. All the amenities—the nightlife, the short commute to work, restaurants and shopping—the market is operating on a more limited basis.”
Class A properties are usually the first to see the fastest rise or fall in rents due to market fluctuations. That has been the case so far this year, with prices dropping into Class B range. During the first quarter, year-over-year rents fell among Class A buildings by 7.7 percent; that accelerated to 12.4 percent in the second quarter. Since A and B products are so intricately entwined, it’s no wonder that rents among Class B buildings fell 7.3 and 14.9 percent in the first and second quarters, respectively.
After the lockdown first ensued back in March, tenant retention rates at first remained stable, primarily because of the limitations on tenants’ ability to move and with the short-term leases that landlords were offering. Now, however, renters are looking at all of their options—including relocation to lower density locations in the suburbs and outer city neighborhoods.
Some buildings are low density in nature and/or are located in lower density pockets of the downtown market. These properties have generally fared better. For the rest of the market, concessions are on the rise—with offerings of one, two or even three-months’ rent—in an effort to staunch tenant migration.
“We’ve gotten to the end of the leasing season,” DeVries said, “so right now a lot of owners are just scrambling to fill as many of the vacant units as they can before winter hits.”
The despair of the downtown multifamily market is not necessarily at the exultation of the suburban market. First of all, it’s not a one-to-one apartment-to-apartment scenario. Those renters with enough capital and steady employment may finally jump into homeownership with rates as low as they are. At the other end of the spectrum, tenants facing financial hardship may move in with family until their situation stabilizes.
Secondly, this is likely a short-term disruption. Once a vaccine is in place, renters will see a downtown market that has been cost-corrected and return to the CBD, since the amenities it offers are still a powerful draw.
“I think people are going to move back when they see that their offices are opening and that they have a comfort level in going back to a safe working environment,” said DeVries. “But until that happens, I don’t think that you’re going to see a big change in terms of increased occupancy and rental rates downtown.”
While the suburban multifamily market may not be flush with new tenants escaping the density of downtown, it still has weathered the current situation far better than the CBD. The suburbs saw just over 1 percent year-over-year rent growth from July 2019 to July 2020. While annual rent increases closer to 3 percent were the norm before the pandemic, these property owners have to be content with rents, and occupancy, holding steady during such a tumultuous period. Integra forecasts that absorption will stall for the duration of 2020, topping out at approximately 750 units. The downtown market will likely return to pre-pandemic levels sometime in 2021.