A quickening pace of job growth has led to more household formation, and thus underpinning demand in Chicago and elsewhere for apartment space. While net absorption picked up considerably during the first half of this year, particularly in urban areas, new supply continued to weigh on vacancy improvement over the past year.
According to Marcus & Millichap’s latest multifamily research, supply additions are beginning to shift to the suburbs, allowing room for recovery as units begin to lease. More than 2,700 units were finalized in the suburbs in the past 12 months, with an additional 4,000 apartments to be completed by 2020.
Compare that to the city, where construction was mostly concentrated in the urban core as nearly 5,500 apartments were completed during the past year. In the Streeterville/River North submarket, roughly 3,000 apartments were delivered. Approximately 8,200 units were completed across the entire metro in the last year.
One recent completion was luxury high-rise 465 North Park in Chicago’s Streeterville neighborhood. Developed by Jupiter Realty Company, on behalf of owners MetLife Investment Management and Allstate, the Pappageorge Haymes Partners-designed building rises 48 stories at Illinois Street and Park Drive and offers 444 rental units.
Suburban vacancy remains tight, having held in the low-5 percent band or below since 2010. This is due to few completions and healthy tenant demand. Now, the low rate is sparking an increase in construction as developers work to supply quality space.
Significant suburban multifamily deliveries are located in Central Cook County and Far Northwest Chicago Suburbs submarkets. The elevated pace of completions in certain neighborhoods may begin to impact vacancy in those areas this year.
Transaction velocity slowed in downtown and surrounding neighborhoods during the past four quarters as an influx of supply created concern for some investors. Despite the decline, sales in the area remain above the previous three-year average.
Properties along the lakefront remain popular, and buyers are targeting assets in Chicago’s Lakeview and Uptown neighborhoods. Here, properties changed hands with average first-year returns in the mid-5 percent band. Southern lakefront properties, particularly in Kenwood and the South Shore neighborhoods, were also highly sought after as cap rates averaged in the mid-8 percent area.
Buyers from out-of-state markets are increasingly targeting Chicago’s apartment assets. Transaction velocity among out-of-state buyers jumped 18 percent during the past 12 months. California, New York and Florida buyers were particularly active.
