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Job growth and property taxes propel apartment demand

Matt Baker November 20, 2018
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Corporate expansions and relocations, especially by tech firms, continue to support job growth in the Chicago metro, which in turn is driving up demand for multifamily housing. According to the latest Marcus & Millichap market report, residents are turning to apartments over condos in part because of high property taxes.

Software firm Salesforce is considering opening an office downtown, a move that could potentially bring 5,000 additional jobs to the area. During the third quarter, Social media giant Facebook leased 263,000 square feet within 151 N. Franklin Street and talent acquisition technology firm Yello, with offices in 55 E. Monroe Street, announced in would double its workforce by the end of 2019.

Meanwhile, the West Loop has proven to be a maturing tech hub. Digital innovation consulting firm Solstice, housed at 111 N. Canal Street, announced it would double in size to 60,000 square-feet while Google will expand its Fulton Market footprint when it occupies 132,000 square feet of Sterling Bay’s 210 N. Carpenter Street, now under construction.

While these higher-paying jobs are fueling household formation all around the Chicago MSA, elevated property taxes and high costs, on the other hand, are making homeownership unaffordable for many. Illinois has the second highest property taxes in the country with an effective tax rate of 2.32 percent statewide, nearly double the national average.

These two factors, high-earning job creation and outsized property taxes, should increase apartment demand for the foreseeable future. According to the Marcus & Millichap report, young professionals entering the workforce have a 65 percent propensity to rent.

Rental vacancy was down during the 12 months ending in June, the first decline in two years. Elevated construction had hampered improvement, with more than 17,000 apartments built since 2016. More units are on the way this year and next—approximately 16,300 units with expected deliveries through 2020—but the rising pace of construction isn’t enough to tamp down demand.

The Marcus & Millichap report projects with demand outpacing supply this year, the area should experience vacancy improvement and healthy rent growth. Building on a 3.9 percent increase the prior year, the average effective rent climbed to $1,482 per month during the year ending in September. Several suburban submarkets posted above-average rent growth. In Central Cook County, effective rent jumped 7.2 percent to $1,289 per month.

Sales velocity across the Chicago metro declined slightly since last October, hindered by limited listings and, earlier this year, investors hedging after the newly enacted tax reform initially muddied the waters. Moving forward, some owners may place their properties on the market to capitalize on elevated pricing, with the average price per unit at roughly 45 percent above the previous cyclical peak.

Demand persists for apartments in northern suburbs near the waterfront. In the city, popular neighborhoods include Ukrainian Village, Logan Square and Lakeview. Assets in these areas typically change hands with first-year returns in the mid-5 percent band. Buyers looking for lower entry costs and first-year returns up to 200 basis points higher than the metrowide average are looking to assets in southern lakefront locations.

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