Apartment vacancy will fall in the Chicago metro in 2013 as another year of solid job growth sparks demand for rental housing, according to a second quarter research report on the Chicago apartment market by Marcus & Millichap Real Estate Investment Services.
While current economic conditions do not conjure memories of the last economic expansion, the local economy nonetheless proceeded through the first quarter on firm footing, according to the report. Local payrolls expanded and the federal government revisions to employment saw the metro’s employers creating roughly 50 percent more jobs over the past three years than initially reported.
Accordingly, the demand generated for rental housing has been quite strong and will remain vigorous in the quarters ahead as more residents enter or re-enter the working population, according to Marcus & Millichap’s report. Potential impediments to further progress in the apartment sector include the metro’s high unemployment rate, which sat near 9 percent as the first quarter concluded. The effects of high unemployment may suppress many households’ incomes and wages, thereby affecting rental housing affordability, especially in older properties in working-class communities. As a result, some apartment operators may defer imposing higher rents in favor of retaining their long-time tenants.
Transaction activity continues undeterred in the metro despite recent changes to capital gains tax rates, according to Marcus & Millichap’s report. Low interest rates on acquisition financing are sustaining intense investor demand, which often results in multiple offers for a property. Construction of new rental towers in the city may emerge as a concern for institutions and large investors in the near term, but luxury rentals may minimally impact the operations of older properties that attract a different tenant profile.
Assets in north side neighborhoods remain a focus for investors, and the best assets typically trade at cap rates ranging from 5 percent to 6 percent. Currently, cap rates for suburban Class B and Class C assets in the collar counties are in the 7 percent range. The performance of suburban properties has generally trailed apartments in more urbanized areas. Some have been affected by shadow stock, comprising condos and single-family residences deployed as rentals. An improving job market, however, will spark additional formations of new suburban rental households.
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