Chicago’s apartment market is running hot — just not in the way developers would like. Demand is outpacing supply, rents are climbing faster than in many Sunbelt cities and occupancy remains tight. But the same conditions that should be spurring construction are running headlong into the realities of costs, taxes and policy hurdles that make new projects a tough sell.
“There’s a big undersupply of multifamily units,” said Maxwell Jacobson, vice president of development for S.R. Jacobson Development Corporation. “There’s strong occupancy, but with the undersupply of units, there’s a lot of demand out there for new units.”
Jacobson’s numbers tell the story: “deliveries are down 61 percent year over year and the pipeline is more than 50 percent below the 10-year average, but rents are up more than 5 percent in the past year.”
“The Chicago MSA is one of the highest in the country in terms of rent growth,” Jacobson said. “It’s been in the top three the past year.”
Recent stability has eased some of the anxiety generated over the past few years.
“You had this period after COVID between ’22 and ’24 where interest rates rose and were just overall volatile and it kills confidence in buying buildings,” said Andy Friedman, partner with Kiser Group. “Whereas today you’ve got the five-year treasury sticking under 4 percent and very high odds of rate cut in September, so the interest rate backdrop is far better than it was.”
“I’m starting to sense that people are realizing that we’ve likely hit the peak of the interest rate environment,” said Max Grossman, director at Interra Realty. “Rate changes will be slow and steady, but they should be moving in the real estate community’s favor. I think that the marketplace is going to see more transaction volume toward the end of this year into next year as things have really normalized.”
Even as financing conditions improve, local tax policy has become the bigger sticking point. Reassessments in 2024 lifted multifamily valuations, increasing tax burdens and shaking underwriting models.
“A city government that isn’t hostile towards property owners, specifically apartment owners, would spur more building,” Friedman said.
He pointed to mandates tied to rezonings as another obstacle.
“Any multifamily development that requires re-zoning mandates that 20% of the units must be kept affordable. You can buy units out of that requirement but If you keep 15 percent of them affordable you get a tax break,” Friedman said. “If not for that, you might have killed any new construction at all. Add in the fact that you have a good deal of anti-development Aldermen that scale back or outright block development and the result is a city where very little multifamily supply comes online.”
Still, new programs are helping shape some segments of the market. Cook County’s Affordable Housing Special Assessment, which lowers assessed value for qualifying projects, is beginning to make a dent in neighborhoods on the south and west side.
“It’s a strong incentive and I have no doubt that it’ll be something that will be thought about and discussed for every deal going forward for at least the near term,” Grossman said. “That reduction in taxes is freeing up a lot of cash flow, increasing revenues and that’s a strong positive across the board.”
The city’s additional dwelling unit program also has promise, Grossman said, though bureaucracy slows momentum.
“There’s a reason no one talks about how it’s easy to work with the city to do a lot of these projects,” Grossman said. “Just to get a lot of this stuff off the ground can take months. If we could find some way to just be more real estate friendly and not have as much red tape, I think that would be encouraging.”
While obstacles dominate the conversation downtown, neighborhood-level activity is a bright spot. Grossman highlighted projects such as Thrive Exchange in South Shore, Lawndale Redefined in North Lawndale and United Yards in Back of the Yards as proof that transformative development is possible when public and private capital align.
“There’s probably as much excitement about the quantum computing campus as there’s been in quite some time just knowing the job growth and economic engine that’s going to be on the South Side,” Grossman said. “Honestly, we’re in a very transformative time in terms of new development.”
Developers like Jacobson are looking outward, finding fewer hurdles and plenty of demand in the suburbs.
“The reason why we like the suburbs is they have the schools, the easy commute with the Metra system and the lifestyle people enjoy,” Jacobson said. “One strong driver for our rental communities that we’re seeing is amenities, which you don’t get when you buy a single-family house.”
His firm’s Orland Park project billed as Orland Ridge features 294 build-to-rent townhomes and ranch villas anchored by a clubhouse featuring a pool, gym, pickleball courts and a dog park. That, Jacobson said, reflects what suburban renters are willing to pay for.
“We find that’s a big driver for us and people really appreciate that,” Jacobson said.
Despite the headwinds, long-term investors see Chicago’s fundamentals as an advantage. Unlike Sunbelt markets, where supply surges have cooled rent growth, Chicago’s tight pipeline is propping up values.
“In Chicago there’s no fear that you might buy a building and within the next two years any meaningful amount of new units are added in your vicinity,” Friedman said. “It is just simple supply and demand. So if demand keeps growing and supply stays the same, rent pricing must go up.”
“Looking forward, we’re confident that the marketplace is going to be healthy headed into next year,” Grossman said.
For now, Chicago’s multifamily sector remains a study in contradictions: high rent growth, strong demand, but construction gridlocked by taxes and policy. The opportunity is there if developers, investors and government can find a way to align.
