Apartment construction downtown has been red-hot, and now the boom is spreading to some Chicago neighborhoods and out to the suburbs.
"There is a lot of activity in the neighborhoods," Appraisal Research Counselors Vice President Gail Lissner told a ballroom full of local real estate professionals this week in Chicago as the company released its annual report on the local market for apartments and condos. "Any location close to the L is desirable."
Meanwhile, in the suburbs, more apartments were opened last year than in any time in the past 20 years and demand for those units meant suburban rents grew more than the increases downtown, according to research by Appraisal Research Counselors.
Most of the surge in new construction has occurred in the city, but suburban governments are welcoming new developments, said Appraisal Research Vice President Ron DeVries.
The rents in new or almost-new units in the suburbs increased 6.7 percent in 2016, while they increased just 2.85 percent downtown, according to Appraisal Research. The median rent was just $1.39 per square foot in the suburbs in 2016, while downtown it was $2.89 a square foot for space in a newer building. In other words, for 1,000 square feet a renter would pay on average $1,390 in the suburbs and $2,890 for one of the new downtown apartments. An older but well-kept Class B building downtown would be $2.52 a square foot, or $2,520 for 1,000 square feet.
With rents high and the supply of downtown units up 150 percent thanks to a surge in construction over the last few years, developers are facing a greater challenge filling their new buildings. Some have been offering deals such as a month of free rent to people signing leases, according to Appraisal Research. But the suburban rental market is not as pressured by new construction and nearly all of the apartments are occupied.
There has been an emphasis on building in Chicago’s downtown, where it’s been popular for millennials to live and where corporations such as McDonald’s have been relocating their headquarters. Yet Appraisal Research reported that apartment construction is reaching its limit and should peak next year. During the last quarter of 2016, 92.5 percent of Chicago’s downturn units were occupied. That compared with 95.3 percent in the suburbs.
The strongest occupancy in 2016 was in DuPage County, with 95.7 percent of the apartments full and the median price of a two-bedroom apartment at $1,315. Northwest Cook County was 95.4 percent full with a two-bedroom apartment averaging $1,390. The weakest area was the North Shore at 93.8 percent occupancy and a two-bedroom apartment at $2,446.
Although the city is popular with millennials, two-thirds of that population still lives in the suburbs, DeVries said.
In the Chicago area, more than 70 percent of residents owned homes before the 2008 housing crisis. At the end of 2016, it was 65.5 percent, according to Appraisal Research.
Despite the huge increase in renters, however, "there has been a lack of development outside the Loop," said Michael Rossi, vice president for M&R Development, a developer that is moving into areas outside downtown.
"The downtown is really saturated," said Rossi, who is overseeing development of a 140-unit apartment complex with 160,000 square feet of retail in Wrigleyville at Addison and Clark streets.
M&R also is co-developing a 75-unit apartment building in Wilmette and a 297-unit building in Itasca.
The suburbs hold opportunity for new apartment buildings, because there has been little new construction, Rossi said. "There’s not inventory."
Investors see opportunity in the suburbs too. DeVries said he thinks major suburban apartment-complex transactions — which involve the sale of a complex from one investor to another — will in 2017 surpass last year’s sales volume.
"Investors had an insatiable appetite for multifamily investments" last year, he said, and that is expected to continue this year, although rising interest rates and high construction costs could constrain activity.
"From Schaumburg to Naperville, you are starting to see new construction," said Stephen Rappin, president of the Chicagoland Apartment Association. It’s a trend that’s occurring nationally after the surge of construction in downtown areas.
"Developers are looking for the next frontier," said Robert Pinnegar, president of the National Apartment Association.
gmarksjarvis@chicagotribune.com
Twitter @gailmarksjarvis
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