August 20 08:28:00, 2006 By Alby Gallun
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Amid rising occupancies and rents, the downtown apartment market is on the verge of its biggest construction boom in nearly 20 years.
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Amid rising occupancies and rents, the downtown apartment market is on the verge of its biggest construction boom in nearly 20 years.
Developers will add more than 1,250 apartments to the downtown market this year and are working on plans to build as many as 8,000 units over the next four years, according to a report by Appraisal Research Counselors, a Chicago real estate consultancy. That would increase the total 44% to roughly 30,250 units.
Condominiums have been the property type of choice for many downtown developers, but some now are turning to apartments as the condo market slows.
The rental market, meanwhile, is surging after a long slump, as an improved job market boosts demand for apartments and thousands of units are converted into condos, shrinking supply. The number of units fell 25% since 1991.
"Supply has gone way down and with the rise in rents and occupancies, a lot of these projects are feasible right now," says Appraisal Research Vice-president Ron DeVries.
After bottoming out at 89.7% in 2002, the downtown rental occupancy rate hit 97.2% at the end of the second quarter, according to Appraisal Research.
With the upper hand over tenants, downtown landlords have nixed concessions like free rent, fueling a 13% increase in effective rents at luxury buildings over the past year.
The timing couldn't be better for a few developers who are close to completing projects, including Chicago-based Golub & Co., which is leasing units at the Streeter, a 481-unit tower at 345 E. Ohio St., and Fifield Cos. of Chicago, which is wrapping up the 450-unit Residences at Left Bank at 300 N. Canal St.
Yet the party is about to get more crowded. Five new buildings accounting for 1,976 units are expected to open in 2008. Dallas-based Lincoln Property Co. and Amli Residential of Chicago each have South Loop projects in the works, and Chicago's Magellan Development Group LLC is working on two East Loop towers with a combined 1,083 units.
On top of that, Appraisal Research is tracking projects that could add about 5,562 apartments to the market over the next four years. With a slowing condo market, some condo developers are thinking about selling their sites to firms that build apartments, or even doing it themselves.
The question is whether the exuberance of developers will come back to haunt them when the supply of apartments exceeds demand. Appraisal Research's Mr. DeVries says he's not overly concerned, noting that condo conversions have removed so many apartments from the market that there are actually fewer rental units downtown now than there were 15 years ago.
"I think the market is there to absorb" extra supply, says Matthew Lawton, who sells apartment buildings and lines up financing as senior managing director in the Chicago office of Holliday Fenoglio Fowler L.P. "Will it put a governor on . . . rent growth? Absolutely."
copyright 2006 by Crain Communications Inc.
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