Rents up at downtown apartments for first time in 2 years

(Crain’s) — A construction wave coupled with 11.2% unemployment would normally make life miserable for apartment owners, but downtown landlords are holding up surprisingly well.

The occupancy rate for top-tier downtown apartment buildings rose to 93.6% in the first quarter, up from 91.4% in the fourth quarter and 90.9% in the year-earlier period, according to Appraisal Research Counselors, a Chicago-based consulting firm.

Including concessions like free rent, net rents at Class A buildings rose to $2.16 a square foot, up 3.9% from $2.08 in the fourth quarter and 1.9% from $2.12 in first-quarter 2009. It was the first year-over-year rent increase in two years.

“There’s just huge demand for rental product downtown right now, and owners have been quick to capitalize on it,” says Appraisal Research Vice-President Ron DeVries.

Apartment demand is usually low when unemployment is high, as would-be tenants try to save money by doubling up or living with their parents. But that’s not the case downtown, where many prospective condominium buyers are renting as they wait out the depressed condominium market.

“They’re not convinced that the market has bottomed out on the ownership side,” Mr. DeVries says.

That helps explain why a much-feared surge in apartment supply so far has not kept occupancies and rents from rising. Developers have added 4,077 units to the downtown market since the beginning of 2008 and will complete another 799 by the end of the year, according to Appraisal Research.

“Six months ago all of us were nervous,” says Steven Fifield, president of Chicago-based Fifield Cos., the developer of Alta at K Station, a new two-tower, 848-unit apartment project at 555 W. Kinzie St. in the West Loop.

The nerves have given way to relief. Fifield estimated it would lease about 10 units a week at Alta’s 420-unit west tower, which opened March 1. Instead, Alta is averaging more than 20 and the west tower is already 50% leased, Mr. Fifield says.

“The supply is getting absorbed substantially faster than I expected,” he says.

One key measure of demand is rising at its fastest pace of the past 10 years. The number of occupied downtown apartments rose by 2,190 units from first-quarter 2009 to first-quarter 2010, the biggest annual gain of the last decade, according to Appraisal Research.

By contrast, the number of occupied apartments fell in the last recession by more than 1,400 units.

Granted, developers are offering good deals to attract tenants, in many cases as much as two months of free rent. As a result, developers are collecting lower net rents than they projected when they broke ground, before the jobless rate soared.

And while downtown Class A net rents are rising again, they have fallen more in the current recession than they did in the last one. Net rents declined 13% from their peak in the third-quarter 2007 to their low of $2.08 a square foot in fourth-quarter 2009, according to Appraisal Research. They fell 12.4% in the prior recession.

Still, given how strong demand is, Mr. DeVries expects net rents to rise about 4% this year and occupancy to hit 95%.

“Once those jobs do start coming back, it will be fascinating to see what happens with rents,” he says.

If there is one spot where oversupply is a concern, it’s in the South Loop, where new construction and competition from condo rentals is depressing rents.

“There’s been a bit of divide in the market,” Mr. DeVries says.

But optimism is returning, with some developers already laying the groundwork for the new round of construction.

They are looking forward to 2012, when the economy is stronger and the market has had time to absorb the supply from the current development wave. After completing 2,234 units this year, downtown developers will finish none in 2011.

“There’s a lot of people talking now and trying to work up numbers for a new rental building,” Mr. DeVries says.

By: Alby Gallun May 24, 2010 for Chicago Business

Apartment wave forms on Chicago's horizon From the Crain's Chicago Business Newsroom As condos cool, rental construction heats up

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.

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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