Cranes are everywhere in Chicago-land as Construction heats up

Strong Rental Demand

Sustained job growth attracts residents to the region and underpinning rental demand. In the last four quarters, roughly 9,600 new households were established metro wide and due to rising home prices and the lack of a down payment, many of these residents will rent. Strong tenant demand during this period has culminated in apartment vacancy dropping to the pre-recession level, tightening to less than 5 percent in most submarkets and activating apartment developers. Although construction cranes are visible throughout the metro and deliveries are expected to reach the highest point in more than 15 years, developers are most active in the core of Chicago. Companies such as Kraft Heinz continue to move their headquarters from the suburbs into the city, in part to attract young professionals, many of whom prefer living in an urban environment. This trend, as well as the many expanding tech and creative firms, will generate demand for the wave of luxury apartment towers being delivered in the city. Meanwhile increased employment opportunities in the collar counties, as well as lower rents compared with the city, will lure tenants to suburban complexes.

Value Add Opportunities

The expanding apartment inventory and strong rent growth are keeping investors active in the city core at cap rates that are generally in the 5 percent range for stabilized properties. Mixed-use buildings with more than 100 units in downtown or the near north are especially in high demand. Buyer competition for these properties is robust and if priced appropriately, well-located assets will receive multiple offers at list price. Meanwhile, many other investors are seeking value-add opportunities, targeting vintage properties with more than 20 units, and cap rates for assets with a substantial upside potential will dip into the 3 to 4 percent range. As these properties become harder to find, investors will move farther from the core, particularly into the collar counties to the north and west. With buyers plentiful and the cost of financing low, more syndicate owners who bought during the downturn are likely to take profits this year, which should provide more buying opportunities.

Forecast

Employment: Following the creation of 55,800 jobs last year, payrolls will expand by 65,000 employees in 2015, a 1.4 percent rise. The professional and business services sector is expected to lead this year’s gain.

Construction: Metrowide, roughly 6,600 apartments are forecast to be delivered in 2015, up from slightly more than 4,600 units last year. Of this year’s total, 3,700 units will be brought into service in the city, while the suburbs will receive 2,900 rentals.

Vacancy: Sizable job growth will push the demand for apartments above the wave of new supply coming online. As a result, vacancy in the metro will dip 10 basis points in 2015 to 4.1 percent. Last year, vacancy fell 80 basis points.

Rents: Amid tightening vacancy, the average effective rent will jump 4.6 percent to $1,310 per month. This is up from a 3.1 percent gain last year. Rents in the city will soar 6.8 percent while those in the suburbs climb 3.7 percent.

Economy

• During the second quarter, metro employers created 16,100 jobs, raising the 12-month total to 59,600 positions, an increase of 1.3 percent. This is down from one year earlier when 63,500 workers were added to payrolls.
• Despite significant hiring, the metro’s unemployment rate in June remained in the low-6 percent range, which is 90 basis points above the national rate.
• So far this year, job growth has been led by the professional and business services sector. This relatively higher-paying segment generated nearly 19,000 positions in the first two quarters and will support demand for luxury rentals. It was followed closely by the trade, transportation and utilities sector, which added 10,000 slots during this period. These gains should boost demand for lower-tier apartments.
• Outlook: Payrolls will expand by 65,000 employees in 2015, a 1.4 percent rise. Last year, 55,800 jobs were generated.

Construction

City

• Approximately 1,700 apartments were delivered in the city during the first half of 2015. Of these, nearly 1,000 units were in the Streeterville/River North submarket; the rest were in The Loop. The completions brought the 12-month total in the city to 3,300 units, down from the year-earlier period when 4,300 rentals were placed into service.
• Developers have roughly 6,600 rentals under construction citywide with de­liveries scheduled into 2017. Also, more than 15,000 units have been pro­posed, though most have not yet announced a start date.
• The largest project finalized during the second quarter was the 367-unit State & Chestnut in the Streeterville/River North submarket. The 35-story tower on State Street provides ground-floor retail space and high-end amenities, and rents start above $1,800 per month.