After a bleak winter of uncertainties and challenges, the Chicago area rental market has not only shown signs of life in recent months, but in many ways and in many geographic pockets, the area has seen a return to basics. pre-pandemic rent growth levels, occupancy and general optimism. And investor interest in multi-family properties remains strong, as apartment buildings in Chicago’s neighborhoods regularly trade at high prices.
But what about the stories of commuter thefts? Or the worries of living in a skyscraper during the pandemic? There has been a lot of talk about the challenges that have affected the multi-family market, but the reality, real estate professionals proclaim, is that there will always be people who want to live in the city. In addition, many residents want to be in the heart of the urban core.
Interest in new high-end rentals continues despite ongoing pandemic conditions
“Here’s the headline: Demand for new urban luxury apartments has never been greater,” says Aaron Galvin, CEO and co-founder of Luxury Living Chicago, which oversees the rental of 3,000 upscale rental apartments at across town. “It’s all the way back and we are already past where we were before the pandemic in terms of rental percentage, occupancy percentage and even rental prices.”
Galvin’s optimism in the high-end urban rental market seems almost defiant in the face of the persistent nature of the pandemic and the uncertainty it causes, however, at this point the rental rebound offers optimism and reflects the sustainability of Chicago real estate, He suggests. And just like many other industries, the multi-family market has had to keep up with the knocks and evolve over time.
A key strategy that has helped maintain stable rents for multi-family landlords has been the use of concessions coupled with longer-term leases. Trading for a month or two of free rent and reduced fees, or entirely reduced, was a longer lease period, which gave the tenant and landlord extra time and a greater sense of security.
“People were getting a once in a lifetime deal, but at the same time, the fact that the Millennial or Gen Z population, who make up the majority of people living in newer downtown buildings, were committing to 18 to 24 years old. -The one-month leases gave us a lot of confidence going into 2021 that the narrative of the cities dying was overblown, ”said Galvin.
However, at this point many of the generous concessions have since burned down and occupancy rates have stabilized. At the height of the pandemic’s fallout, average occupancy rates hovered around the mid-1980s, says Galvin. But currently the percentages are now over 95% to 100% rented, he adds.
For all intents and purposes, the pandemic marks the end of the last development cycle, suggests Galvin, which saw the delivery of around 40,000 new Class A units between 2013 and 2023. And for much of that cycle, those new ones apartments have been absorbed every year. , he adds. The pandemic and the resulting economic fallout should, however, have an impact on new deliveries for years to come. Galvin predicts that we could see as few as 1,600 total rentals delivered over the next two years. But by 2024 and 2025, those numbers could return to pre-pandemic levels with more than 4,000 new apartments each year, he suggests.
In the future, we can also expect to see changes in apartment floor plans, amenities and exterior offerings. The massive shift towards working from home will continue for countless professionals over the following years, and these tenants will need additional space in their apartment for a home office. Galvin suggests that the new buildings will likely include more units with dens and a more balanced mix of one and two bedroom apartments.
In addition, more than ever, tenants want more outdoor space and common areas. And in addition to wanting a corner or den for a home office, more buildings will bolster their coworking offerings.
“Green spaces have never been more important,” says Galvin. “Outdoor space is the most requested feature right now by apartment seekers, and I don’t think that’s going to change. ”
Sales of collective housing remain strong in both cities and suburbs
Another key aspect of the rental recovery has been strong demand and sales of multi-family assets, especially newly renovated or new construction products. Recent selling prices on properties in all popular lakeside communities, from Rogers Park to the South Shore, continue to increasingly hedge, while transactions in assets in high demand areas like Lakeview and Wicker Park are entering new record sales per unit territory.
But there was certainly a period of uncertainty in the first two months of the stay-at-home order, and some investors put trading on hold to see what would end up happening. But once leases and rents continued to prove strong and government aid was announced to help struggling tenants meet rent payments, buyers and sellers almost immediately returned to the table. , said Jon Morgan, co-founder and CEO of Interra Realty.
“We had a pipeline that started in March from the start of the pandemic, which was roughly $ 80 million in subcontract and most of it was suspended or temporarily canceled,” Morgan said of the first weeks of the pandemic. “But it all came back soon after and we ended up shutting everything down.”
Some buyers who put transactions on hold at the start of the pandemic ended up paying more for a property after returning to the table, Morgan says. While those weeks seemed uncertain and putting millions on rentals was a huge risk, many of those who made deals instead of walking away ended up playing their cards right while others started over in a market. extremely hot and competitive.
And lately there has also been a big push into the suburbs as the rental market continues to grow outside of the city. “In previous years, the suburbs could account for 10-20% of our total selling speed,” Morgan explains of Interra’s brokerage business. “But for this year it will probably be over 20% of our total selling speed. “
Low interest rates and access to capital have been the main drivers of the current residential real estate boom, but the desire to buy and hold durable assets is another important part of the multi-family market, suggests. Morgan. The pandemic has highlighted volatility in the stock market and more abstract assets like cryptocurrencies, but a fully rented multi-unit building offers a greater sense of security for many investors.
“I think as long as interest rates stay at their lowest, investor activity and appetite will stay here for a while until you start to see rates rise more than five years ago,” Morgan said. “And that could be awhile when you look at the economic indicators.”
But how would the market fare if another big wave of COVID panic and warrants hit Chicago? And how do investors factor other issues like property tax issues and the pervasive pension crisis into their calculations on multi-unit properties? And with prices hitting new highs, what room for growth is left in the near term?
“What we’re finding is that the most sophisticated investor gets opinions and bases their offers on the opinions of real estate tax advisers,” Morgan explains. “And I think investors sort of spend [the pension issue] usually, because they look at economic growth, the fact that new businesses are still coming in here, and they look at the economy as a whole.
This article also appears in the August 2021 issue of the Illinois Real Estate Journal