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The Chicago multifamily market remained strong during Q3 2017, as rents continued to set new record highs. Rising vacancy rates remained in line with the market’s historical average, despite a historically high influx of new supply. Corporate relocations and an emerging technology sector have driven demand. Additional demand factors include more millennials entering prime renting age and baby boomers downsizing into apartments.
Rental Market
According to Reis, the average asking rent for multifamily properties in Chicago reached $1,347/unit at the end of Q3 2017, up from $1,336/unit during Q2 2017, and represented the highest level on record. Year-over-year, rent was up 4.9%. The Class A average at the end of the quarter was $1,835/unit, up 5.8% year-over-year, while rent for Class B/C properties drifted upward 3.0% to $1,065/unit. Gold Coast, an area with a high concentration of new luxury development, posted the highest submarket rent, at $2,480/unit. Reis projects overall rent growth in Chicago will average 4.8% during 2017, and will slow to 1.7% by 2021.
After rising in every quarter since year-end 2009, Chicago’s vacancy rate finished at 4.5%, an increase as compared with 3.8% one year ago. The increase has been mostly driven by the addition of new high-end luxury developments to the market. The Class A vacancy rate finished at 6.1%, up from 5.0% year-over-year, while Class B/C properties finished the quarter at 3.5%, up from 3.2%. East Lake County had the lowest submarket vacancy at 2.0%. Reis forecasts that the market’s overall vacancy rate will reach 4.7% by the end of 2017, then inch up to 4.9% by the end of 2021.
“Although the apartment vacancy rate is expected to continue to rise as the supply of new units is expected to exceed occupancy growth, the increase in vacancy should be moderate,” says Barbara Denham, Senior Economist at Reis. “Most major metros face a similar predicament: higher new completions and decelerating demand. Chicago’s excess supply is much lower than most major metros as developers have been more cautious relative to other cities, and demand growth has been steady.”
New Development
Among the top U.S. markets, Chicago had the most cranes working on residential projects, according to the most recent Crane Index survey from Rider Levett Bucknall. However, demand for newly constructed luxury apartments has not been able to keep up with the pace of new supply, as more than 6,806 new units were completed during 2016, while absorption totaled 6,233 units. The highest concentration of new development has been in the City West, Gold Coast, and Loop submarkets.
Reis forecasts 7,329 new units will come online in Chicago during 2017, which would mark the highest annual total in the last 30 years, while absorption is expected to reach only 4,155 units. An additional 16,363 new units are expected to be delivered through 2021, representing 3.5% of the existing inventory, with absorption expected to total 14,427 units during that time.
Sales Market
On the multifamily investment side, the Chicago market turned in a strong quarter during Q3, as prices increased and cap rates declined.
Data from Real Capital Analytics (RCA) showed that sales volume totaled $1.6 billion during the quarter, higher than the five-year quarterly average of $892.2 million. The 12-month average sale price was $190,990/unit, up 9.0% from the same time one year ago.
Through the first nine months of the year, sales totaled $3.3 billion, higher than the $2.9 billion recorded for the same period during 2016. For all of 2016 sales totaled $4.6 billion, the highest annual total on record.
“It should come as no surprise that deal volume is growing in Chicago even as it falls in other major markets of the US. Investors are hungry for yield and Chicago has that and then some,” says Jim Costello, SVP, Real Capital Analytics. “Over the last 12 months, cap rates in Chicago have averaged 140 basis points lower than those for the large coastal markets. This growth in deal activity is following the yield advantages.”
The RCA Chicago Apartment CPPI™ increased 9.1% over the last 12 months, compared to 9.9% one year ago and 10.0% for the U.S. overall.
Foreign investment accounted for $503.5 million of transaction volume year-to-date. Canadian investors accounted for $262.5 million of activity, with France following close behind at $201.0 million.
Chicago’s 12-month rolling average cap rate at the end of September was 5.9%, down from 6.1% one year ago, although higher than the U.S. overall average of 5.6%.
Economy
The Windy City’s recovering business cycle continues to move forward at a healthy pace, although budgetary issues and high crime rates remain a concern.
The U.S. Bureau of Labor Statistics reported that total nonfarm employment in the Chicago-Naperville-Arlington Heights, IL metropolitan division increased by 0.3% (representing 11,100 jobs) during the 12 months ending in September 2017, lower than the 1.2% gain for the U.S. overall during that time.
The largest gains over the last 12 months were in the financial activities sector (up 4.1%), while the losses were measured in the trade, transportation, and utilities sector (down 0.7%). Chicago’s unemployment rate fell to 4.2%, an improvement from 4.9% one year ago, and in line with the U.S. overall rate.
The local housing market continued its recovery, as the S&P Case-Shiller Home Price Index increased 3.9% during the 12 months ending in September, trailing the U.S. index, which increased 6.2%. Chicago’s index remains well below its pre-recession high set in March 2007.
The Zillow Home Value Index for Chicago increased 6.4% during the 12 months ending in September 2017, lower than the 6.9% increase for the U.S. index during that time. Zillow also reported that Chicago's price-to-income ratio came in at 3.1, putting it 2.2% higher than the market historical average, although in line with the U.S. average. Mortgage affordability was reported at 41.4% lower than the historical average, while rental affordability was 20.8% higher than its historical average.
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