Prosperous Times for Chicago’s Apartment Market

The 446,000-unit investment-grade Chicago apartment market maintained its momentum in the first quarter of 2012, as net absorption stayed solidly positive and rents edged upward. The past two years have seen the strongest demand since the early 1990s, and the current vacancy rate is the lowest since 2001. Chicago’s first quarter 2012 mean cap rate was 4.8%, similar to the rates recorded during the previous three quarters. The rolling 12 month cap rate for the first quarter was 5.0%, down slightly from the 5.4% recorded one quarter before. “Investors continue to respond positively to current conditions of lower vacancy and improving cash flows, striking deals to position portfolios to take full advantage of the recovery,” according to Marcus & Millichap. For multifamily rental property, there was never much damage to recover from, and that recovery has also taken place. Reis predicts increasing prosperity during the five-year forecast period, with low vacancy and above average rent increases.

Lowest Vacancy Rate Since 2001

Reis reports a vacancy of 4.4% for the first quarter of 2012, down 20 basis points from the prior quarter, and 100 from a year earlier. The rate has been falling steadily since peaking in 2009. The Class A and B/C vacancy rates are similar at 4.6% and 4.3%. They fell 10 and 20 basis points in the first quarter, and are down 100 and 90 respectively, from a year earlier. Reis predicts the vacancy rate will fall to 4.0% at the end of 2012, a slowdown from the declining pace seen recently.

Strong Demand Encourages New Supply

The rate of vacancy decreasing is expected to slow because new supply is picking up. Just 20 new apartments completed construction in the first quarter, but this left nearly 5,300 under construction. Also under construction, according to Reis, are nearly 1,200 condominiums following the completion of 306 in April. Developers are responding to increased demand with 723 units of net absorption in the first quarter of 2012. This included 211 in the Class A segment and 512 in the larger Class B/C segment; the respective 2011 totals had been 1,673 and 3,193.

Rents on Course to Surpass National Rates

Chicago’s apartment rents posted modest gains in 2010 and 2011 following a modest decrease in 2009. In Q1 2012 the average asking rent increased 0.2% to $1,088 per month, while the average effective rent rose 0.5% to $1,019 per month.
The year-over-year increases are 1.5% and 2.0%, respectively, similar to the annual gains for the prior two years. Despite a modest first quarter start, Reis predicts rents will increase by 3.2% asking and 4.2 effective in 2012. Chicago’s asking rent gains are forecast to slightly exceed the U.S. and Midwest region averages starting in 2013. The effective average is already at record level, prior to this forecast of above average rent growth here.

Photo: View From Balcony (photo: Flickr/locusolus)