Chicago braces for another wave of apartment development
These days, Chicago is home to one of the busiest apartment development markets in the country. Demand for urban living has fueled a surge in multifamily construction across Chicago. Even though the building boom is starting to push vacancies higher, there is still a robust pipeline of projects across the city that range from luxury high-rises to compact micro apartments.
Completions jumped to 10,545 units last year – making it the #8 market in the country for new supply, according to data from RealPage. And the metro faces another big year of building ahead with an estimated 12,000 units that were under construction at year-end. That activity comes on top of what has been a steady flow of new projects coming to the market in recent years. Annual completions have been averaging between 5,000 and 7,000 units from 2013 through 2016, according to RealPage.
Much of the new development has been concentrated in two downtown submarkets – The Loop and Streeterville/River North. The two areas alone accounted for nearly half of all completions last year. The new supply is creating fresh buying opportunities for investors. For example, Reonomy recorded 22 multifamily sales in the River North area alone last year and another four in The Loop. Some of the top priced property sales in the River North area can be seen here:
Making Amazon’s Short List
One transformative project underway is the redevelopment of the former Chicago Tribune printing plant, a 37-acre site along the Chicago River. The Chicago Tribune has reported on a development master plan for the River District that would create about 9 million square feet of office and residential space, along with a river walk and public park space. The River District dovetails into the city’s broader plans for revitalization about 760 acres along the river that had previously been zoned for industrial use.
The project is a key part of the city’s bid to land Amazon’s second North American headquarters. Chicago is one of 20 finalists that Amazon is considering, and the River District is one of 10 possible sites in Illinois that have been pitched as the potential home for the urban campus. If the city succeeds, it would be a huge boon to the economy and both residential and commercial real estate markets. Amazon has said that it plans to invest over $5 billion in construction and eventually grow its second headquarters to include as many as 50,000 workers.
Developers chase new opportunities
Development has been concentrated in luxury, high-rise apartments downtown. But even broadly speaking, supply is starting to outpace demand with vacancies that are rising moderately higher. Marcus & Millichap is forecasting that vacancies will rise 30 basis points to reach 6.3% by year-end. Although some landlords are having trouble pushing rents higher amid the increased competition, Marcus & Millichap reported that average effective rents rose 5.3% in 2017 and the firm is predicting that rents will rise another 3.0% this year.
Developers are working to set themselves apart from competitors and provide renters with alternatives. For example, LG Development has proposed a plan to build 166 “micro” apartments in the West Loop that will include a mix of primarily studio and one-bedroom units with an average size of about 400 square feet. Investors also are jumping on that trend. The Maynard, a 74-unit property micro apartment property in Chicago’s Uptown neighborhood recently sold for $9 million or about $400 per square foot.
Both developers and investors are continuing to look for opportunities in the Chicago metro. It is one of the top 10 largest metros in the country, and landing Amazon would be a huge economic boon for the region. At the same time, residential developers are keeping a close eye on the near-term balance of supply and demand along with other challenges such as flat population growth over the past several years. According to the Chicago Tribune, the city reported slightly negative population growth in 2016 and 2017.
One reason people are citing for leaving the city is the high cost of living, which again points to the opportunity to create more affordable workforce housing options. Developers also are paying attention to demographic shifts and changing lifestyle preferences that is fueling demand for live-work-play housing and projects that cater to millennials and young professionals who are gravitating towards more shared spaces and community-living options.
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