Downtown apartment rents surpass previous boom

Downtown apartment rents surpass previous boom By: Alby Gallun August 15, 2011

(Crain's) — Life was good for downtown landlords before the recession hit four years ago, as rents hit record highs. It's even better now.


Rents at downtown buildings have already eclipsed the highs of the last boom and are likely to keep rising, fueled by a broad shift in the housing market away from condominiums and toward apartments.


“The market tightened faster than we expected, and the landlords responded in kind,” says Ron DeVries, vice-president at Appraisal Research Counselors, a Chicago-based consulting firm.


The average net rent at high-end, or Class A, buildings downtown hit $2.43 a square foot in the second quarter, up 6.1% from the first quarter and 9.5% from a year earlier, according to a new Appraisal Research report.


That also tops the peak of the last boom, $2.35 a square foot, in third-quarter 2007. Net rents include the impact of concessions like free rent, which are disappearing as buildings fill up.


The apartment sector is arguably the strongest in the local real estate industry, mainly because of the condo market's continued troubles. Some downtown dwellers in their 20s or 30s who normally would rent for a few years and then buy a condo are staying put, worried that condo prices have further to fall. Others no longer qualify for a mortgage.


The average Class A occupancy rate rose to 95.6% in the second quarter, up from 93.9% in the first quarter and 94.5% a year earlier. During the last boom, the occupancy rate peaked at 97.5%, in second-quarter 2006.


With demand for downtown apartments outpacing supply, developers are building once again: Construction on five projects comprising 1,718 units is under way, and at least a dozen more are in the planning phase. The question is whether developers' exuberance today will create a glut of apartments a few years from now, pushing occupancies and rents back down.


Mr. DeVries isn't concerned yet, saying net absorption — or the change in the number of occupied downtown apartments — is totaling about 2,000 units a year currently. Developers will build about 5,500 units through the end of 2014, or about 1,375 a year on average, well below the current rate of absorption, according to Appraisal Research.


Jerry Ong, principal at Chicago-based Jupiter Realty Corp., agrees, saying people also worried that an oversupply of condo rentals would depress the apartment market — a prediction that turned out to be wrong.


“I think there is some resiliency downtown, and that's a significant factor,” Mr. Ong says.


But won't rising rents and falling condo prices eventually work against landlords, drawing people out of apartments and back into condos? Not until the fear factor disappears, says Mr. DeVries.


“We just don't see that happening until demand comes back for the condos, and that's not going to happen until stability in (condo) pricing returns and the ability to finance the units like we used to is back in the market,” he says.


Rents at lower-quality, or Class B, apartment buildings also have risen, but not as much as they have in the Class A segment. Class B rents rose to $2.07 a square foot in the second quarter, up 6.2% from a year earlier.


The price difference between the A and B buildings is now the widest it has been since Appraisal Research has been tracking the downtown market. Mr. DeVries expects the spread to narrow in the coming months as some tenants get priced out of Class A properties.


“You are going to see some spillover from the A to the B as the price gets high,” he says.


Read more: http://www.chicagorealestatedaily.com/article/20110815/CRED02/110819921/downtown-apartment-rents-surpass-previous-boom#ixzz1V8uWqGQA
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