Chicago real estate, living and neighborhood perspective

Rentals, REITs and Growth

Un dia de mi vidaBuilders, landlords and investors are carefully watching the apartment sector, determining the health, and potential decline of demand and return of investment in the city. With the pace of apartment building and current supply increasing recently there are concerns that there could potentially be an oversupply.

After the bust, the rental market saw significant growth as previous homeowners who underwent a short sale or foreclosure needed housing for a few years. Unemployment / underemployment also added to rental demands.

Builders and landlords met this demand with a spike in rental housing availability. But the old adage of location, location, location still remains true. Not all areas saw the growth they were hoping for. Key areas that were able to leverage the rental markets were neighborhoods / areas with job growth and affordability. Additionally, specific neighborhoods in Chicago were centered among accessibility to transportation and neighborhood amenities.

In Lakeview, for example, 2012 saw a total of 1666 total units rented1 where as 2014 had 1901 total rental transactions. The Near North neighborhood (consisting of River North, Streeterville, Gold Coast) had 3014 rentals in 2014, up from 2633 units rented in 2012.

Other active neighborhoods were West Town which saw a jump from 864 in 2012 to 1100, Near West Side (West Loop, University Village) saw an increase from 995 to 1100, and Lincoln Park which jumped from 1116 to 1283.

In the past six months, builders have constructed new multifamily apartments at an avg pace of 357,000 units a year. An increase of approximately 26% more than the 30-year average. (Evercore ISI).

Apartment REIT S&P

Additionally, the mindset of Millennials who are entering the workforce have had a different mindset with housing, strongly preferring rental housing in either smaller accommodations or shared housing to reduce expenses, centrally located and accessibility to public transportation. Whether these attitudes change as Millennials grow older is yet to be seen, but landlords and builders are set to take full advantage of their rental demands now.

Other considerations are the current unemployment rate in the city which has been on a decline for the past few years. As individuals impacted by the recession recover their economic health, they will impact larger rental housing segment or may move onto real estate ownership.

Chicago unemployment rateAs the economy heals, look for rental demand, and pricing to start stabilizing. As builders start to slow their pace of apartment buildings and REITs come down from their peaks, rental pricing will climb slower and in relation to job growth, average income and may occasional suspend when real estate ownership starts to grow in specific neighborhoods.

Gen X’ers who kept their homes through the bust, and getting ready to upgrade their homes as families expand will either place their current home for resale, with some strongly considering holding as a rental investment as market prices continue to stabilize versus rental prices which may afford them a positive return.

There is still a lot of required and pent up demand that a rental bubble will not occur – so long as building supply doesn’t become over abundant in the next couple of years. Landlords will see returns start to stabilize soon, versus the year over year spike increases as seen previously and REITs rate of growth will start to come down from their peaks as well. Those who have already secured rental investments will find an easier time leveraging their portfolio versus those yet to come to market.

1Rental housing data from MRED and may not include housing directly offered by landlords, builders or apartment buildings.


Sherwin L. Sucaldito, REALTOR®, GREEN, ABR, CRPM
@properties
The Institute of Luxury Home Marketing
Green REsource Council, GREEN
Accredited Buyer’s Representative , ABR
Certified Residential Property Manager, CRPM
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