Rents May Be Recovering Downtown

Downtown apartment rents, occupancies rise

By Alby Gallun, Aug. 24, 2009

(Crain’s) — It’s the worst of times for many real estate investors, but downtown apartment landlords can’t complain about much.

Rents and occupancies at top-tier downtown apartment buildings rose for a second straight quarter, bucking the downward trend of the broader real estate market, which has been battered by the recession and credit crisis. Leery of the lousy condominium market and possibly uncertain about their own economic futures, many downtown residents are choosing to rent rather than buy, boosting demand for apartments.

The average effective rent at Class A downtown buildings rose to $2.17 a square foot in the second quarter, up 2.4% from the first quarter, according to a report by Appraisal Research Counselors, a Chicago-based real estate consulting firm. Effective rents include concessions such as free rent.

While that’s still down 4.8% from the year-ago period, it’s a positive sign for an apartment market that usually takes a hit during recessions.

“All things considered, it’s not a terrible place to be right now,” says Appraisal Research Vice-President Ron DeVries.

The average Class A occupancy also rose for the second consecutive quarter, to 93.4%, up from 90.9% in the first quarter and 91.6% in the year-ago period.

The numbers would be even stronger if it weren’t for all the new apartment buildings on the market. Developers have built 2,098 apartments downtown since early 2008, and the so-called shadow rental market is growing as more condo owners, unable to sell their units, rent them out instead.

Demand for apartments, meanwhile, normally tracks closely with the job market, which has been awful. Chicago-area employers have cut more than 200,000 jobs in the past year.

But other factors may be playing a larger role in the current market. Many would-be buyers are renting instead either because they’re worried about condo values falling further or because they can’t get a loan to finance a condo purchase. Others may be nervous about taking on a mortgage given the state of the economy, says Greg Mutz, CEO of Amli Residential Partners LLC, a Chicago-based apartment owner.

“People are worried about their jobs,” he says. “When you’re in that kind of mind-set, you don’t want to be illiquid, and you want to have flexibility.”

The apartment market is “not as bad as I thought it would be,” he says.

Amli completed construction last year on a 440-unit building at 900 S. Clark St. While the high-rise is more than 80% leased, it faces competition from other new buildings in the South Loop, where developers have been especially busy.

Compounding the supply problem, Chicago-based developer Centrum Properties Inc. recently decided to convert a new 342-unit condo project at Roosevelt Road and Clark Street into apartments.