In a recent article from Crain’s Chicago Business (Surge in Supply Could Hit Downtown Apartment Rents), Ron Devries of Appraisal Research Counselors, Crain’s oft-quoted multifamily housing source, discusses the increase in rents over the past 12 months and the outlook moving forward.

While Appraisal research has continuously informed landlords and developers that the downtown Chicago rental market is short of supply and strongly encouraged the new development occurring in River North, Streeterville and Lakeshore East, they now warn that there are too many luxury Class A apartment units coming online in the next couple of years.

Further, he describes the impending apartment bubble as “…heartache for developers because 3500 units is a lot of units and we don’t have that much demand.”

As someone who tracks the downtown Chicago Luxury apartment market daily, this comes as no surprise to me.   There are only so many people looking for this type of living environment and all the stainless steel, state of the art workout rooms and rooftop pools are not going to change that.  The luxury high-rise building is for a specific client.  It’s for someone who wants to be close to work, steps from Chicago’s most trendy restaurants and have all the conveniences at their fingertips.

So what does this building boom (bubble) mean for the renter?

The Market in 2012

In the short term, landlords and property management companies are in the driver’s seat.  While there were 3500 new luxury apartment units that came online in 2010 and 2011, there are virtually no new apartments this year.  Prices are going to remain high and will increase even more through the summer of 2012.

The Market in 2013

2013 will be a different story.  There are going to be about 2000 new units by summer of 2013.  While prices for these properties will still be quite high, they will offer amenities, service and level of finish not currently found on the apartment market.  Hardwood floors will be the standard and the locations are the best in the city.  These are true condo quality buildings.  These new ultra-lux properties will force the buildings built in 2010 and 2011 to lower prices or face mass vacancies.  There will be deals on those properties.

The Market in 2014

2014 will be even more interesting because that’s the point where supply will truly be greater than demand.  Will these buildings flip to condo instead of rental?  Will they continue to build more for 2015 and 2016?

Only time will tell but it’s a pretty safe bet that we are headed for a downtown Chicago apartment bubble.

Chicago Magazine’s Deal Estate reporter, Dennis Rodkin, was recently asked this same question and turned to Luxury Living Chicago’s managing broker, Aaron Galvin, for an expert opinion (see Dennis’ video at the end of this post).

In answering this question, we always advise our clients to look at this decision qualitatively and quantitatively.

BUYING

Lets say you want to buy a $275,000 condo and you have $25,000 you are able to put down.

• The approximate cost to borrow $250,000 for a condo is $1200 per month (depends on interest rate, length of loan and whether the property qualifies for FHA financing).
• Factor in $300 for assessments and $300 per month in taxes.
• Add on any miscellaneous fees and utilities.

The result – a monthly cost of around $2000 to purchase a condo.

RENTING

What does $2000 per month in rent get you in three of Chicago’s mot popular neighborhoods?

River North:  $2000 will allow for an 800-850 sq ft one bedroom in a full amenity building.  You will have all the amenities of a full service building including 24 hour door and maintenance service, on site management, workout facility and pool.  The level of finish in the apartment will be very nice but not brand new.  Parking will not be included.

Lakeview/Lincoln Park:  For $2000, you can rent a 1000 sq ft 2 bedroom in a 4 flat building in a great neighborhood.  You will lose the amenities you would find in a luxury highrise building but you get an extra room and more of a neighborhood feel.  You should be able get upscale finishes including hardwood floors, granite counter tops and stainless steel appliances, as well as two updated bathrooms.  You can park on the street with a permit.

Lincoln Square:  As you move further north or south from the epicenter of the city, $2000 per month in rent allows for more space.  $2000 in Lincoln Square should pay for a highly upgraded 3 BR around 1800 square feet.  The finishes throughout the unit will be top notch and you should even have some outdoor space such as a large deck or backyard.  You may even be lucky enough to find a single family home or certainly a duplex up or down.  Garage parking or a spot in the back will be included.  Some Chicagoans prefer to be a bit away form the hustle and bustle, but if you work downtown, the commute can be taxing.

SO WHAT SHOULD YOU DO?

There are so many factors that go into deciding if a condo is the right buy.  While we can’t predict what’s going to happen to the housing market, here are two questions we always ask people when deciding to rent or buy:

1.  How familiar are you with the city/neighborhoods?  If you have lived in an area before and know you love it, it makes the buying decision much easier.  You can have the nicest place in the city, but if you don’t love what you see when you step outside your door, you will not be happy in the long run.  If you are new to the city or trying out a new neighborhood, it’s always best to rent first.

2.  Where do you see yourself in one year, three years and five years?  If a client cannot answer those questions, they are not ready to buy.  Buying is a long term commitment and there is a high likelihood the Chicago condo market will not turn around in the next 3-5 years.  The only properties breaking ground right now are rental buildings.   Condos are not being built because very few people want to buy them.

Our feeling is that the market is not going to be much different one year from now or even two years forward.  There is little incentive to buy right now and be tied down to a property unless you have long term plans of becoming a landlord.  Owning real estate is still a great plan long term, but you have to be in it for the long haul.

Rent right now and keep your eye on the market.  Renting allows the flexibility to move if needed, but the security to know you aren’t committed long term.

Photo Courtesy of Chicago Tribune

The early winter months are filled with holiday shopping, family vacations and accepting the fact that you can’t wear shorts anymore.  If you have to move in the middle of the Chicago winter, you know it’s a difficult time to find a great apartment to live.   You would think there are exceptional deals but the winter of 2011-2012 is proving a bit more difficult.  Here are a few reasons why the Chicago apartment search in November and December this year is a tough task:

1.     Apartment prices are still high.  If less people are looking, why are prices so high?  Landlords and property management companies still think they can command summer prices because summer wasn’t that long ago.  Their buildings are still very occupied and with few people moving at this time of year, they remain full throughout the beginning of the winter.   It’s after January that you’ll start to see some good move-in incentives.  This is because people start to move after the first of the year, causing occupancy to rise and the specials to kick in.

2.     Anybody looking in the dead of winter, has to move.  Most people that move in the winter months are coming to downtown Chicago for a new job or school.  They are being relocated and must find housing quick.  This is another reason larger management companies can keep prices high.  They have a captive audience.  Note that if this section applies to you and you do have to move, Luxury Living Chicago is very much in tune with the best options available and can assist in helping you find a great apartment at the best value for this season.

3.     Availability is low.  There just aren’t a lot of apartments available this time of year.  Most of the good ones went at the end of the fall leasing season and current tenants are less likely to move if they don’t have to.  Larger luxury Chicago apartment buildings are willing to do shorter term lease renewals that allow tenants to extend their lease into the busy Spring/Summer leasing season.

4.     Many of the newest downtown luxury Chicago apartment buildings are for sale.  This is a unique situation also contributing to high prices this year.  Many of the newest buildings are for sale or under contract and they have promised investors a certain rent per unit.  If they started to give mass concessions and lowering rents, investors may back out and the buildings won’t sell.

While I don’t expect the newest luxury buildings will be giving away the house come late winter/early spring, I can pretty much guarantee it will be better pricing than what you see right now.  Hang in there.  Make it through winter and look forward to renting that brand new luxury apartment this spring.

What is the square footage?

It’s one of the most common questions people ask when inquiring about an advertised apartment. People like to hear a number attached to the space they are considering. Moreover, everyone has a number in mind that is “about what they are looking for.” Whether you are moving from a studio in Lincoln Park or just sold your home in the suburbs, there is often a per-conceived notion of what is enough space.

My suggestion: don’t worry about the square footage. Rather, focus on the layout of the unit and what you need/want to put in the apartment. This is why I always ask at least three questions to help narrow down a search:

1. Who will be living in the apartment? This question helps me understand what kind of storage space you will need. The reality is that couples and roommates have more stuff than singles. Closet space becomes important. Also, many of the newer buildings offer lofted second bedroom options. Developers did this so they could market properties as two bedrooms. These simply do not work for roommates or couples with children. While the lofts are cool and trendy, they may not always be the right fit.

2. What furniture do you have? If you have a gorgeous 12 seat dining room table that you “can’t possibly live without,” then downtown Chicago high rise living is probably not for you. However, there are plenty of apartments that can accommodate a small bistro table or provide built in breakfast bars with ample room for seating so you can still entertain with the best of them.

3. How do you plan to use your living space? This can be a tricky question but people tend to have an idea of how they want their apartment to function. For example, if you are looking for a one bedroom plus den, chances are you, or someone in the apartment needs a home office set up. There are 1,000 square foot one bedroom plus den layouts where the den is simply a nook off the living space with a slab of granite serving as a desk, versus an 850 square foot one bedroom plus den that has a dedicated small room perfect for providing office privacy. But if you ruled out the second one based on square footage alone without every seeing it, you may have just passed on the perfect place for your needs.

For the two bedroom client, the second bedroom is almost always for “guests.” Downtown Chicago luxury two bedroom rentals cost about $500 more per month than one bedrooms. The common space is often times very comparable. So for the ten nights per year that you may have guests, you are spending and extra $6000! I’m sure your in-laws would be more than happy to stay at The Elysian or Peninsula, spa service included, for that price. Not to mention, most buildings offer on site guest suite accommodations; a fully furnished apartment for around $150-$200 per night. If you can, cut the second bedroom.

I’m not saying square footage is not important in selecting your apartment home. But there are many other factors to consider before ruling out a property based on that number. Square footage alone does not dictate how your apartment will serve your lifestyle. Luxury Living Chicago will be sure to ask you those questions to find the perfect place to call home.

Panel of Speakers at the Chicagoland Apartment Association 2012 Preview Breakfast

There are few real estate headlines these days with the word “optimism,” but bring together some of the biggest names in the downtown Chicago luxury apartment business and it’s all smiles.  With rents at historic highs and demand increasing daily, developers who struck it rich with their last offerings are breaking ground again.  More than six thousand new units are set to deliver in downtown Chicago in the next three years, all in prime downtown locations.

The Chicagoland Apartment Association preview breakfast was a showcase for those developers, who are very positive about the downtown Chicago apartment market.  Here is what the panel of developers and industry experts had to say…

Curt Bailey, President Related Midwest 

Proposed Projects:

Property                         # of Units                    Status
500 N Lake Shore        500                               Ready to break ground
111 W Waker                450                               Ready to continue building

His thoughts on the market:

• We did “years of research and due diligence” to make sure these locations are going to be successful.
• We are building as 100% rental buildings with floor plans that work for renters (read: lots of studios, convertibles and one bedrooms).
• Chicago used to be rent until you were ready to buy. Now it’s rent and continue renting for awhile.
• These properties will be some of the nicest in Chicago.

Greg Mutz, Chairman and CEO AMLI Residential

Proposed Projects:

Property                         # of Units                    Status
AMLI River North          427                             Just broke ground

His thoughts on the market:

• AMLI has over one billion dollars in the pipeline nationwide.
• Apartments are selling for much more per square foot in downtown Chicago than condos.
• Cost to building downtown is not much more than suburbs; a large reason for continued building.
• Chicago is a relatively easy market to find subcontractors and labor compared to Texas or any southern states.
• When reselling apartment buildings now, you only need to show single digit rate of return (6-7%) versus the 12%+ before the recession.

Steven Fifield, President and CEO , FRC Realty Inc.

Proposed Projects:

Property                         # of Units                    Status
365 N Halsted               500                              Ready to break ground

His thoughts on the market:

• Lending has become much tougher in this environment.
• The major reason luxury apartment buildings are selling is because of the internal rate of return (IRR).  Because these buildings are all 95% or more leased, there is a high IRR.  It is one of the safest investments large institutions can make right now.
• None of the new developments are using land that requires affordable housing.
• Prices to build properties right now are the lowest in thirty years.  It’s a great time to build if you can get the financing.

Nick Ryan, Managing Director Marquette Companies

His thoughts on the market:

• Acquiring lots of properties all over the country; Class A, B and C buildings.
• Had tremendous success with Trio in the West Loop.
• Also recognized apartment buildings as one of the safest investments available to large institutions.
• Construction quality is better than ever because architects and contractors have time to do it right.
• On retention, 60% of people used to jump buildings each year and now 60% of people are staying.

Mark Stern, Senior Vice President Acquisitions Waterton Residential

His thoughts on the market:

• Having great success with Mondial in River West.
• People are getting rent increases, looking around and realizing they should stay.  There are no bargains to be had right now.
• Cautiously optimistic about the market; there may be too much coming on at the same time.

Stay tuned.  As these buildings continue to break ground, we’ll be following them every step of the way and posting an in-depth analysis of the progress and plans for each property.

Now, the slow season has hit and prices are falling.  The same 1 BR at Flair that was leasing for $2105 is now $1895 and the 2 BR are under $3000 again.   If you are looking for the best value, late fall and winter is the time to move…if you can handle snow!

Start your Chicago apartment search with Luxury Living Chicago today by browsing through our inventory of apartments.  We have the most up to date pricing and availability.

That’s not soon enough, believes Aaron. We are currently experiencing a lack in availability of apartments and condos for rent in downtown Chicago. We need more luxury Chicago apartments and soon. Occupancy has hovered around 95% for class A buildings all summer long.

Unfortunately, we’ll just have to wait, as no new buildings are set to open until late 2012/early 2013.

However, there are plenty of buildings in the works. Aaron believes it’s a great time for developers to get into the multifamily housing game, as this is the one sector of real estate thriving in the down economy. Aaron cautions developers that they need to build with longevity in mind. This means creating floor plans, amenities and other building features and conveniences that appeal to both renters and ultimately to buyers.

This past summer pricing for luxury apartments soared. After a few years of slow or no change, downtown rents jumped by about 15 percent from summer 2010 to summer 2011. Even as we head into September and October, typically a slower time for the downtown Chicago rental market, prices continue to hold steady.

Aaron attributes the high prices to a shortage of inventory in the Chicago market. The summer of 2010 saw 3,500 new apartments come online, but no new buildings are set to open until later 2012 at the earliest. The lack of new units, coupled with the down housing market where people are opting to rent versus buy, has created the perfect storm for high pricing.

It’s the law of supply and demand.

We also discussed the same issue with the Wall Street Journal later in the week, arguing while some statistics indicating the tide is beginning to turn, consumer behavior has not quite caught on. “People are scared” as Aaron Galvin was quoted saying, and we still see more and more perfectly qualified potential home buyers choosing to rent, not seeing homeownership as the safe bet it once was.

All these factors have added up to create a perfect storm: not enough apartments and quickly rising prices. The downtown Chicago apartment market is going to remain tight for at least a little while longer and your best bet of navigating quickly changing pricing and availability it is with help from Luxury Living Chicago.

Day after day I get calls and emails asking for apartments with washer/dryer in unit, granite, stainless steel and the new luxury finishes everyone is seeking.  People are also telling me they would like to spend $1600 on a spacious 1 BR..  Unfortunately, that is simply not available.  True luxury apartments have gone up as much as 20% since last year and it’s tough to find a luxury one bedroom any less than $2000…and that doesn’t include parking!

Here are the top three questions I have been asked lately and my take on the market:

Why are prices so high?

The answer is quite simple:  supply and demand.  There is a shortage of luxury apartments available for two reasons.  First, all of the brand new, fancy places that came to market in 2009 and 2010 are occupied.  People received great specials last year and they love their apartments.  That leads to the second reason.  The people that rented these luxury Chicago apartments don’t have any newer options and don’t want to buy condos, so there is little incentive to make a change.  Owners and management companies are increasing rent just enough to maximize revenue and it doesn’t make financial sense to move.  Supply and demand, plain and simple.

When are prices going to come down?

It’s going to be a while.  There are no new downtown luxury properties set to deliver until 2013 and unless the Chicago condo sales picks up tremendously, people are just going to keep renting the nicest properties they can.  There will be a slight dip at the end of the year as the weather turns but the prices and lack of availability is here to stay?

If the prices are so high, what can you do for me?  Is there any negotiation?

As I mentioned, there is not a lot of availability so owners/management companies are not very likely to negotiate.  The value we bring in this type of market is our market knowledge.  We know the buildings that have vacancies and can find the best value such as lower floors to bring the price down and dog floor options that are even harder to find.  We stay on top of these luxury properties each and every day to get updated availability and once you become our client, you are the first to know.  The concept of client has become even more important in this environment.

There is no question prices are high and it’s not as easy to find apartments these days.  However, downtown Chicago has never been a better place to live for the nightlife, restaurants, and world class shopping.  Just be glad it’s not New York!