If you own an apartment building in downtown Chicago, the grass looks a lot greener out in the suburbs right now.
With developers adding thousands of apartments to the city skyline, the supply of downtown units is exceeding demand, dragging down rents. But that’s not the case in the suburbs, where development also has surged, but not enough to weigh on the market.
“The near-term outlook for rent growth is better out there,” said Ron DeVries, senior managing director in the Chicago office of Integra Realty Resources, a consulting and appraisal firm. “You just haven’t seen the supply additions out in the suburbs that you’ve seen downtown.”
The median net suburban apartment rent was a record $1.45 per square foot in the third quarter, unchanged from the second quarter but up 4.5 percent from a year earlier, according to Integra. Net rents include concessions such as a free rent.
The suburban occupancy rate, meanwhile, was 95.4 percent in the quarter, vs. 95.5 percent in the second quarter and 96.1 percent a year earlier.
Demand for apartments soared after the recession, as fewer people bought homes in the aftermath of the financial crisis. Demand has remained strong amid an expanding economy and job market, the primary driver of apartment demand. In the suburbs, the median net rent has risen nearly 23 percent over the past five years.
Rents soared downtown, as well, but they are dropping now amid a construction boom. Developers will complete a record 4,500 downtown apartments this year, another 3,500 in 2018 and as many as 5,000 in 2019, according to Integra.
Many downtown developers are offering two months of free rent and other deals to fill their buildings. The result: The average Class A net downtown rent fell to $2.83 per square foot in the third quarter, down 2.8 percent from a year earlier, according to Integra.
BUSY IN THE BURBS
Developers also have been busy in the suburbs, building 2,831 units last year—the most annually since at least 1996—and another 1,843 this year, according to Integra. Not only are there fewer projects in the suburbs, but they are spread out over a large geographical area, limiting their impact on the market. One exception may be downtown Evanston, where more than 1,100 apartments are in the works.
The North Shore, which includes Evanston, had the lowest occupancy rate, 93.8 percent, among all 10 suburban submarkets tracked by Integra, while Will County had the highest, 96.6 percent.
The Naperville/Aurora submarket led the suburbs in rent growth, with the median net rent rising 6 percent between third-quarter 2016 and third-quarter 2017, according to Integra. The Kane and Kendall county submarket had the lowest rent growth, 0.7 percent.
Amid a strong economy, DeVries doesn’t see any slowdown on the horizon for apartment landlords. He expects overall suburban rents to rise 3.5 percent over the next 12 months.
Source: Crains Chicago 12/4/2017
Randolph is a Multifamily Investment Sales Broker with eXp Commercial servicing Multifamily Buyers and Sellers in the Greater Chicago Area.