If you’re on the hunt for an apartment in downtown Chicago this spring, brace yourself for some sticker shock.
The net rent at high-end, or Class A, apartment buildings rose 32% last year, while the net rent at less-expensive Class B properties jumped 34%, according to the Chicago office of Integra Realty Resources, a consulting and appraisal firm. After plunging in 2020, rents rebounded from a low base, but they have recovered everything they lost and even hit new highs.
Tenants who could afford a downtown apartment a year ago may have to expand their search to cheaper neighborhoods. A hypothetical 1,000-square-foot Class A apartment in downtown Chicago rented for $3,370 per month at the end of 2021, up from $2,550 a year earlier, when desperate landlords were offering bargain deals.
“A lot of people are absolutely priced out of the market,” said Integra Senior Managing Director Ron DeVries.
DeVries expects downtown rents to rise at least 5% in 2022, fueled by strong demand and a slowdown in development that will limit the increase in supply.
COVID-19 put a scare into downtown landlords, but it didn’t last very long. Demand for apartments sagged in 2020 as the economy slipped into recession and downtown professionals worked from home. Untethered from their offices, they could live anywhere. Downtown lost its appeal for many of them as restaurants, bars and museums closed and rioting and looting erupted in the city. The downtown apartment occupancy rate dropped to 86.5% at the end of 2020 from 93.3% a year earlier, according to Integra.
But tenants quickly returned in 2021, drawn in first by landlords offering deals on rent and later by expectations that they would return to the office as the pandemic eased. By the end of the year, the downtown occupancy rate had risen to 94.7%.
“We just had this big pothole we went through and came out the other side,” DeVries said. “We’re back on trend.”
The recovery continued even as the delta and omicron variants swept through Chicago, delaying plans by companies to bring employees back to their downtown offices. With COVID case counts back down and many pandemic restrictions lifted, more people are returning to the office. Optimism that downtown Chicago will regain its footing is growing.
Leasing is well ahead of schedule at One Chicago, a recently completed two-building residential development in River North, said Jim Letchinger, the project’s developer. Rents, originally forecast at $3.98 per square foot, are “well above that” today, he said.
“Across the board, it’s the best time to be in business,” said Letchinger, founder and CEO of Chicago-based JDL Development.
Confident the boom will continue, JDL is getting ready to break ground on its first two buildings in North Union, a $1.2 billion, 2,700-unit development on the Near North Side. It plans to begin construction this month on a 236-unit multifamily structure at 920 N. Wells St., with a 410-unit building at 878 N. Wells getting underway in a couple months, Letchinger said.
Developers put the brakes on new projects during the early days of the pandemic, one reason Integra projects they will only complete 1,263 units downtown this year, down from 2,693 in 2021. A decline in supply, combined with strong demand, means landlords still will have pricing power this year, DeVries said. The market could shift in tenants’ favor in 2023, when developers complete about 5,500 units downtown.
Absorption, a key measure of demand that reflects the change in the number of occupied downtown apartments, rose to a record 7,084 units in 2021, according to Integra. The market essentially caught up from 2020, when absorption totaled -238 units, the first year of negative absorption since 2005.
DeVries expects absorption will fall to 2,600 this year, mainly because of the decline in development. It will rise in 2023 to 3,200 units, a more normal level, but still well short of the 5,500 apartments developers will complete downtown, according to Integra.
DeVries doesn’t foresee a long-lasting glut, but the surge in supply will affect the market.
“We’re going to be oversupplied for a short period of time,” he said. “There’s going to be some short-term pain” for landlords.
Developers are especially busy in the Fulton Market District. Marquette, a Naperville developer, is wrapping up two projects there with 520 apartments. Four other buildings totaling 1,000 units will open in the neighborhood in 2023, according to Integra. Many more are in the works.
Developers will keep building as long as rents keep breaking records. The net Class A downtown rent rose to $3.37 per square foot in the fourth quarter, up from $2.55 a year earlier, but just shy of the all-time high of $3.41 in second-quarter 2021, according to Integra. Net rent factors in the value of concessions like free rent.
As high rents push more apartment hunters out of downtown, properties in places like West Town or along Milwaukee Avenue could be an appealing alternative for many. In some cases, rents in outlying neighborhoods are 20% lower than those downtown, DeVries said.
“People that can’t afford the best of the best downtown can afford some pretty nice units in that first outer ring,” he said.