The downtown residential market has become good for apartment developers and owners, who are benefiting from the lack of condominium sales. During the condo boom, developers hurriedly built new condo buildings and many existing apartment buildings turned condo. However now, many people are opting to rent rather than buy, and there is a shortage of rentals on the market.

“We keep setting records every year in terms of the number of units rented,” Ron DeVries, a vice-president at Appraisal Research Counselors, told Crain’s.

Image by © Image Source/Corbis

Rents for top-tier downtown apartments climbed 7.2 percent last year to $2.23 per square foot on a net effective basis, DeVries said. This included benefits such as months of free rent.

DeVries told Crain’s that rents will increase by another 7 percent to 8 percent this year.

Occupancies ended last year at 93.6 percent for Class A downtown apartments, up from 92.4 percent in fourth-quarter 2009, but down from 94.7 percent in third-quarter 2010, according to Appraisal Research data. DeVries said with only one 312-unit apartment set to open, rental occupancy could approach 98 percent.

“There is so little supply, and the absorption figures are off the chart,” he says.

According to Crain’s, the biggest contributor to new apartment supply is likely to be failed condominium deals, which investors are snapping up with plans to convert unsold units into rentals. There are currently seven condominium buildings downtown with more than 150 unsold units, Appraisal Research says.

Condo developers have sought to convert their buildings to apartments or have pursued price cuts, auctions or bulk sales to investors in hopes of unloading their unsold inventory.

For the third straight year, there were about 600 condos sold downtown, while nearly 2,000 announced units were cancelled.