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Are Chicago Developers Flirting with Excess Supply?

by Chicago Agent

Could Chicago apartment developers make the same mistake that housing developers made just six years ago?

Two more apartment developers are jumping in on the Chicago apartment craze, as Chicago Real Estate Daily reports that Optima, in a joint venture with Tampa-based DeBartolo Development LLC, and Habitat Co. will be constructing apartment complexes in Streeterville and River North, respectively, adding another 775 units to the already flourishing Chicago rental market.

Though the projects are fully financed and being constructed in prime spots of the city, they come at a time when the scary phrase of “excess supply” is beginning to creep in on rental discussions in Chicago.

As Chicago Real Estate Daily’s reporter, Alby Gallun, notes, seven downtown rental projects are currently under construction, and Appraisal Research Counselors has estimated that another 5,600 apartment units will be on the downtown market by the end of 2014.

Excess supply remains the ultimate thorn in single-family housing’s side, and though numbers vary, general assessment puts the current level of excess homes at more than 1 million, and that does not even count the millions of shadow properties outside of the MLS. In fact, Warren Buffett, in an interview this week, plugged excess supply as the number one ailment for housing.

So with all the negatives surrounding excess supply, why are so many apartment units being constructed? Because all the personnel are so confident about the properties, it seems.

Bob Ratliffe, for instance, who is the vice president of Bentall Kennedy, the bank financing the Habitat Co. property, offered nothing but sunshine in his projections for the rental market.

“Mr. Ratliffe isn’t concerned, saying that with the so-called echo boom generation entering its 20s, demand for apartments will remain exceptionally strong,” Gallun reports.

“There’s a very, very large demand for multifamily, and it’s not going to get overbuilt anytime soon,” Ratliffe said.

And though Appraisal Research predicted a “softening” of rents in 2013, when many of the current developments go live, David Hovey, the founder and president of Optima, is similarly optimal in his predictions.

“Though landlords in other parts of town may suffer from the jump in supply, Mr. Hovey says demand for apartments is strong enough in Streeterville that his project won’t feel the effects,” Gallun reports.

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