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Will Oversupply Sink Chicago’s Rental Market?

by Peter Thomas Ricci

Chicago’s rental market has been cruising along the last few years, but have developers been a bit too exuberant in their building?

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Chicago’s rental market has been one of the big success stories in the post-boom housing market, but a new report out from Appraisal Research Counselors is casting some doubts on the market’s recent exuberance.

According to the report, which was authored by Ron DeVries, the vice president of Appraisal Research Counselors, Chicago’s supply of rental properties is poised to exceed the market’s demand, an imbalance that could pose problems in the next year or two.

Is Chicago’s Rental Market Out of Whack?

Indeed, DeVries report’ does paint a grim picture for Chicago’s rental market:

  • It’s been common knowledge among landlords that roughly 5,300 apartments are poised to hit Chicago’s rental market in 2013 and 2014, but according to DeVries’ report, another 3,000 units will hit the shelves in 2015, and it’s unlikely the marketplace can handle that much supply.
  • It’s a simple matter of absorption, the report said. Chicago, the last three years, has absorbed an average of 1,348 units per year – or, in other words, only half of the prospective increases in supply both this year and next year (and not even counting the additional 3,00 units in 2015).

In comments to Crain’s, DeVries said it looks like the rental market got away from its fundamentals.

“There clearly are going to be winners and losers,” he said. “We thought that the market was going to be a little more disciplined, but there are still a large number of units that are getting financed.”

Chicago Developers Aren’t Worried

Interestingly, developers in Chicago are not all that worried about the rental markets, in part because the rental market has been so wonderfully strong in recent years. For instance, while condo developments have struggled, rents at Class A downtown buildings have increased 27 percent since 2009.

And Curt Bailey, the president of Related Midwest, cites his own data that the annual increase in demand for downtown real estate (both apartments and condos) has averaged 3,00o to 4,000 units since 1990, which would easily match the increase in supply (see our recent cover story for more on the soaring downtown marketplace, and what’s influencing that demand).

And Crain’s raises another good point: though the rental market may have an oversupply, there’s nothing stopping those developers from converting high-rise apartments to condominiums, once the for-sale market regains its prestige among downtown residents.

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