As more new developments continue to appear in downtown Chicago, construction in North Side neighborhoods such as Lincoln Park and Lakeview remains low. With little new construction to compete with, North Side landlords have the ability to raise rent prices more freely than downtown property owners who are beginning to feel the impact of the construction boom.
Over 6,200 apartments are expected to open downtown this year and next, and with rent prices in that area already starting to fall, competition for tenants may become a struggle.
“I stayed away from those areas [in downtown Chicago],” says Stuart Handler, CEO of TLC Management, which owns properties from Evanston to the South Shore, in an article in Crain’s. “I didn’t want to battle it out with new high-rises.”
Meanwhile, in North Side neighborhoods, demand for apartments continues to exceed supply, allowing many landlords to raise rents by 5 percent or more. While this is good news for building owners, tenants will not see relief any time soon.
“I don’t see it leveling off in the near term,” says Lee Kiser, co-founder and principal of Kiser Group, an apartment broker based in Chicago. “There’s a lot of short-term rent growth to capture.”
Surging Supply in the Chicago’s Downtown Rental Markets
The apartment industry has experienced significant growth over the past few years with the housing crash causing many residents to shy away from home ownership. From 2010 to 2012, net rents at top-tier, or Class A, downtown buildings rose nearly 24 percent according to Appraisal Research Counselors, a Chicago-based consulting firm.
The demand for rental properties caused a surge in development in the downtown area, and with the increase in available apartments, landlords have had to start lowering rent. Class A rent prices dropped 2.7 percent last year, according to Appraisal Research.
While landlords in Lincoln Park and Lakeview are charging higher rents, rent growth is actually better in up-and-coming neighborhoods such as Logan Square and Humboldt Park, which have experienced an influx of residents who are looking for less expensive rental options. One landlord, who asked not to be identified as to avoid alienating tenants, says he recently increased rent prices 12 percent in one four-unit Logan Square building.
Higher Costs = Rising Rents
Even though double-digit rent increases are often limited to buildings that have undergone major renovations, Andy Ahitow, founder of the tenant service Chicago Apartment Finders, estimates that most landlords have been raising rents by about 5 percent in the strongest neighborhoods.
These rent increases have not affected the demand for apartments in these neighborhoods. Handler’s buildings, which have a total of 2,811 units, are 97 percent occupied. TLC’s rent prices rose 3.5 percent to 4 percent last year. However, costs for landlords are rising, too. Handler estimates that his gas and water bills rose 100 percent each last year, and he’s spending between $300,000 to $500,000 on each of his 14 high-rises to comply with new safety regulations. Handler and other landlords are also preparing for property tax increases because of Mayor Rahm Emanuel’s plan to solve the city’s pension crisis. If operation costs continue to rise, rent prices may continue to do so as well.
“There’s a real pressure on costs, which will mean that landlords will find a way to pass those costs along,” Handler says.