High occupancy levels. Rising asking rents. Strong demand. The rental market is thriving in Chicago, and the luxury segment is no exception. The conditions have created a perfect storm for a construction frenzy. “Chicago’s had a lot of new development, particularly in the higher-end apartment area, so there’s a lot of product online, all great product,” said Michael Newman, the president and CEO of developer Golub & Company, LLC. “There’s still a lot of demand and activity, but potential renters have more to choose to from.”
That demand is spurred by the ongoing strength of Chicago’s job market. As noted in a report by Berkadia Real Estate Advisors, nonfarm employment expanded 0.5 percent annually through January 2017, adding 23,600 employees to the workforce, with a metro-leading 8,300 of those positions coming from the higher paying financial activities sectors.
In response to the call for more rental apartments, developers have practically doubled their efforts, adding 6,888 units annually through the first quarter of 2017, compared to just 3,762 the previous year. Many of the units – 4,837 of them – rose in the city’s more affluent submarkets the Gold Cost, River North and the Loop.
Developers have to give luxury apartment renters what they want, and it seems what they desire these days is a smart home. “Renters want a lot of tech features,” Newman said. “There’s a lot of technology on the interface between landlords and tenants, as well as within the building. Keyless entry, USB ports everywhere. Also, there are all these apps. One of our buildings has bikes that can be reserved and checked in and out on an app. You can securely let people in the building with an app. That’s what’s going on, and you’re going to see a lot more of that.”
At Golub’s 1001 South State, a year-old, 397-unit luxury apartment tower in the South Loop, residents have Wi-Fi and smart phone-compatible thermostats, an environment wired for up to 1 GB internet connectivity and an area called “Makerspace,” which provides technical tools such as a 3D laser printer for engraving and shaping designs from various materials.
The Millennial effect
Much of the offerings in today’s luxury properties are influenced by the desires of Millennials. It’s this portion of the population that may soon have an impact on another segment of the multifamily sector. “Rental demand will remain strong and as the Millennial group ages, they’ll still rent longer than other generations, but their fair share will buy,” Newman said.
The average net effective rental rate for luxury properties dropped from $2,599 in the first quarter of 2016 to $2,416 in the first quarter of 2017, according to research by Luxury Living Chicago Realty. “With an influx of new construction apartment buildings, there is a lot more supply this year in the first quarter compared to 2016. To be competitive, most buildings are offering one-and-two-month-free concessions, which results in a decrease in net effective rents,” Aaron Galvin, the managing broker and owner of Luxury Living Chicago Realty, said.
Still, Newman’s outlook for the Windy City’s luxury apartment market remains sunny. “Rents are not trending up to the same percentage degree as they have; it’s tapering a bit. It will be interesting in the next year or two because there is still new supply and we’re still seeing a lot of good job growth in Chicago. Chicago in and of itself – people want to be here, and that is what ultimately fuels this.”
In terms of investment, total investment activity in Chicago real estate has declined over last year, according to HomeUnion’s 2017 National Single-Family Rental report. HomeUnion found that “Both traditional and investment buyers are targeting properties higher up the quality scale,” in Chicago, though the city’s high median price was prompting some investors to leave the market. The report also forecast growth in Chicago’s economy based on projections of 54,000 new jobs to be added in the city this year, a good sign for rental demand.