An inside look at Chicago real estate

Lack of New Apartment Construction Not a Bad Thing

Steve Bergsman
   | Rental Market

During the real estate boom, all facets of the real estate world were operating in crazy-time except one — multifamily housing. The problems for the sector were twofold: with mortgages so cheap and available, less folks were renting apartments; and secondly, single-family developers were buying up empty land that could have gone to apartment development.

New Construction

Then came the economic crash and credit dried up, which meant new apartment developments continued to lag.

Now, we’ve entered the recovery cycle and the multifamily sector has rebounded strongly. “As rents recovered in nominal terms in 2011 and returned to their historical average in real terms in 2012, multi-housing developments picked up and, by year-end 2012, had recovered to the 1989-2008 average,” according to a CBRE report.

Chicago’s multifamily sector, however, has not fully rebounded, which is not really a bad thing at this point in the cycle. In some regards, the Chicago apartment is in-balance considering the state of the local economy.

The national rate of multi-housing (5+ units) permits issued in 2012 averaged just over 1% more than the national average from 1989 through 2008 average, according to CBRE. At the top of the list, with an average of over 2.5% was Raleigh, N.C., followed by Austin, San Francisco, Minneapolis, and Houston. Among the major cities below the national average for permits, Chicago, at about 0.5%, ranked close to the bottom, just above Detroit.

While that doesn’t look too promising, the lack of permits in the future — which indicates less new construction — is not necessarily bad news. Between the fourth quarter 2011 and the fourth quarter 2012, Chicago was one of a handful of major cities (with Boston, Washington, D.C., San Francisco, Philadelphia and Detroit) that showed year-over-year vacancy increases.

In addition, over the same period of time, all primary apartment markets in the country (Chicago, Boston, Los Angeles, New York, San Francisco and Washington, D.C.) reported rent growth had been slowing.

None of these data points take into account the wave of single-family homes that have become rentals and thus compete for those who prefer to rent rather than own.

With the Chicago economy still weak, the region doesn’t need an influx of new apartment construction. That would only make the economics of existing rental ownership even weaker than they appear to be, i.e., vacancies increasing and rental growth ebbing.

When the national and local economies pick up steam and job growth occurs again, then developers might want to get back in the game of new construction in Chicago.