MARKET SNAPSHOT: Windy City Relatively Stable Compared to Other Midwest Markets

By Erika Schnitzer, Managing Editor

Chicago—Apartment operating fundamentals throughout Chicago are expected to remain soft this year, particularly in the suburbs, according to the Marcus & Millichap’s 2010 National Apartment Report.

Metro-wide, vacancy is forecast to reach 7.3 percent this year, 30 basis points higher than at the end of 2009. Asking rents are anticipated to drop 2.2 percent before the end of this year, while effective rents are predicted to decline 2.7 percent.

Smaller properties—with 10 to 50 units—in the city, are currently seeing vacancy rates between 2 and 5 percent, Jonathan Przybyla, vice president and regional manager of the Marcus & Millichap’s downtown Chicago office, tells MHN. Rents in these properties have essentially flattened.

Meanwhile, “in larger developments in the city, we have seen an increase to 7.5 percent, which is high compared to previous years, but from an overall standpoint, isn’t that bad,” Przybyla notes. And because of the shadow market, effective rents are down about 1.5 percent, primarily due to increased concessions.

At the same time, the suburban market is seeing vacancy rates between the low-6 percent to high-8 percent range, according to Przybyla, and asking rents are down about 2 percent, with effective rents decreasing approximately 5 percent.

The good news is that construction activity is expected to slow in 2010, with about 800 units slated for delivery within the next 12 to 16 months—down from 2,000 units in 2008 and between 1,000 and 1,200 in the years prior.

A considerable shadow market continues to pose a threat, particularly in the South Loop, however, according to the report. But, Przybyla points out, there was an increase in sales activity in December and January, so units are being absorbed.

Meanwhile, transaction volume has decreased and cap rates have reached the mid-7 percent range. Przybyla notes that there are two types of buyers currently interested in the market: those looking for stable apartments with solid occupancies and rents—which would mostly be in north of the city, as well as the CBD—and those investors looking for distressed properties, which are primarily west and south of the city. These buyers, notes Przybyla, are looking for “distressed sellers and assets that are selling very cheap—10 cents on the dollar.”

Deals involving out-of-state buyers will remain limited, though Przybyla notes that he does see some capital coming in from markets such as South Florida, Detroit and New York, “where they see values attractive to the market.” He adds, “Compared to other Midwest markets, we are a stable market. Even though there were downward trends overall, we didn’t get too out of whack with overpricing and overbuilding.”