The Chicago multifamily market has one major dilemma: oversupply. “The problem is plain and simple,” says David Vandenburg, president of TVO Realty Partners. Most of the product is concentrated in the downtown area, as opposed to the suburbs, where there is a glut of new supply in Near North and near the west side of downtown. The units with the most saturation are for-sale condos located in high-rise, mid-rise and townhome properties. Corporate unit contracts that evaporated, affordable mortgage rates that have lured renters to become owners and the significant layoffs from large downtown and suburban firms have caused vacancies to ramp up. Caution is the operative word for new development in Chicago’s multifamily market.

Approximately 5,000 units will be built downtown this year, yet the comparable inventory added to the market in 2001 has not been absorbed. This year marks the single largest supply year, clocking in just below the approximately 4,000 units added in both downtown and the suburbs.

The majority of development is taking place in the Near North submarket, which encompasses the first few miles north of downtown, and in the Near West submarket/River West. Chicago is a vibrant, 24/7 city with a downtown office market second in size only to Manhattan. People want to live in active communities with close proximity to work, shopping, dining and entertainment. “Those amenities are available where the development is occurring but the high-end market has been overbuilt and is not selling as well as the more affordable segments,” Vandenburg says.

The majority of the developers are local developers, or national and institutional groups that are located or have a presence in Chicago. These developers have built all multifamily property types, much of which has targeted the upper income lot. Some of the larger projects have been tailored for the moderate or “affordable” segments. However, most projects have been after the dollars of empty nesters, young singles and couples who desire city life.

To justify downtown construction, the market’s rule of thumb was that rental rates needed to be $2 per square foot and for-sale condo prices in excess of $200 per square foot. Rental rates have dropped, with condo prices surely to follow. The average market rates must have dropped to $1.75 to $1.50 per square foot, with a month-free concession found throughout the market. The suburbs are much more affordable, with monthly rents in the $1 per square foot range for older Class B product, $1.25 per square foot for newer product and $1.50 per square foot for the luxury rentals. However, concessions can be found throughout the competitive suburban submarkets where concentrations of new development and job losses have occurred. Vacancy rates have climbed, mostly in downtown, while the suburban vacancy rates have stabilized or recovered in some areas and risen slightly in other areas, such as the Interstate 88 corridor, where many of the job losses and office vacancies have occurred.

Further development will continue in the Near West side –– further west than the west loop gate or market district where most development has occurred over the past 5 years. The commute times to downtown are a third of the times from the north and south direction, and the community and its services are experiencing a revival.

The market has slowed down, but the downward pressure on rents and the trickle effect has not made its way through the market entirely. There is still an abundance of supply coming on, plenty that has not sold or been absorbed, and some developers continue making plans for developments to be ready 2005.

“2003 shall be a very telling year,” Vandenburg says.

David Vandenburg is president of TVO Realty Partners.


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