HEARTLAND SNAPSHOT, DECEMBER 2005

Suburban Chicago Multifamily Market

Multifamily development is alive and well outside the city lines of Chicago, with smaller counties and towns experiencing strong growth and recovery. The allure of metropolitan Chicago and the availability in the suburban markets work hand-in-hand to make the suburban Chicago multifamily market a thriving one.

“One significant development is the change in building codes by many municipalities,” says William Montana, senior investment advisor in the Chicago office of Hendricks & Partners. “With the onset of condominium conversion, many suburbs have enacted sprinkler ordinances.” With hard cost estimates ranging from $3,000 to $5,000 per unit, converters will find it more expensive to acquire properties for conversion.

The majority of development is taking place in what Montana calls the “collar” counties, which border Cook County and the city of Chicago. “DuPage and Lake counties have been developers' favorite [counties], accounting for 69 percent of the units developed between 2000 and 2005,” he says. The availability of land, cooperation of local officials and residents, employment growth and relatively low real estate taxes make the collar counties attractive to those unwilling to pay Cook County taxes. “The Fox River Valley, Naperville and towns with proximity to the Interstate 55 corridor have all seen new development,” Montana says. On the other hand, northwest Cook County has not seen development of market-rate apartments since 1991.

Current developments are catering to the “renter-by-choice” and feature attractive amenities such as entertainment rooms, state-of-the-art exercise facilities, concierge services, in-unit washers and dryers, underground parking and appliance packages. Large units with high ceilings have been the trend; newly developed projects have an average unit size of 1,024 square feet, a 22 percent increase compared to units constructed before 1975. “Land scarcity has led [the] way to more mid- and high-rise developments with condominium-type features, thus, possibly creating a conversion exit for the developer,” Montana says.

Rents, as with other primary markets, vary by location and property characteristics. Newer, well-located properties with full amenities range from $1.10 to $1.30 per square foot. Older properties with fewer amenities can range from 95 cents to $1.15 per square foot. “The recent strengthening of the rental market has translated into higher effective rents for many properties in the form of lower loss-to-lease, a decrease in delinquencies, fewer concessions and improving occupancy levels,” Montana says.

Recovery has begun for the suburban market. For each year between 2002 and 2004, the average vacancy rate was more than 9 percent, with several properties reporting double-digit rates. “With concessions, loss-to-lease and bad debt, the average economic loss was just under 16 percent for the same time period,” says Montana. “A few properties were operating at 30 percent economic loss. It was a struggle.” However, the spring 2005 rental season saw increased traffic, the beginning of higher occupancy levels and effective rents. The average vacancy level is now approximately 6 percent. More infill properties have reported vacancy levels in the low single digits. “For the time being, it seems the worst is behind us,” says Montana.

A submarket with high employment, positive population growth, high barriers to entry, moderate to low supply and ample difference between rent-versus-own payments can be safely defined as a good submarket for apartments. According to Montana, no single suburban submarket has all these attributes but some are better positioned for the future. Infill locations such as northwest Cook County, which includes the towns of Arlington Heights, Mount Prospect and Schaumburg, offer high barriers to entry, a fairly large difference between rent-versus-own prices and a dwindling apartment supply due to condo conversion.

An increase in the area's population could come from the $6.6 billion expansion of O'Hare International Airport. The FAA approved the airport expansion in September and construction is underway. The addition of more than 195,000 new jobs as well as a 78 percent increase in total flights should contribute to increased population and housing requirements for the area.

The addition of Metra's STAR (Suburban Transit Access Route) Line will further strengthen the suburban Chicago market's connection to the city. The 55-mile STAR commuter rail line will link communities from Joliet to the airport. Towns benefiting from the new line include Arlington Heights, Des Plaines, Elgin, Elk Grove Village, Joliet, Naperville/Aurora, Plainfield, Rolling Meadows and West Chicago.

As an investment, the multifamily market has been a tight one in 2005. According to Montana, 14 complexes have traded for a total of $436.5 million. “The private investor has dominated the transaction activity, accounting for more than 50 percent of the purchases,” he says. “Price per unit has eclipsed $150,000 per unit for well-located, newly constructed communities.”

While there is still some softness in suburban Chicago, investors view the region as a solid market that is in the midst of a recovery. As the conversion market continues to absorb existing apartment properties, the market fundamentals will steadily improve.



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