While there is anecdotal evidence of a slowdown in sales in the Chicago multifamily market, particularly at the upper end where single units are priced for $1 million and more, brokers still report strong volumes matching last year’s record sales. “Units are sitting on the market longer, and there are fewer bidders for units, but prices have not fallen significantly,” says Michael Miller, a principal with Chicago-based Baird & Warner Real Estate Capital.

There are several thousand multifamily units currently in the planning stages, or in need of construction financing, within the city. The majority of these new developments are geared to deliver mid-priced units, ranging between $250,000 and $500,000, to satisfy the heaviest demand in the for-sale market.

The majority of development within the city is taking place in the inner ring adjacent to the central business district (CBD). The South Loop currently has the strongest demand, and there are also a number of developments in the West Loop, Rivernorth and Lincoln Park areas. Demand is driven by easy access to the CBD and the lakefront amenities. There is also continuing development along the Chicago River, which has developed into a more attractive amenity in the past few years as a result of high quality views of the river, and the city of Chicago is making an effort to develop walkways and attractive green space along the water.

“The rental market in the entire Metropolitan Chicago area has been negatively impacted by the slow economy as well as the availability of low interest rate financing for home purchases,” Miller says.

Apartment rents have declined between 5 percent and 15 percent during the past 24 months, and concessions are readily available in the market, including up to 2 months’ free rent for a 14-month lease. While apartment occupancy has recently stabilized, the market may still feel a significant impact from investor units in condominiums that will convert to rental units if the sales market continues to slow. This occurrence could increase vacancies by another 2 percent to 5 percent.

In suburban Chicago, multifamily developers are finding it difficult to attain zoning for apartments. However, the suburbs are receptive to townhome and condominium construction. “The major suburban trend continues to be construction of mid-rise units in suburban downtown locations,” Miller says. Many suburbs, including Arlington Heights, Elmhurst, Wheaton and Highland Park, have created active downtowns with this type of development.

The majority of suburban development is either in the far reaches of the Chicago area, where land is relatively inexpensive and available, or in suburban downtown areas. Some hot spots for development continue to be in Fox Valley, Romeoville and McHenry County.

In downtown Chicago, apartment rental rates for good quality, high-rise units range from $1.50 to $1.95 per square foot, which has decreased approximately 15 percent from the market peak. Suburban apartment rents in higher quality units range from $1.20 to $1.40 per square foot, also a decrease of about 15 percent from the market peak. Vacancy rates range between 10 percent and 12 percent in downtown, and between 15 percent and 20 percent in the suburbs.

“The market for multifamily housing has been due for a slowdown for several quarters but continues to remain robust as interest rates have declined,” Miller says. “As rates stabilize, or even rise, demand should begin to fall and new development should stall. The multifamily market from here on will be heavily dependent on whether we get any sort of economic recovery.”

Most tenants have satisfied their demand for nice quality apartments within the last 3 years, and the three significant demand drivers — household formation, immigration and job creation — are not providing a needed boost. “Given the frantic pace of housing construction during the past several years, the market is in danger of supply exceeding demand, causing rising vacancies, and falling rents and sale prices,” Miller says.

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