Downtown apartment market falls further, but suburbs stay strong

Occupancy is at its lowest level since at least 1998, dragged down by the pandemic. But step into the suburbs and it's a different world entirely.
By: Alby Gallun

​As downtown apartment landlords struggle through the worst market in decades, it's sunshine, lollipops and rainbows in the suburbs.
 
The downtown occupancy rate fell to 87.1 percent in the third quarter, down from 93.8 percent a year earlier, according to the Chicago office of lntegra Realty Resources, a consulting and appraisal firm. The rate has never been that low in the 22 years since the firm's executives began tracking the downtown market.

To attract tenants, downtown landlords have slashed rents, which fell 18 percent to 23 percent, depending on market segment, from third quarter 2019.
 
"Some (landlords) are saying they can't remember it ever being this bad," said Ron DeVries, lntegra senior managing director.

The coronavirus pandemic and civil unrest over the summer have reduced the appeal of high-rise living across the country, and with so many people working from home, fewer are renting apartments to be near a downtown workplace.
 
That has turned out to be a bad combination for landlords-but a good one if you're in the market for a new pad. Downtown rents are down about $500 across the board, DeVries said.

Step into the suburbs and it's a different world entirely. The suburban apartment occupancy rate rose to 95.3 percent in the third quarter, up from 95.1 percent in the second quarter and 95.0 percent a year earlier, according to lntegra. The median net suburban rent was $1.53 per square foot in the quarter, versus $1.54 in the second quarter and $1.48 a year earlier.
 
The forces that have depressed demand for apartments downtown - corporate work-from-home policies and the decline in people seeking out dense, urban living - have had little impact on the suburban market.
 
"It's like no market event has happened there," DeVries said.

A TALE OF TWO MARKETS
While the suburban Chicago multifamily occupancy rate has inched higher this year, the rate for Class A downtown apartments has dropped to its lowest level in more than two decades. Suburban rents have held steady, but downtown Class A rents have plunged to 2013 levels.

With coronavirus cases surging and the leasing entering a seasonally slow period, DeVries expects the downtown market to fall further. But recent news about promising COVID-19 vaccines offers hope that it could begin to recover next summer.

Though vaccinations will take time, they'll eventually allow companies with downtown offices to call employees back to the office. If people are working downtown, they're more likely to live there.
"When are employers going to start bringing people back?" DeVries asked. "Because that's really going to drive demand."

If the vaccines "turn out to be successful, I think things could turn around on a dime," he said.
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Still, DeVries expects the downtown market won't come back fully until the spring of 2023, more than two years from now. It has fallen hard: Including concessions, the average rent at Class A buildings-the fanciest and most expensive of the bunch-fell to $2.53 per square foot in the third quarter, down 18.4 percent from a year earlier, according to lntegra. The last time the average Class A rent was that low was in late 2013.
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The average Class Brent fell even more: 23.3 percent, to $2.07 per square foot­ where it was in 2011.
 
One key measure of demand, absorption-or the change in the number of occupied apartments-has slipped into negative territory after expanding for several years. Downtown absorption totaled -531 units in the quarter, and lntegra forecasts absorption for the year will drop to -1,300 units, the first year of negative absorption since 2005.
 
With numbers like that, some landlords could wind up defaulting on their debt. But Devries said he doesn't expect widespread distress downtown because most properties aren't carrying too much debt, and lenders, sensing a recovery on the horizon, will be flexible with borrowers.
 
"There's got to be motivation to wait it out," he said.

Apartment development has slowed to a crawl downtown, but some developers are moving ahead with projects, betting that the market will be much stronger when they finish them. Marquette, a Naperville-based developer, recently broke ground on two apartment buildings totaling more than 500 units on the west end  of the Fulton Market District.

''There's lots of tire-kicking in the city," said Damian Eallonardo, senior vice president of operations at W.E. O'Neil Construction. "I don't think any developers have given up on it. They're just moving more cautiously."
 
But they're still pretty busy in the suburbs, he said. Chicago developer John Murphy recently restarted construction on a 153-unit apartment project in downtown Skokie that O'Neil is overseeing as general contractor.
 
"We're still seeing a fair amount of activity" in the suburbs, Eallonardo said.
 
Outside of downtown, many landlords that cater to lower- and moderate-income tenants have had a hard time collecting rent as the coronavirus has put many people out of work.
 
But the market for apartments in many Chicago neighborhoods is holding up for the same reason the suburbs are, DeVries said. Though lntegra doesn't publish data on neighborhoods, it performs consulting assignments in them.

"People aren't leaving the city of Chicago," Devries said. "They're leaving density."