Despite signs of a slowing economy, the outlook for Chicago's multifamily market may be the best of all the property types. Occupancies are high, rents are rising and few new properties are under construction.

“Apartments are at the top of every investor's list,” said Greg Moyer, senior vice president in the Chicago office of Palo Alto, Calif.-based Marcus & Millichap Real Estate Investment Brokerage Co. “There has been a six-year undersupply of apartment units.”

From 1993 to 2000, Moyer notes that 2.5 jobs were created for every new housing unit constructed in the Chicago area. “We have seen occupancies soar,” he said. He pegs current apartment occupancy levels at about 98% marketwide.

Downtown, the market has been squeezed by a wave of condominium conversions. Between 1991 and the third quarter of 2000, there were 48 announcements of conversions of rental apartments to condominiums, according to a study by Appraisal Research Counselors Ltd., Chicago. This translates into a depletion in the supply of rental apartments by 9,546 units.

New apartment buildings are being converted to condominiums even before construction is complete. For example, Chicago-based American Invsco Corp. announced that it will purchase the Sterling, a 50-story, 389-unit apartment building under construction at the southeast corner of LaSalle and Kinzie streets. The units will be sold as condominiums. The building should be complete next November.

The residential building boom in the city has mostly consisted of condominiums, or units for sale. In 2000, for example, 5,500 new units were added to the market. Only 500 of those units were rentals; the remainder were for sale, according to Appraisal Research Counselors.

“We are watching the condo market,” said John R. Jaeger, vice president of Appraisal Research Counselors. He expects 5,300 new condos to hit the downtown market this year. He cautions that renters might be lured into a purchase if pricing of “for sale” properties becomes very competitive.

“Apartments are at the top of every investor's list. There has been a six-year undersupply of apartment units.”
— Greg Moyer Marcus & Millichap Real Estate Investment Brokerage Co.

Average city rents have increased about 8% over the past year, according to the Chicagoland Apartment Association, Schiller Park, Ill. Currently, the average monthly rent for a studio apartment is $1,054; a one-bedroom unit, $1,507; and a two-bedroom unit, $2,130. Though rents have risen, owners complain that increased taxes and high heating costs have cut profits this year.

Chestnut Tower, a 35-story high-rise with 230 units at 121 W. Chestnut St.; and One Superior Place with 344 units, opened recently.

New downtown projects are under way that will add to the supply of apartment units, although the number of condo conversions should keep occupancies high. The new buildings include:

• The Fisher Building, 343 S. Dearborn St. The historic office building is being converted to 184 rental units.

• Two East Erie is under construction at the northeast corner of State and Erie streets. The 39-story building with 250 apartments should be complete this year. It is a project of locally based John Buck Co. and The Carpenters Union.

• Millennium Tower is being built at 220 North Columbus Drive. A project of the Charles E. Smith REIT, the building has 480 units.

• The Grand Plaza is under way at 535 N. Dearborn St. It will have 764 apartments.

The suburban multifamily market also has been strong. “We predict another solid year,” said K. Bruce Webster, executive vice president of Chicago-based Equity Residential Properties Trust. The company owns and manages eight Chicago-area properties, totaling 4,000 units.

Occupancies are about 97%, although west suburban markets in the Naperville/Aurora area are a little softer because of new construction.

Suburban rents increased about 3% to 5% in 2000, according to Donald Smith, chairman and CEO of Jupiter Realty Corp., Chicago. “The market is in good balance,” he said. Jupiter recently opened 264 new units at The Meadows in north suburban Lakemoor. It plans to construct another 296 units in Phase III of the project.

Smith doesn't expect a wave of new suburban apartment construction anytime soon. Zoning regulations in many suburbs discourage multifamily development. “There won't be a lot of new product,” he predicts.

Property prices were up for the year, according to Moyer. But building prices varied widely and investors found little good product to buy. In 2000, the average cost per unit in the metro area was $52,000, up from $49,000 in 1999. However, apartment buildings sold in the city averaged about $108,000 per unit.