Chicago’s Recovery Promises Higher Rents

By Veronica Grecu, Associate Editor

Judging by the falling number of loan delinquencies, rising property values and increased rents for office buildings, Chicago’s commercial real estate shows signs of recovery from the credit crisis and recession. This will have a positive impact on mortgage payments, as landlords will find it easier to get new tenants and keep existing ones. For businesses, this means the end of very low-priced rents, as statistics show that the landlords will most probably increase the rents. Also, investors are back in the high-end market and have already started driving up prices on some of Chicago’s top apartment buildings and office towers. One such property is the Hyatt Center in the West Loop, sold by the Pritzker family in December for $625 million.

In recent months, the number of loan delinquencies has fallen for the first time in more than two years. According to research firm Trepp L.L.C., the local delinquency rate on commercial mortgage-backed securities decreased to 6.75 percent in January from 7.60 percent in September 2010. Foresight Analytics L.L.C. shows that the delinquency rate on local commercial real estate loans held by banks dropped as well, to 7.3 percent in the fourth quarter. Even so, Chicago’s delinquency rate on bank loans stayed higher than the national average, which dropped to 5.3 percent in the fourth quarter.

The current strong demand for apartments in Chicago suggests a continuation of last year’s trend, with rents expected to jump this spring. This will particularly impact the newer buildings downtown as well as the suburban areas, where there are many existing and prospective tenants. Last year, rents increased approximately 7 percent on average; this year, they are expected to gain an additional 7 to 8 percent, according to a forecast report run by Appraisal Research Counselors.

For prospective tenants, this means that concessions such as a free month’s rent or a flat-screen TV will most probably disappear and they will have to face the reality that there are more renters than apartments available in Chicago, especially in downtown. According to Ron DeVries, vice president at Appraisal Research Counselors, the absorption of rented apartments in downtown Chicago is phenomenal. Translated into figures, 2,000 more apartments were rented in downtown Chicago in the fourth quarter of 2010 than in the same period of the previous year.

Many city dwellers are now choosing to rent rather than own an apartment in Chicago’s downtown residential area, despite the fact that last year the average rent for premier downtown apartments increased by 7.2 percent to $2.23 per square foot on a net-effective basis. This price includes appealing rent concessions such as months of free rent.

DeVries says that in 2010 apartment landlords were discarding occupancy levels in favor of pushing rents. This allowed them to eliminate concessions almost completely and reach increased net-effective rates.

According to Appraisal Research, the occupancies for Class A apartments in downtown ended at 93.6 percent last year, as compared to 92.4 percent at the end of 2009 and 94.7 percent in third-quarter 2010. And DeVries thinks that occupancy could reach 98 percent this year.

At the same time, failed condominium deals are resulting in new apartment supply, with investors trying to convert unsold units into rentals and condo developers resorting to price cuts, auctions or bulk sales. According to Appraisal Research figures, there are more than 150 unsold units in condominium buildings in downtown Chicago. Gail Lissner, vice president at Appraisal Research Counselors, says that we are witnessing the end of an extraordinary period of new construction for condo development.