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As the downtown apartment market cools off, the suburbs are humming along in Goldilocks mode.
The suburban market is neither too hot nor too cold, with demand strong enough for landlords to push through moderate rent hikes—and for the market to absorb a rising supply of apartments. The median net suburban apartment rent was $1.38 per square foot in the third quarter, down from a record $1.41 in the second quarter but up from $1.33 a year earlier, a 3.8 percent increase, according to Appraisal Research Counselors, a Chicago-based consulting firm.
Suburban renters, who have endured seven years of rent increases, probably won’t get much relief anytime soon: Appraisal Research Vice President Ron DeVries expects rents to rise another 3 to 4 percent over the next 12 month
While developers are as busy in the suburbs as they have been in two decades, they haven’t gotten carried away as they have downtown, where about 8,700 apartments are expected to open over the next two years. As a result, the downtown occupancy rate has fallen to its lowest level in nearly seven years, while the suburban occupancy rate remains over 96 percent.
“The suburban market hasn’t seen the deliveries of the downtown market, so they’re really running in two directions,” DeVries said.
Demand for apartments rose after the housing crash, as many people had a hard time getting a mortgage or were wary of buying a home in a shaky for-sale market. More recently, the improving job market has filled up buildings: As more renters get jobs or raises, they leave their roommates to get apartments of their own.
The suburban occupancy rate slipped to 96.1 percent, down from 97.1 percent in the second quarter and 96.7 percent in third-quarter 2015. But that’s still a historically high level: DeVries considers the market full when its occupancy rate exceeds 95 percent.
“Job growth in the (Chicago area) remains positive, albeit at a slower rate of growth,” DeVries said in an email. “There has been limited new supply added to the overall market. Because a significant percent of the population continues to prefer renting vs. owning, we expect rents to continue upward over the next couple years.”
The strong market has stirred the animal spirits, as investors have paid up for suburban apartment buildings and developers have launched dozens of projects. Suburban apartment sales have totaled $1.27 billion this year, a record, according to Appraisal Research, and 2016 isn’t even over yet.
Developers, meanwhile, have completed 2,831 apartments in the suburbs so far this year, the most in at least two decades, according to Appraisal Research. Another 2,391 are under construction.
So far, however, the supply increase hasn’t fueled fears of a glut. Though North Shore landlords have suffered slightly from overbuilding there, the suburbs cover such a vast geographical area, and the new projects have been spread out enough, to minimize the impact on the market.
That doesn’t mean the overbuilding risk has disappeared. More than 8,900 suburban apartments are in the planning phase, according to Appraisal Research. Whether they actually get built will depend on whether their developers can secure construction financing—no sure thing.
“Some of them will get financed and some of them won’t, but there’s no shortage of interest in adding to the supply,” DeVries said.
Source: Crains Chicago Business November 21, 2016 Alby Gallun