Apartment Investors Give Chicago a Much Needed Nod

We all know the Chicago rental market has been less than ideal. Prices have fallen and vacancy rates have risen. Couple that with staggering unemployment statistics, and a slew of other national (and local) financial problems and the result is a dreary, almost hopeless housing outlook for 2009.

But wait! Today in Crain?s, the ?biggest downtown real estate deal of the year? just so happens to be the 480-unit Cityfront Place at 400 N. McClurg Court. Miami-based luxury high-rise developers Crescent Heights (30 E. Huron, Park Place Tower and Regent?s Park) put Cityfront Place under contract for $83 million and the deal is supposed to close this month. According to the article, this acquisition is the first downtown apartment building to sell in over two years which is a good indicator that the rental market might rebound before any other division in the housing market.

Known at “Condo Converters”

Crescent Heights is known in Chicago primarily as condo converters. One could easily assume that the apartment building was bought for conversion, but Tomer Bitton, a Partner at Crescent Heights noted that ?The condo market is dead. The rental market is at the bottom and is beginning to improve.? It seems likely that Crescent Heights will keep the 39 story Cityfront Place as a rental building until the housing market and condo prices improve.

I see this as very positive news for the Chicago rental market. This kind of investment activity may seem counterintuitive given the current unemployment rate for Illinois stands at 10.5%. However, the Regional Economics Applications Laboratory at the University of Illinois predicts the state?s workforce will shrink by 4.15% to about 5.4 million jobs by September of 2010. Larger investors can take this information and speculate that they can see the bottom, which gives them a reasonable basis for projections and ?worse case scenarios? that they were unable to see before.

We would like to thank kern.justin for sharing today?s photo via the Creative Commons License.

Rising above the trees...are occupancy rates really rising?

I recently read a Crain?s Chicago Real Estate article about how the downtown apartment market is improving. The good news about this is that there is finally good news! Chicago?s rental market has been put through the ringer this season and no more bad news is great news.

The downtown apartment market is doing marginally better, but there?s still plenty of room for improvement. As of last week, some of Chicago?s more reputable rental high rises were still offering major incentives and concessions. Larger apartment management companies like Planned Property, Lincoln Property Residential, Near North Properties, Habitat Company, and Village Green are all still offering attractive perks to fill properties before the October 1st deadline. Renters can enjoy free parking, enormous rent reductions (5-15%) and up to two months free rent.

Incentives Galore!

And it?s not just the renters who are benefiting. Some management companies are offering apartment locator services 150% commission splits (1 1/2 month?s rent) versus the traditional one month?s rent. Other companies wine and dine leasing agencies with parties, trip giveaways, hefty agent-centric bonuses and increasing flexibility during lease negotiations.

Most companies who offer these types of incentives are filling vacancies faster than those that don?t. However, it?s still affecting their bottom line with respect to how much of their operational costs are being allocated towards incentives to renters and rental agencies.

The numbers can be deceiving when the rates are high.  For example, a one-bedroom apartment, without parking, goes for $1,600 in Streeterville.  Rather than lowering the rent to attract tenants, companies will offer a free parking space or 2 months free rent on a 13 month lease, making the bottom line look beefier than it may actually be.

False Sense of Improvement?

Downtown apartment management companies have been struggling with vacancies since 2001 and none of the incentives mentioned above are new ideas.  I do think that while the numbers are improving slightly, management companies have become more creative in reporting their financials. These incentives are boosting numbers, giving everyone a somewhat false sense of hope that things are getting better, when in reality, they?re not.

The way I see it, at the end of the day, vacancies are being filled and that?s a good thing. That means the plan is working. Although management companies are throwing in everything but the kitchen sink (no pun intended), they are filling vacancies and gaining better-than-expected rates given the current glut from the ?shadow market? and less than desirable unemployment rates.

We’d like to that John Picken for kindly sharing today’s photo via the Creative Common’s License.

14 August 2009 ? The likely demise of the Spire along with other new construction buildings now being marketed for rent instead of sale continues to contribute to the reduction of Chicago?s housing inventory. Another nail in the Spire?s coffin is the lawsuit filed Thursday by Bank of America against the Shelbourne Development Group for default on loans on the 1194 unit development. This comes on top of substantial liens placed on the “Lien – ing Tower of Chicago.” Peter Holstein, developer of Parkside of Old Town announced he is going forward on construction of rental units in place of the planned condominiums on the land where Cabrini Green low income housing once stood. Centrum development also is converting the Lofts at Roosevelt Collection from condos to rentals, canceling all contracts for sale. This is the third major project the developer has terminated sales on.

Did you see fewer moving vans this summer in Chicago. It's one sign of the tough rental market.

Let?s face it, it’s a scary time to be a landlord. The apartment rental market is facing difficulties like never before. For the first time in six years apartment rents are down nationwide. Fueling the fire are investor-owned properties (usually condos or town homes), which has expanded the rental supply by roughly 50 percent. Whether landlords own or manage 200+ units or 2 units, everyone is feeling the pinch. Here is where I see problems and opportunities in this market.

The Current Rental Situation in Chicago

1. The rental market and the job market run parallel to each other. Unemployment is up, hiring and recruiting have slowed, and people with jobs are scared that they are going to get laid off.
2. Consumer confidence is very low. People are more money-conscious now then they have been in the past. It is expensive to move and people are taking that into consideration when their renewal letter arrives.
3. There is still an over-abundance of inventory on the market. As mentioned earlier, the “shadow market” has expanded rental stock by over 50 percent.

The Bad News?

In my experience, most of my rental clients are either people relocating to Chicago or recent graduates. I see fewer people in both categories this season. Fewer college graduates are getting jobs right out of college and the job market has tightened with respect to new hires and moving allowances. There are still college graduates getting jobs right out of college and people are still relocating to Chicago, just fewer than in years past, which is creating a more competitive marketplace?especially since there is more inventory available. So, the number of “new” renters has slimmed down and existing renters are staying put, downsizing, moving in with mom and dad, or moving in with more roommates to save money. Of course, downsizing and consolidating living space by living with more roommates creates movement in the marketplace, however, it is just not enough to stimulate market prices positively. Further, this mentality contributes to fewer livable addresses and more apartment inventory, which drives the price of rentals down across the board. Once the job market improves, people will be back in the market looking for new places to live.

The Good News?

Yes, the apartment rental market is facing difficulties like never before. However, despite these recent challenges, a large majority of renters are still looking for a new place to live this year and more than half are planning to pay the same or more in rent. Here is why?

1. People still want to try out living in new neighborhoods or cities.
2. Renters want more for their money and are willing to negotiate.
3. There are a lot of renters out there looking for an upgrade and more amenities.
4. There are tons of rental incentives being offered to renters. It?s hard to pass up on a good bargain.
5. Although unemployment has reached over 11 percent in the Chicago metropolitan area, there are companies that are still hiring.
6. Some landlords have increased rents not knowing that their tenant?s income has decreased. Or, they don?t care. This decreases a renewal rate which means movement in the market place.

My Advice

1. Be sure to stay in tune with news related to employment and the shadow market.
2. If you have leases expiring, be sure to send renewal letters out 60-90 days out.
3. Study what rents are going for in the neighborhood before sending your renewal letters. It’s never been easier to do with sites like rentometer.com, craigslist.com, and chicagoreader.com.
4. If you think your unit(s) is underpriced, consider moderate increases (2-5%).
5. When tenants decide not to renew, maximize exposure by taking quality photos of the apartment when it is clean and use them in advertisements.
6. Keep the building exterior and common areas as clean as possible while marketing the property for rent. It makes a huge difference.
7. Price your property in alignment with the market. Nothing costs more than an empty unit.

Thanks to John Benson for sharing today’s photo via the Creative Common’s License.

Not an uncommon sign these days in Chicago

Normally May is a great time to be a landlord in Chicago. This season, I wish I could say it is, but it isn?t. Apartment conditions in Chicago have softened because of the rising unemployment rate and overbuilding. The citywide condo boom has ended, and a lot of recently completed and under-way projects are now being put on the market as rentals. Job cuts in the financial sector have slowed interest of high-end rental units across the board. These two factors are what are hurting landlords the most. The fact of the matter is there is a ton of inventory out there and fewer people are moving. Those who are moving seem to be more cautious and choosy than ever before.

What Can a Landlord Do in This Market?

What should a landlord do in order to protect him or herself? The number one action landlords can take is to make sure all rental property is priced competitively. Do your research, but if you are not sure about price, seek out advice from a professional rental agent. There is a tremendous amount of competition in the market place for every rental unit type. Renters have more tools at their fingertips than ever before and are a lot savvier than most landlords give them credit. They will look at everything on the market before making a decision and there is no fear of loss like there has been in the past. Renters know that if they take too long to decide on a unit and they loose it, another great deal is right around the corner.

How About an Example?

Here is a scenario that should help put things into perspective. Say a landlord has a rental that is coming available in a month. It is a 2 bed/2 bath that normally rents for $2,000. If after the 1st week of marketing the property there is no showing activity, that means either it is being marketed improperly or it is definitely overpriced. If there are showings being generated, but no one is moving forward with negotiations or a lease, then the unit is without question overpriced.

If by the second week there is still no activity, a price reduction is in order. Here is why it will make sense?If the property sits vacant for a month, that is a $2,000 loss. Prorated over 12 months, that is roughly $166 a month. Lower the price to $1,900, beat all of the competition in the neighborhood, and save yourself $66 a month!

We would like to thank TheTruthAbout for generously sharing today’s photo via the Creative Commons License.

Rental Season is Coming Soon to Chicago

It?s no secret to anyone that the current sales market is less than ideal. Under most normal circumstances, average homeowners are holding on to their property and hoping for the housing storm to pass. But what if you have to sell? You could be someone who is being transferred to another city or state by your employer. Or, you might be like one of a million owners who are in financial trouble and simply need to sell.

Sellers Might Want to Consider Renting

People are faced with a difficult decision: Do I try and sell, and hopefully suffer marginal losses and manage the debt associated with selling in a down market? Do I attempt a refinance to bring down my mortgage payment? Or do I hold on and try to weather the storm a bit longer in hopes that the market will turn around? Any way you look at it, these choices seem grim. However, there is another option. It may make sense to rent your unit out for a couple of years.

Today?s post will focus on the Lakeview neighborhood rental market. (Lakeview is defined as Irving Park Rd. to Diversey Pkwy, Damen to the Lake Michigan?map below.) In order for potential sellers to make an educated decision on even considering the option of renting their home, it is important to understand what is happening in the market.

My Thoughts On Lakeview?Flat Rents and Landlords a Bit Panicky

Post-gentrification rental numbers put Lakeview at the upper-middle spectrum of the Chicago rental market (in regards to price, size, and amenities).  With a diverse renter base and an eclectic mix of condos and apartment styles, Lakeview, in my opinion will always do well, no matter what.  From what I’ve seen over the last six months (particularly this winter), landlords have been a bit panicky and frantic to get their places rented in a timely fashion.  I have never been asked more often about price and marketability than I have been this year.  Like any other neighborhood in Chicago, Lakeview is 90% price driven.  What matters most to renters looking during the winter is price.  Consumers know there is a housing crunch and they will try everything they can to capitalize on that.  However, come the spring, it’s a different story all together.

We are right on the cusp of the “busy season” in the rental business.  While traffic is picking up, and there is in fact a flurry of activity, the real wave has yet to crash.  Expect to see a massive swell of renters for all unit types within the next two months.  Year-on-year, 2009 is projected to be an outstanding year for the industry.  Having said that, my advice to landlords out there is:

1. Make sure you get your renewals done at least 60 days before the lease end date.
2. If you want to experiment with rent increases, do it 30-45 days before your lease end date.
3. Advertise your available units as soon as possible- however you go about doing that.  The more traffic the better.

I project rental averages in Lakeview to remain flat because landlords are worried about what people are going to do.  As unemployment increases, insecurity on whether units will rent will become more prevalent in the summer.  That’s not to say that a landlord who delivers a good product has anything to worry about.  If a unit is priced right, looks good on paper, and shows well, landlords will have no problem getting their units rented in a timely manner.

Lakeview Rental Data From the MLS

Studios (condo quality)
Average rental price: $900 for 500 square feet usually no parking available.
Average market time: 2 months

1 Bedrooms (condo quality)
Average rental price: $1.350 for 800 square feet.
Parking typically costs $100-150 extra, however most landlords use parking as a bargaining chip depending on the strength of the applicant.
Average market time: 1 ½ months

2 Bedrooms / 1.5 baths (condo quality)
Average rental price: $1,950 for 1250 square feet.
Parking: Same cost and principal as 1 bedrooms
Average market time: 2 months

3 Bedrooms / 2 baths (condo quality/few single families)
Average rental price: $3,000 for 2000 square feet.
Parking: $100-200 extra
Average market time: 3 months

4 Bedrooms (single family caliber)
Average rental price: $4,000 for 2600 square feet.
Parking: Included
Average market time: 3 months

5 Bedrooms + (Single family caliber or new construction)
Average rental price: $8,500 for 4,650 square feet. This is an average based on 5.5 bedrooms and 4 bathrooms.
Parking: Included
Average market time: 5 months

Some Basic Advice to Landlords This Rental Season

These stats are based off of activity over the last year. My advice to anyone thinking of renting would be to make sure that when you do decide to put your unit on the market for rent, be certain that your place is priced as good as or better than anything else out there. Like buyers, renters are very savvy and tend to know a lot more about the market than they are given credit for. A lot of newer landlords feel the need to price their property based on their monthly housing payment (taxes, assessments and mortgage). The fact is, you might not be able to cover all of your costs. If you can cover your monthly payments or even have a little postive cash flow; consider it a bonus.

We would like to thank TurkeyChik for so generously sharing today’s photo via the Creative Commons License.

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The rental season is fast approaching. Chicago’s tough winter weather and the tradition of 12-month leases have created a very strong rental season; we usually don’t see moving trucks blocking the roads except from April to September.

When people look at apartments, they tend to look at the layout, the size of the bedrooms, the light coming through the windows, and most importantly if it fits their budget. There are a few other questions renters forget to ask. And, if you’re using a rental agency, their agents tend to not bring up such items because they may spoil the deal. So, here are ten to make sure you either get the answer to or investigate yourself:

1. Is There Decent Water Pressure?

Under Pressure?

I’m amazed at how many people don’t turn on the sinks and shower! Turn them on. And don’t just turn on the tub, pull the little lever and see if the water comes out of the shower head at a rate that will do more than give you a good misting. Then, make sure that they all turn off! Dripping faucets are a sure sign that you might not get the response to maintenance requests that you would like. One last thing to check while you’re playing with the shower is how tall is the shower head? Are you going to spend the next year or more stooped over in order to get clean?

2. Do the Tub and the Sinks Drain?

While you’re playing with the water, fill the sinks and tub up and make sure they drain…that is unless you enjoy the feeling of standing in calf-high water as you shower.

3. Do All The Windows and Doors Open and Close?

In many of the vintage buildings in Chicago this is a very important question. Both the windows and doors have likely had somewhere fewer?but not too many fewer?than 100 coats of paint on them. Getting windows to open and close is extremely important, not only from a enjoying-the-first-day-of-spring point of view, but also a safety point of view. It’s also really nice to be able to close that door to your bedroom rather than having to leave it open a crack and wondering if the new roommate you found last week has voyeurism issues. So, before you sign that lease, make sure to open all the windows and make sure that you can close and latch all of the doors.

4. Do the Appliances Work?

This is another area where people seem to get shy. They seem to not want to upset the landlord by poking around and turning stuff on. Turn all the burners on. Turn on the oven. (By the way…is the oven clean?) Turn on the dishwasher. You want to make sure all these things work.

5. Can You Paint?

This will be in the lease, but you should ask it right up front. If you can’t imagine yourself in all white rooms with all white doors and all white trim, you need to find out what the rules are on painting. Most will require you to turn the walls back to white before you leave. Some will be so thrilled that you want to paint that they will pay for the paint if you don’t go too crazy on the colors. Talk to them.

6. Do the Radiators Turn Off?

Is This Guy Going to Melt You in January?

Ever felt like you were going to melt in January in Chicago? If not, you’ve never lived or worked in a steam-heated building! I have to laugh when I drive by buildings and see half the windows open in January. It’s not really all that funny from a environmental point of view, but I know how those people feel. I lived in an apartment that had five radiators, of which we left two on and still roasted much of the time. If we hadn’t been able to turn off the radiators in the bedrooms, we wouldn’t have been able to sleep.

7. Does the Laundry Room Get Cleaned and the Machines Repaired?

Ask to see the laundry room. Most people only count how many machines there are and then begin to do the mental math comparing that number to the number of apartments times number of people per apartment times the number of loads… Also take note of the cleanliness, the number of Out Of Order signs, and the age of the machines. They will break down, g-u-a-r-a-n-t-e-e-d. When it happens, will there still be enough machines to handle the building?

If there is no laundry room, walk to the nearest coin laundry with a 40 pound bag of something and see what you think of doing that once a week.

8. Do the Hallways Get Cleaned Regularly?

Make sure to take note of all the public areas, like hallways and entrances. Are they clean? If they aren’t clean at the moment, make sure to ask when they will be cleaned. How often are they cleaned? It’s less than a joy to have to wiggle past a six-month old tower of Yellow Pages only to climb up filthy stairs that haven’t been vacuumed in months.

9. How Much Noise From Above, Below, and Sides?

Make everyone in the apartment stand still and quiet for a few minutes, and just listen. If you’re there during the day, it won’t be very representative since many neighborhs will be at work. But, just listen to the ambient noise level and gauge it by the time of day you’re there. Have someone go out in the hallway and pretend they’re coming home from a party at 2 a.m. How much can you hear?

10. Is There Enough Kitchen Storage and Counter Space?

Moving into a Chicago 4+1

Can you get by with the number of cabinets that are in the kitchen? Mentally put your stuff in them, and don’t forget the bag of potatoes! Where are they going to go? How about your blender? If you do a lot of cooking, is there going to be enough space for you to roll out your Sunday morning croissants? Put yourself in the kitchen and mentally make a meal. Where will you put stuff? Where will you work? Where will you plug your bread maker in?

11. The Ubiquitous BONUS Item!! Where Are the Phone/Cable/Satellite Dish/Electrical Outlets?

Where is your TV going to go? Is there a electrical plug in and a cable/dish plug anywhere near by? If not, can you run a wire to it somehow? How about your computer? Where will it go? Are there enough outlets? Will you have to resort to WiFi to get connected to the modem? Are there enough electrical outlets in the bathroom to handle the curling iron, hair drier, and electric toothbrush?

12. The Not-So-Common 12th Item in a 10-Item List!! Do You Have Access to The Circuit Breakers?

Apartments rarely have enough juice to run all your stuff, especially if you are using window air conditioners along with your computer and curling iron. You need to make sure you have access to the circuit breakers and know how to flip them back on.

Photos by Evan Prodromou, Wes Peck, & Eric Schmuttenmaer