By Alby Galun | April 14, 2014
As more construction cranes sprout in downtown Chicago, they remain rarer in neighborhoods such as Lincoln Park and Lakeview. Stuart Handler likes it that way.
With few apartment developments going up in North Side neighborhoods, landlords like Mr. Handler have more freedom to raise rents than do owners of downtown high-rises, which are starting to feel the impact of a major construction boom that shows few signs of ebbing. For all the ebullience about the downtown renaissance, Mr. Handler is happy most of his buildings are elsewhere.
“I stayed away from those areas” in downtown Chicago, says Mr. Handler, CEO of Chicago-based TLC Management Co., which owns 35 buildings from Evanston to South Shore. “I didn't want to battle it out with new high-rises.”
With more than 6,200 apartments expected to open downtown this year and next, the battle for tenants may be just beginning. Rents at high-end downtown buildings already have started to fall, according to one report.
It's a different story in North Side neighborhoods, where demand for apartments continues to exceed supply, and many building owners are hiking rents by 5 percent or more annually. While that's good news for landlords, it means no relief for tenants anytime soon.
“I don't see it leveling off in the near term,” says Lee Kiser, co-founder and principal of Chicago-based apartment broker Kiser Group. “There's a lot of short-term rent growth to capture.”
The past few years have been a golden age for the apartment industry, as the housing crash scared many residents away from owning and pushed them into the rental market. Net rents at top-tier, or Class A, downtown buildings rose nearly 24 percent from 2010 through 2012, according to Chicago-based consulting firm Appraisal Research Counselors.
But developers rushed in, and downtown landlords have started to lose their pricing power amid the supply surge. Class A net rents fell 2.7 percent last year, according to Appraisal Research.
Development has picked up in city neighborhoods as well. Halsted Flats, a 269-unit project, recently opened near Wrigley Field, and the first residents will move in next month at Webster Square, a 76-unit development at Lincoln and Webster avenues.
Yet construction has been limited in the neighborhoods because it's hard to find land for big projects, and rents in many places are not high enough to justify a new building, Mr. Kiser says.
In general, rents must hit around $2 per square foot, at a minimum, to justify the cost of a new building. Many existing structures on the North Side aren't getting that, while downtown apartments are fetching $3 per square foot or more.
Finding reliable data on occupancies and rents outside downtown is difficult because it's such a large, fragmented market, and the market dynamics of city neighborhoods vary widely. Being a landlord still is tough in many South Side neighborhoods that are struggling to recover from the recession and housing crisis.
Landlords in wealthy Lincoln Park and Lakeview can command high rents, but rent growth is better in gentrifying neighborhoods such as Logan Square and Humboldt Park, which have seen an influx of residents who have been priced out of other neighborhoods. One landlord, who asked not to be identified because he didn't want to alienate tenants, says he recently hiked rents on four units in one Logan Square building by 12 percent.
Yet double-digit rent increases are more the exception than the rule, often limited to buildings that have undergone a major renovation. Andy Ahitow, founder of Chicago Apartment Finders, a tenant service, estimates that most landlords in the strongest neighborhoods have been hiking rents by about 5 percent.
For many renters, moving out isn't a good option because it is so hard to find a new place nearby. Mr. Handler's buildings, which encompass 2,811 units, are 97 percent occupied. TLC's rents rose 3.5 to 4 percent last year.
Yet costs are rising, too, he says. He estimates that his gas and water bills rose 100 percent each last year, and he's spending anywhere from $300,000 to $500,000 on each of his 14 high-rise buildings to comply with new life safety regulations that take effect next year.
Mr. Handler also is bracing for property tax hikes because of Mayor Rahm Emanuel's plan to solve the city's pension crisis. That could push rents even higher.
“There's a real pressure on costs, which will mean that landlords will find a way to pass those costs along,” he says.
Editor's note: This story has been corrected to clarify Mr. Handler's estimate of how much he will spend on each of his apartment buildings to comply with new life-safety regulations that take effect next year.