The luxury apartment boom in Chicago has been quite the success story for the past five years as developers have delivered thousands of Class A apartments to the city’s core and surrounding neighborhoods, driving rental rates to new highs. However, for this new product to work there has to be a stable population of high-income earners seeking to live and work in the city’s core.
Up to this point, the market has supported these new developments, as vacancy is very low for Class A product and job growth in certain high-paying sectors, such as the tech industry, has been strong.
According to a 2014 story from the New York Times, Chicago renters spend approximately 31 percent of their gross income on rent. With this figure, we can calculate approximately how much income is associated with the city’s existing stock.
Currently, there are 41 existing Class A apartment buildings in Chicago with a total of 13,784 units. The average rent per unit is about $2,643 per month. Using 31 percent and backing into the income, the tenants of each apartment should make roughly $95,000 annually combined. If you assume a 3 percent vacancy and collection loss for all Class A apartments, the combined annual income of all of these tenants is more than $1.27 billion.
That’s a lot of paychecks.
While currently this portion of the city’s housing stock is not only stable, but thriving, the question on the minds of industry analysts is: what will happen with the next wave of Class A apartments set to deliver in the next few years?
There are another 41 Class A buildings with more than 14,000 apartments planned or currently in lease-up in Chicago. Assuming the rents in these new apartments are roughly the same as they are in the existing apartments and the vacancy and collection loss stays constant, these additional apartments will require $1.34 billion more in annual tenant income.
That’s a lot more paychecks.
Fortunately, Chicago has been a recent urban success story. From 2000-2010, Chicago saw the largest population gain in its downtown core of any major city in nation according to the U.S. Census Bureau. Skilled workers have moved to the city and employers have followed, searching for new talent. Whether or not the pace of newly created jobs will keep up with new housing supply remains to be seen. Granted, some join the rental pool out of a lifestyle preference—retirees downsizing and looking to try out city life, established workers transitioning between homes, and so on—but it’s fair to say that a lot of the success of these new developments will be tied to future job growth—and high-paying jobs at that.