by Dan Rafter

Lee Kiser, principal of Chicago multi-family investment brokerage house Kiser Group, is predicting something new for the owners of downtown Chicago apartment buildings: rent declines.

Why? There’s simply too much supply today in the trendiest neighborhoods near and in downtown Chicago, Kiser said.

“For multi-family it’s a tale of two cities, and always has been. It’s just going to be more evident in 2014,” Kiser said.

Those two cities? Kiser says one is represented by the the downtown core of institutional-grade multi-family projects. Then you have Chicago’s neighborhoods outside the downtown area. In downtown, Kiser says, you’ll see a softening of rents, especially at the luxury end of the market, because there is so much new supply coming in.

But in the neighborhoods of Chicago — the ones outside the downtown core — there hasn’t been nearly as much new multi-family construction. That should keep rents rising in these areas, Kiser said.

The downtown apartment market is an especially competitive one, Kiser said. That’s because multi-family buildings here are competing not only with all the new apartments that have hit the area in recent years, but also with the buildings that right after the housing crash were quickly turned from condos to apartments.

At the same time, downtown apartment buildings are competing with a city condominium market that Kiser says is “coming back feverishly.”

“The person who is willing to pay that luxury downtown rent for a high-rise apartment is the same person that will be attracted to the condos in downtown Chicago,” Kiser said. “Are these people going to rent or buy? That has an additional downward pressure on rents. Landlords will lower their rents to make it more attractive for people to lease rather than purchase a condo.”

The neighborhoods outside Chicago, though, are in the middle of a different trend. Here, rents should increase in 2014, Kiser said.

Chicago’s neighborhoods — places like Streeterville, Lakeview, Lincoln Park, Lincoln Square and Ravenswood — attract a different type of renter, Kiser said. These renters like neighborhood settings. They want grass and parks. Sure, they want to be close to public transportation so that they can reach downtown Chicago quickly.

But they don’t want to live in the concrete world that is the city’s downtown.

“You really have two different tenant profiles,” Kiser said. “They don’t cross over. People who want to live downtown for that true urban experience are not interested in residing in Chicago’s neighborhoods. The people who like the residential feel of Chicago’s neighborhoods are not attracted to the core urban experience.”

Kiser himself is an example of this. He moved to Chicago more than 20 years ago from North Carolina. He quickly settled into the residential life of the city’s Lincoln Park neighborhood.

“I didn’t want to be downtown were there was no grass,” he said. “I liked the neighborhood existence. We could hop on the Red Line and be downtown in 20 minutes. Most people who live in the neighborhoods are like that. For one reason or another, they don’t want the hardcore urban existence.”

In Chicago’s neighborhoods not only has there been little construction over the last five years, it’s also a challenge for developers to buy land at a low enough price to make the numbers of a new apartment building work, Kiser said.

As Kiser says, developers need to hit a certain price-per-square-foot of rent to make a multi-family project work. In Chicago’s neighborhoods, it’s rare for developers to be able to get the density they need to justify a new apartment project, he said.

Condos are coming back strong in Chicago’s neighborhoods, too, and this will also cause apartment rents here to jump.

“You will begin to see more and more of the vintage stock being lost to condo conversions,” Kiser said. “There will be a further depletion of rental stock in neighborhoods, which means that you will see continued rent growth in the neighborhoods.”

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