Downtown Chicago apartment rents hit record high

This is the basic economy: demand for apartments is high and supply is low, the result of a slowdown in construction during the pandemic. Developers will complete just 1,500 downtown apartments this year, the lowest total in a decade, according to Integra.

A strong local labor market fuels the demand side of the equation. When companies hire, their new employees tend to rent apartments nearby. This rule seems to hold even though many downtown professionals are still working remotely or on hybrid schedules, reducing the need to be near the office. And while rising downtown crime is scaring some tenants, the numbers don’t yet seem to reflect a fear factor.

Rising mortgage rates are also expected to boost the apartment market, driving up the cost of single-family homes and condominiums, putting them out of reach for many potential buyers.

“It’s going to help retain tenants in a lot of these buildings,” said Ron DeVries, senior general manager of Integra’s Chicago office.

Downtown apartment occupancy was 94.5% in the first quarter, down slightly from 94.7% in the fourth quarter of 2021, but up from 91.1% a year earlier , according to Integra.

It’s not just the high end of the downtown market that’s booming: net rents for less expensive Class B buildings also hit an all-time high of $2.92 per square foot during the quarter, up 18.7% from a year earlier, according to Integra. Net rents include concessions such as free rent.

“It wouldn’t surprise me if rents went up another 5% this year,” DeVries said.

With limited competition, now is the perfect time to be a developer with a new building. The rental office recently opened in Millie, Michigan, a new 47-story skyscraper at 300 N. Michigan Ave. with 289 apartments.

“It’s going really well,” said JR Berger, managing director of Chicago-based Magellan Development Group, which is developing the building as a joint venture with Sterling Bay, another Chicago developer. “He definitely exceeded our expectations.”

Apartments in Millie rent in the mid-$4.00 per square foot range, Berger said, among the highest for downtown buildings tracked by Integra. The tower includes a 280-room Citizen M hotel; the apartments have stunning views as they start on the 17th floor above the hotel, he said.

Berger estimates that rents at another Magellan apartment building, Cascade in Lakeshore East, have risen about 20% since the 503-unit property opened last August.

“We are fully leased and well above pro forma,” he said.

But rising rents will drive some tenants out of the downtown market. DeVries expects to see a ripple effect, with more tenants moving to the downtown outskirts in search of cheaper buildings.

“What people don’t want to do is move from Building A to Building B” with fewer amenities, he said. “But they can give up a bit on the spot.”

David H. Henry