Top rental broker Aaron Galvin predicts rental shortage by 2022

Luxury Living Chicago Realty CEO Aaron Galvin has been one of the top-producing rental brokers in Downtown for the past five years.

He and his wife Amy founded Luxury Living in 2007, months before the “condo crash” of 2008. The River North-based residential brokerage markets, leases and sells luxury apartments and condos in neighborhoods like the West and South Loops, Streeterville, Logan Square, Lincoln Park, Wicker Park and Bucktown.

Luxury Living currently leases about 40 percent of the new construction apartment buildings in Downtown Chicago, including Wolf Point East and River City Apartments. The brokerage also has the majority of the listings in Chicago’s condo deconversion market.

We sat down with Aaron to talk about the state of the market, and where it’s headed.

The interview has been edited for length and clarity.

How has Downtown Chicago’s luxury market changed since you founded the brokerage in 2007?

It has changed dramatically in the fact that the stigma behind apartments has been entirely removed as it relates to when we started. Apartments and rentals and multifamily are certainly seen as the darling of the industry much more so than condos.

Is there a particular neighborhood in which Luxury Living is most active?

We are most active where there is the most new apartment inventory, and that ebbs and flows depending on the development cycle. There have been other times where Lincoln Park can be our top neighborhood. Consistently, River North has always been at the top. I do anticipate that we will probably transition to the West Loop being the top or certainly in the top two neighborhoods that we will be working on in 2020. Quite honestly, it’s one of the most exciting neighborhoods not just in Chicago but in the country. Ultimately, properties, like Wolf Point East, that we’re leasing up are the confluence of River North and West Loop, which is exactly where people want to be.

Are you worried about saturation in the luxury apartment market?

There’s not an overabundance of supply of new luxury apartments in Chicago right now. If you look at the inventory that’s been delivered to this point, the vast majority of that inventory has been absorbed and even rerented at higher prices. The variance of apartment offerings has ensured that we do not have an oversupply of apartments in Chicago, and in fact, we’re anticipating there could be a shortage of apartments by 2021 or 2022.

Why are you predicting a shortage?

What it comes down to is that there is a level of uncertainty that exists right now as it relates to the tax assessments in Cook County and the affordable requirements ordinance. Both of those things are really putting a pause on a lot of new developments, and that does give a little bit of concern that there’s not going to be quite as much new apartments or new condos for that matter a couple years from now. I think that time will tell, but as long as we continue to have the job growth in Chicago, which does not seem to be slowing down anytime soon based on the number of cranes you see in the West Loop and Fulton Market, we will have the demand for both apartments and condos.

Which trends are you seeing in the condo market?

Condos are another story, right? I mean, everybody knows that. The condo market has not been quite as strong as apartments over the last five years, but there is a segment of the condo market that is very strong and it’s a segment that we do focus on. The resale condos that are about $600,000 or less, that a buyer doesn’t have to put hundreds and hundreds of thousands of dollars into, those condos are still selling. While new construction remains a challenge, people do still want to purchase in Chicago, and we really recognize that and want to be able to help those renters convert to condo buyers.

Has Luxury Living been involved in leasing apartments to short-term rental or co-living startups?

Actually, we were at the forefront of the co-living short-term movement on a project as early as 2016. We studied what was happening in other markets. We were fortunate to work with really forward-thinking developers, and we saw very quickly that there definitely was a market for co-living in Chicago.

What’s the most important criteria needed for short-term or co-living?

There has to be a significant enough delta between the price of a studio apartment compared to what somebody would pay to live in a co-living unit. We have found that that delta needs to be upwards of $500 for somebody to say, ‘I would rather share the living space versus living on my own in a studio apartment.’

How much is the ultra-luxury market bolstering the rest of the luxury market?

I think that the one place where the condo market has really thrived over the last few years has been in the ultra-luxury market. I truly believe there are just as many ultra-luxury renters out there as there are ultra-luxury condo buyers and I think we need to see more of that ultra-luxury rental coming online. I have many conversations with developers to try to understand what is the depth of that market in Chicago. My take is that if you’re seeing a 100-unit, ultra-luxury building, like No. 9 Walton being able to absorb the way it has, if you put a similar level of finish, same kinds of amenities, same kinds of services into a rental development, that the appetite is there for that. That is going to expand even more if we can find a way for the Chicago suburbs to rebound [as] a for-sale market.

Why are more people choosing to rent instead of buy?

I think there are two reasons why more people are renting rather than buying. The first is that there is a level of flexibility in terms of how people shop and what the majority of the demographic that is renting or buying real estate right now want. People like the idea of being able to move around, try different neighborhoods, move up in their careers and that may mean moving out of Chicago. Similarly, the same things are happening in other markets. The second is that there simply has not been the supply of new development condos, because it’s very, very difficult to make the numbers work to build new development condos right now. You know the locations where you would typically see new development condos haven’t had them of late and the actual value of the unit once rented, when you add a cap rate to it is worth more as a rental apartment than it is as a condo. That’s very difficult to justify building condos buildings when you can get more for them as apartment buildings.

Do you think it’ll still be possible to deconvert condos now that the threshold has increased to 85 percent?

I believe that there are still some legs left in this cycle. I think we very quickly went from the fourth inning to the sixth inning as far as condo deconversion goes, but what is most important is that those who are seasoned, who are well capitalized and have a very strategic and intentional approach to condo deconversion are still going to be able to succeed in this market because there are a great number of current condo buildings that quite honestly probably never should have been condo buildings, and will serve much better over the next 10 to 15 years as apartments versus condos in disrepair. Do I think they will stay apartments forever? The answer is actually no. I think that we’ve seen through different cycles that you can have apartments convert to condos, condos convert to apartments and vice versa.