Chicago’s downtown rental market heats up as employees return to offices
Occupancy rate bounced up to 94.5% in Q2, rents above pre-pandemic levels
When Jason Lee, newly graduated from MIT Sloan business school in Boston, got an offer to work as a consultant at the Chicago office of one of the country’s largest firms, he debated whether to work remotely for a couple months or pack his bags and head straight to the Windy City, where the office had opened for employees who chose to return.
“One partner moved to Boulder during the pandemic and is working from there, another consultant is in Michigan, but typically, we are all in Chicago,” Lee said.
More than 90 percent of the people from his 900-person office were coming back to work. That’s what convinced the aspiring first-year consultant to be in Chicago on the first day of work.
Lee is one of the many who flocked to downtown Chicago from out of state, contributing to the rebound in downtown rentals. At the same time, many Chicagoans who fled to the suburbs during the pandemic are now returning to the city. Some who bought in the ‘burbs were able to sell at a profit as the housing boom continues there, and others had sheltered with parents or family and are now coming back, said Kyle Stengle, senior managing director at Marcus & Millichap.
Word around town in May was that downtown apartments were still offering good deals, and people like Lee wanted to snatch them before they were gone.
“I came at the tail-end of when apartments were giving concessions to new renters. I received two months free of rent for my 12-month lease,” said Lee.
Renters absorbed nearly 9,900 units from April to June, the strongest quarter for leasing in more than 10 years, according to the company’s market report.
The biggest gains were from people like Lee, moving from out of state, according to Luxury Living Chicago Realty, a Chicago-based apartment leasing firm that tracked relocations from out of state as well as the suburbs.
“Relocation renters are up about 10 percent to about 50 percent compared to both 2019 and 2020”, said Aaron Galvin, co-founder and CEO of Luxury Living Chicago Realty.
“Of that 50 percent, 35 percent came from out of state and 15 percent came from the suburbs this year,” said Galvin.
In 2020, 40 percent of all new leases for Luxury Living Chicago Realty came from relocation renters, explained Galvin. Of those, 25 percent came from the suburbs and 15 percent from out-of-state.
“That fuels confidence that people are coming to Chicago for new jobs, for universities and grad schools.”
Strong demand for rentals pushed asking rents in July above pre-pandemic levels.
The median price for a two-bedroom apartment in Chicago in July was $1,405, approaching the level of March 2020, the last pre-pandemic month, according to Apartment List, a rental listing site. In August, median rent increased 1.2 percent to $1,423 from July and 4.4 percent from a year earlier.
“Vacancy rates are at an all-time low. [There is] really high occupancy in the rental market,’’ said Rob Warnock, senior research associate at Apartment List.
Downtown apartment occupancy rates dropped to 86.5 percent in the fourth quarter of 2020, the lowest level since at least 1998, said Integra Realty Resources, an appraisal and consulting firm. Occupancy rates bounced up to 94.5 percent in the second quarter this year, data from IRR shows.
“We don’t have many vacant units left to lease. That always puts pressure on rent,” said Ron DeVries, senior managing director at IRR at the Chicago office. “If you combine that with the fact that we don’t have any new units from the pipeline right now that are ready to break ground, I think that will push up the rents further.”
Though most market analysts expect the rental market in Chicago to remain strong, further growth in the nation’s second-largest downtown market will depend on the timing and extent of workers’ return to offices. That picture is less clear with the emergence of new variants of Covid.
Across the country, companies have taken a mix of approaches to bringing workers back to offices. In part that has to do with the type of company.
“In places like San Francisco it might be even slower to return to work if a lot of the downtown businesses are in the tech industry and therefore easily convertible to remote environment, whereas if somebody was making the comparison, New York for example, more financial and legal firms are less receptive to remote work,” said Apartment List’s Warnock.
Returning to the office might spur more residential migration in Manhattan than it would in San Francisco, explained Warnock.
In downtown Chicago, about 11,530 apartments will be delivered by the second quarter of 2023, according to a Marcus & Millichap’s market report. There were 6,463 units completed during the 12 month period ended in June.
As IRR’s DeVries puts it, there is going to be a “two-year window” before new deliveries will impact supply of apartments.
“The food scene is really good here, the bar scene is great, Chicago is one of the best cities to be in,” said Lee. Paying about $2,000 in rent every month isn’t too bad considering he is living downtown in a one-bedroom apartment, he said. Lee plans on staying in Chicago as long as his office is there.