Young renters are coming back to Chicago, lifting demand for studios and one-bedrooms that lost out to larger units during the pandemic.
As demand for larger units with multiple bedrooms grew, landlords offered rent concessions for as long as three months on smaller apartments. Now those breaks are disappearing across the city, fueling some recent rent increases.
“I imagine people will soon want studios and one-bedrooms,’’ said Kate Varde, principal of Essex Realty Group, a multifamily brokerage in Chicago that handled its company-best 91 transactions last year. “It’s just a matter of time until we have young college kids and recent grads who don’t want to go home and want to rent their first apartment and feel secure in a job.”
In 2019 and 2020, about 80 percent of apartment leases included some kind of rent concessions, and last year that number had fallen to 20 percent, according to Tony Hardy, who leads a Keller Williams multifamily brokerage in Chicago. This year, he expects rent increases as demand for smaller units grows.
Last weekend, 33Realty, a Chicago multifamily brokerage and property manager with 4,000 units under management, leased a studio and two one-bedroom units in the Andersonville, Lakeview and Old Town neighborhoods, all with no concessions on rent, said 33Realty’s leasing director, Mark Kurgan.
“We’re definitely seeing the younger demographic start to poke around in the market right now,’’ Kurgan said. “Folks that are renting small one-beds or studios and don’t really care how big their apartment is, I think that is definitely starting to come back right now. It’s not absolutely booming, it’s not the summer market. But compared to February 2021, and then March when Covid first hit in 2020, we’re definitely seeing a stronger demand looking for location and value.”
Investors still face hurdles in Chicago, Hardy said, including rising property insurance and utility costs, and those expenses could be felt by renters.
“Insurance premiums have increased, I don’t care where you are. Shopping for insurance for these deals has been very challenging,” Hardy said.
Chicago has had an “unimpressive employment recovery from the health crisis,” while downtown offices and other commercial properties continue to struggle, outside of newer buildings like those in Fulton Market. That may lead apartment building investors to consider other markets before Chicago, the firm Marcus & Millichap said in its 2022 multifamily forecast.
“Payroll projections are still climbing towards the 2019 peak, but tech, finance, and corporate opportunities supply jobs for high-income renters while roles in transportation support Class C rentals. Leisure and hospitality jobs are still at 65 percent of 2019 levels, a factor that will aid Class C vacancy upon the return of tourism,” Marcus & Millichap said.
Landlords expect employment to tick up for those workers and drive demand – and possible rent increases – for the smaller apartment units that lost some appeal due to Covid. The Marcus & Millichap report also projected metrowide vacancy rates to tighten this year to the lowest level since the start of the millennium at 3.7 percent.
Rents surged in Chicago in 2021 and were on pace for bigger year-over-year increases than the national average of 17.8 percent through the first half of the year, then rent growth in the city slowed amid the Omicron virus wave, the report said. Since the start of 2022, rents slid further from the national mark, amounting to a 15.8 percent year-over-year increase as of this month.
Investors should also see the multifamily market lifted as workers feel more comfortable moving back into the city’s crowded spaces, with more security in their employment than earlier during the pandemic, when many workers were uncertain of their futures, Varde said.
“In the end I think we as a society will move back to being in the office. People will want to be in the city. Studios and one-bedrooms, having affordable housing, naturally occurring affordable housing, is always going to be in demand,” Varde said.
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