23
Apr

2019 Chicago Market Summary

Executive Summary

2019 was a banner year for Chicago rental demand in the “walk-up” sector. While job growth was depressed in the city, as compared to the US, Chicago investors had a voracious appetite for the acquisition of assets. Root Realty’s portfolio was guided by strong relationships with owners and real estate investors plus a focus on strong brand recognition outside of the luxury sector. Of course, with the advent of COVID-19, what 2019 performance means for 2020 is yet to be determined. Nonetheless, we think Shakespeare correctly opined, “past is prologue,” and, thus, with the caveat that COVID-19 presents new challenges across all industries, we are delighted with our progress in 2019 and are excited to share the following data with you.

2019 Chicago Labor Report

According to the US Bureau of Labor Statistics, the city added 36,000 nonfarm payroll jobs in 2019. Over 40,000 of those jobs were created in three industries:

  • Education & Health Services (18,000)
  • Government (10,200)
  • Leisure & Hospitality (9,800)

Figure 1 

2019 Chicago Rental Metrics

In 2019 Chicago average market rent per unit increased by 1.9% year over year to $1,565 with an average concession rate of .6%. Vacancy rate was down slightly to 6.1% in 2019 compared to 6.3% in 2018. A total of 7,157 new units were delivered to the market with an absorption of 7,216.

Figure 2 Chicago Market Analytics; Source: CoStar

 

Figure 3 Chicago Key Performance Indicators; Source: CoStar

The cap rates for multifamily sales dropped while transaction volume remained consistent with a lower overall dollar volume. CoStar reported 1,010 transactions in 2019 compared to 1,050 in 2018 while sales volume was down over 18% in 2019 compared to 2018 to $2.3 billion. The average capitalization rate on sold properties was down to 8.1% in 2019 from 8.8% in 2018 and the market cap rate (or asking cap rate) remained stable at 6%. Given that the number of transactions and cap rates held steady, we looked at CoStar’s sales volume by Star Rating and saw a drop off in 4 star – 5 star assets sold in 2019, signaling a demand for units in our target demographic.

Figure 4 Chicago Multifamily Sales Volume by Star Rating; Source: CoStar

 

Despite Chicago’s glittering skyline, 96% of multifamily properties are not considered luxury. We use the CoStar “Star” system to segment between what we call “luxury” properties and “walk-up” properties. Because Root Realty specializes in selling and managing “neighborhood” or “walk-up” assets in Chicago, most of which are outside of the Loop, South Loop, West Loop, and River North, we peeled back the onion and took a look at how those markets performed.

Figure 5 Chicago Vacancy, Effective Rents, & Capitalization Rates. Source: CoStar

We broke down the data into two categories:

  • Subset 1: Walk-up properties North of 290 with 60 units or less, excluding River North, Downtown, and West Loop
  • Subset 2: Walk-up properties South of 290 with 60 units or less, excluding South Loop

 

Subset 1:

In 2019 the market rent per unit for walk-up properties North of 290 increased by 1.3% year over year to $1,514 with concessions of .6%. Vacancy was down to 5.1%.

Figure 6 Chicago Walk-up properties North of 290 with 60 units or less, excluding River North, Downtown, and West Loop; Key Performance Indicators; Source: CoStar

 

North of 290 the multifamily sales market saw an increase in transactions and total dollar volume. CoStar reported 436 transactions in 2019 ($647 million) compared to 362 in 2018 ($526 million), a total sales volume increase of 23%. Capitalization rates were down one basis point to 6.5% from the previous year.

Figure 7 Chicago Walk-up properties North of 290 with 60 units or less, excluding River North, Downtown, and West Loop; Market Analytics; Source: CoStar

Figure 8 Chicago Walk-up properties North of 290 with 60 units or less, excluding River North, Downtown, Sales Analytics; Source: CoStar

Subset 2:

In 2019 the average market rent per unit increased by 3% to $920 per unit year over year. The average effective rent per square foot was $1.19. Vacancy was down to 7.2% in 2019 as compared to 7.6% in 2017.

Figure 9 Chicago Walk-up properties North of 290 with 60 units or less, excluding South Loop Key; Performance Indicators; Source: CoStar

South of 290 the multifamily sales market was stable. CoStar reported 440 transactions in 2019 as compared to 453 transactions in 2018. The sales volume was relatively unchanged at $243 million, as well as capitalization rates remaining steady at 10.1%.

Figure 10 Chicago Walk-up properties South of 290 with 60 units or less, excluding South Loop; Market Analytics; Source: CoStar

Figure 11 Chicago Walk-up properties South of 290 with 60 units or less, excluding South Loop; Sales Analytics; Source: CoStar

Summary

As we move through 2020, we are mindful of the market effects of COVID-19, but we are also encouraged by the market demand for “neighborhood” and “walk-up” units and the overall market stability found in our target Chicago demographic. Root Realty’s commitment to a disciplined growth strategy will allow us to take advantage of opportunities and scale responsibly over the long-term. We are laser-focused on client satisfaction and maintaining effective relationships that will continue to propel our company forward. Our executive team is committed to delivering results throughout 2020 and many years ahead.