Rents at high-end downtown apartments hit new highs for the third straight quarter, but a swelling construction pipeline could make it harder for landlords to hike rents in the future. The average effective rent at Class A downtown apartment buildings hit $2.36 a square foot in the third quarter, up 2.2% from the second quarter and 6.3% from the year-earlier period, according to a report from Appraisal Research Counselors, a Chicago-based real estate consulting firm. Effective rents include the impact of concessions, like free rent, which have all but disappeared amid strong demand from renters.Landlords “are having a little bit of a party right now,” says Appraisal Research Vice-president Ron DeVries.

Yet a bunch of developers are crashing the party. Developers will add 1,676 apartments to the downtown market next year and another 3,109 in 2009, according to Appraisal Research, raising the prospect of supply outpacing demand a few years from now.

Moreover, the number of downtown condominiums for rent is expected to keep rising, offering renters an alternative to traditional apartment buildings.

Condo developers will complete about 6,500 units in each of the next two years, and some buyers will choose to rent them out instead of moving in.

“I doubt that we’re going to see a repeat of (this year’s rent growth) next year not only because of the number of (apartments) that are going to be delivered but also because of the number of condo rentals,” says Mr. DeVries. “That’s going to hamper the growth in rents.”

Whatever the future holds, most landlords are enjoying the present. Demand for apartments is booming amid a strong job market and weak condo market.

Some would-be buyers no longer qualify for loans to finance a condo purchase, so they’re renting instead. Others are renting as they wait for condo prices to fall before making a purchase.

“People are remaining in the rental pool longer,” Mr. DeVries says.

About 70% of tenants at buildings leased by NNP Residential LLC are renewing their leases nowadays, up from 50% a year ago, says Robin Loewenberg Berger, president of the Chicago-based firm, which manages 3,300 downtown apartments.

Next month, NNP will begin leasing the Tides, a new 608-unit building in the Lakeshore East development between Millennium Park and the Chicago River.

“I’m thrilled to be opening this building right now,” Ms. Berger says. “The timing is really good.”

Occupancies at downtown Class A buildings fell to 94.6% in the third quarter, down from 95.4% in the second and 96.5% in third-quarter 2006. Though the occupancy rate is lower, it’s still within a healthy range, especially considering three new buildings are leasing up right now, Appraisal Research says.

Supply has not been an issue in the downtown apartment market for many years. Since 2000, developers who convert apartments into condos removed 6,734 units from the market, while traditional apartment developers built just 5,806 units, resulting in a net reduction of 928 units, according to Appraisal Research.

Yet more than 7,600 apartments are under construction or on the drawing board, representing 47% of the current downtown market as defined by Appraisal Research. Some projects will never get off the ground, and condo conversions are likely to offset some of the new supply.

Still, landlords are likely to feel the impact, especially if job growth tapers off.

Next year, “will be a good year,” with 4% rent growth,” Mr. DeVries says. But “2009 will be a little bit more of a challenge.”

By Alby Gallun

http://chicagorealestatedaily.com