“Urban migration” has taken Chicago’s multifamily market by storm, and it’s been the focus of many news articles this year. But what’s been happening in the suburbs?
Recently, first-ring suburban markets have seen a revitalization, and the trend of urbanizing suburban hubs has continued to drive multifamily development. The new “suburban-urban” landscape offers residents the same amenities enjoyed in downtown neighborhoods at a more affordable price point. Another attractive selling point? These highly walkable suburban lifestyle centers offer immediate access to rail lines, restaurants and retail while still providing the openness of suburban living.
Demand Spurring Development
The strong demand for suburban space is exemplified by the increased enthusiasm from both regional and national developers, with nearly 3,000 units delivered to the suburbs in 2015, 2,465 units already completed this year, and another 2,444 currently under construction according to Appraisal Research Counselors. Throughout this construction boom, suburban Chicago has seen rising rents for the past 6 years, with a 4-5 percent increase expected by the end of 2016. Rents have gone up 4.8 percent compared to this time last year to an average of $1.39 per square foot, while occupancy has risen each quarter of 2016 to 97.1 percent.
Investors Flock to Suburbs
While investors are struggling to make sense out of cap rates in the 4.75-5.25 percent range downtown, capital in search of higher yields has flocked to suburban assets that often offer higher upside at a cheaper cost. Value-add has been the name of the game for suburban investors as they spent $642 million on B and C class properties in 2015, with $259 million of that being in suburban Cook County and $213 million in DuPage County.
One characteristic that appeals to those investing in the suburbs is the larger demographic spectrum. Millennials, families and baby boomers are all motivated by different drivers and are renting in the suburbs.
While it may come as a surprise, there’s a strong market in the suburbs that appeals to millennial renters. Many of them work in the suburbs and have decided that the long commute to and from the city isn’t worth the headache. Landlords are catering to this trend by offering extensive lifestyle amenities at their properties in order to turn an apartment complex into a lively community where like-minded millennials can congregate. The newly constructed 500 Station apartments in Aurora is one such example. The property offers community amenities typical of Class A suburban complexes including rooftop decks, a staffed fitness center, a pet-washing station, outdoor grilling, fireplaces and a swimming pool. Yet the property is taking amenities to an even higher level to cater specifically to millennials with features like a humidor, wine cellar, putting green and video game room. The idea behind developments of this kind is to get enough “young people living together in the suburbs creating a critical mass of like minded individuals” while offering them all of the conveniences of urban livingand a closer commute to work, according to the developer.
But millennials are only one part of the suburban apartment equation. Families have also decided to make suburban apartments their home because of more affordable options in terms of schooling and extracurricular activities. Suburban apartments offer the opportunity to raise children in a more traditional setting with the added flexibility of renting. The same can be said for the growing baby boomer population who can no longer justify their larger family homes and want the flexibility of renting but aren’t ready to move downtown.
Difficulties of Homeownership
There are several factors to look at when considering why an individual opts to rent versus buy. One reason is the instability in the housing market showcased by the recent housing crash of 2008, which has left a bad taste in the mouths of many potential home owners. Another consequence of the housing crash is that banks have stricter lending regulations, which ultimately makes it harder to obtain a mortgage. These issues, coupled with the massive student loans many millennials are strapped with, makes renting much more appealing. The home ownership rate for metropolitan Chicago is at 63.9 percent, the lowest since 1999, and with every point drop equating to 30,000 new renters, there continues to be strong demand for apartments. People also require flexibility as they are more likely to move from company to company. According to Bureau of Labor Statistics, the average worker moves every 4.4 years, which causes uncertainty about their future location and further supports the choice to rent.
While the urban migration has certainly been beneficial for the Chicago market, there are still plenty of exciting rental opportunities in the suburbs.
Jack is an Associate with Chicago’s Investment Services Group, specializing in multifamily investment sales. Jack provides financial analysis and market research to aid in the marketing and sale of multifamily assets across the Chicago Metropolitan Area and greater Midwest.