Among the factors that helped spur U.S. apartment absorption to an especially impressive total in Q2 2014, some pent-up demand was unleashed in metros where particularly bad winter weather led to unusually weak leasing at the end of 2013 and the beginning of 2014. Chicago illustrates that shift in momentum in quite a dramatic fashion.
Chicago apartment demand surged to some 6,600 units during Q2, after the metro had suffered 2,100 net move-outs from the apartment renter base over the course of the previous six months. That stunning comeback put Chicago in a dead heat with Dallas/Fort Worth, Houston, and Washington, DC, for the strongest absorption recorded during the quarter.
Chicago’s apartment occupancy reading came in at 95.7% as of Q2, returning to its year-earlier performance after the rate had drifted down to 94.9% during the winter weather months.
Strong demand and rising occupancy for the quarter allowed apartment operators to get quite a bit more aggressive on pricing during the three-month period. Effective rents for new leases surged 3.1% during the quarter, with hefty increases seen across the product spectrum. Annual rent growth as of mid-2014 was lower at 1.9%, since there had been some pricing cuts earlier. Furthermore, rents proved flat to down slightly on an annual basis in top-of-the-market properties, reflecting the competitive leasing environment that new communities coming on stream have created in the urban core. Middle-market projects are registering annual rent growth of roughly 4% or better.
Given Chicago’s huge apartment demand volume in Q2 included some weather-related catch-up activity, don’t expect absorption to remain at its most recent pace. In fact, MPF Research expects that demand will fall slightly short of upcoming completions (ongoing construction tallies at some 8,500 units, with about 5,800 of them scheduled for delivery between mid-2014 and mid-2015). Occupancy, then, should backtrack mildly in the coming months.
In contrast, annual rent growth should improve. Barring the return of the especially severe weather difficulties seen in late 2013 and early 2014, it’s unlikely that owners and operators will repeat the rent cuts that occurred during that period. So, if even mild quarterly rent upturns are experienced in late 2014 and early 2015, that shift will boost the annual growth figure.