Property prevails during the first half in Chicago's multifamily market

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Property fundamentals in the Chicago multifamily market posted little movement in the second quarter as renter demand and supply growth moved closer to an equilibrium. Renter demand has been strong to this point in the year, as net move-ins have kept pace with elevated levels of new construction coming online. The vacancy rate went unchanged, remaining at 5.1% during the second quarter. Vacancy conditions have been mostly stable in Chicago for the past few years, sitting between 4.5% and 5.5% since the middle of 2021. Asking rents have advanced at a modest pace thus far in 2024, offsetting dips recorded at the end of last year. Area rents are currently up 1% from one year ago. 

Transaction volume in the Chicago multifamily investment market dipped during the first half of 2024, as total sales lagged levels recorded in the same period of last year by 50%. In addition to a slowing pace of transactions, per-unit pricing also retreated after surging in 2023. Differences in the mix of properties sold this year have played the largest part in pricing dynamics. While nearly half of all properties sold in 2023 were Class A assets, top-tier properties made up just 27% of sales in the past six months. Rising cap rates have impacted pricing as well. Cap rates in 2024 have generally averaged between 5.5% and 6.5%, a 75 basis point increase from last year.

Looking ahead

Property fundamentals in the Chicago multifamily market are expected to improve through the second half of 2024, especially in Chicago’s downtown submarkets where absorption has been strong. Employment growth in the area should resume a steady upward trajectory in coming months after cuts in a few major industries dragged on growth in the first half. Sectors such as healthcare and education are expected to continue to post gains and lead the way. New apartment development is projected to slow through the rest of the year, and the number of units coming online will represent a modest addition to the market’s total inventory. This relatively low construction combined with an improving job market should spur renter demand, support rents and keep vacancy flat. 

Multifamily investors have remained cautious throughout the first half of 2024 and transaction activity has been concentrated in the middle market range, with Class B properties making up the majority of sales. This is likely to continue through the end of the year and into 2025, but there is a greater possibility that newer Class A properties may begin to trade at a more elevated clip, as they did in 2023. Recent trends of investment activity in suburban Chicago will likely pace the market. With property fundamentals performing, it may take some combination of higher cap rates or lower lending rates to spark additional transaction volume.

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