StrawStickStone Rent Index: 4th Quarter 2012

Analysis

It’s winter in Chicago. We’ve discussed the Chicago rental off-season before and you’ll be seeing it reflected in all of the Q4 numbers today. Nearly every sector is down, and that’s to be expected. Market activity has fallen off by 40-50% since Q3 as happens every year. What’s important in a situation like this is to look at the sectors of the market that bucked the downward trend.

4th quarter Chicago rental market activity has been the worst so far this year. All told it’s amazing prices have only dropped by less than 10% in most places.

Downtown, the smallest units saw upward movement on the price points. Studios and small one beds were in demand, which is pretty much always going to be the case in downtown Chicago. Students & in-town business make up most of the tenant population and their demand is consistent. Interestingly, the price point for 3 beds was also elevated. Given that we’re looking at an average price point over $5000 per month for these units, I’m thinking that the more budget-minded families stayed put in their units for the holidays while groups of adults and the extremely wealthy were able to move. This would tilt the price point towards the more expensive units favored by the latter group.

In name brand neighborhoods people are scaling down their expectations – vintage 1 beds and 2 beds were up while the more fancy units were down. In fact, even though only 10 vintage 1-beds rented in this zone, their average rent rate was higher than their modern counterparts. This may indicate that the drawing power of granite, stainless & condo-quality has weakened among the renting contingent in these trendy areas. I don’t think it reflects renters “settling” for the lesser quality vintage. It reflects a view that both styles, vintage and new, are seen as closer to equal now. Overall what I’m seeing in these areas is that the demand for space & privacy is paramount, outstripping high-end finishes and deluxe appliances. Studios and single family homes increased in value. The larger vintage units increased as well. That’s one claustrophobic, isolationist group of renters in the trendy areas this fall.

One other factor may be inspiring the shift in the name brand areas – vintage units are far more likely to come with heat included, and the fourth quarter brings the concern about heating costs to the forefront of tenants’ minds. The individually controlled (and funded) central heat in the newer condos is not so attractive when you’re looking at 4 months of below-freezing temps immediately upon moving in.

Moving out to the generic, budget-friendly neighborhoods in our outer ring, it’s a story abount laundry. The only segment to see an increase in rent out here during Q4 was the one bedroom apartments with laundry in the unit. Meanwhile, looking at the 3 bedroom rental activity, I’m seeing equal numbers of apartments in the “3 bedroom condo” and “3 bedroom with laundry” segments. Some of the rentals with laundry were likely single family homes instead of condos. However, we must remember that for every unit rented, several were passed over and remain vacant. The lesson we learn here is that renters working through the MLS for 3 beds in the outer ring expect in-unit laundry. Washer/dryer in unit is no longer optional. In the slower market where tenants can pick and choose, they’re basically ignoring buildings with coin laundry and absent laundry.

gonna have a bad time

Again, this may be due to the onset of winter. Many basement laundry rooms require trekking down a rear outdoor stairwell, frequently icy and usually cold, in order to get laundry done. Wintertime makes in-unit laundry far more critical, especially among the larger family groups that favor the “generic” neighborhoods for their lower rents.

Predictions

The real estate industry took a while to learn how to sell short back when the market first started to dive. Former homeowners who short sold during this time have seen their short sales drop off their credit already and have been able to buy for some time. However, many were so burned by the experience that they chose to remain renters. However, 2010 was when the first-time homebuyer tax credit ended. The folks who short sold towards the end of 2010 got Realtors who knew what they were doing. They are likely to be more optimistic and they will be able to buy again this year. I see them leaving the rental market pretty quickly as soon as they can buy.

Therefore, I predict overall market stasis for Chicago rentals next year, based on the trends we were seeing in Q2 and Q3 2012, as well as signs of life from the sales market. I anticipate a slow flow of renters back into the purchase market this year, especially in late Q3 and Q4 of 2013. This will lengthen market times a bit and the rent rates may stagnate, especially in the generic neighborhoods, but I think it will be another year before the rent rates decrease at all.

I’m going to repeat the advice that I gave last quarter. If you’re an accidental landlord, it’s time to consider selling this year. You can help keep the rental rates up and solve some of your own headaches. Sales inventory is at an all time low. I’m seeing properties spend less than a week on the market, and in some cases renters are purchasing their rented condos.

As for those who stay in the rental market, I do think that in-unit laundry is going to jump from “a nice luxury” to mandatory in the generic neighborhoods this year, at least among the renters who work with Realtors. I already see most of my renter clients demanding it and these wintertime numbers are very telling.

The Numbers

Downtown*
Avg (Count) Change since Q3 Low / High
Studio $1323 (63) Up 0.4% $790 / $2700
1 bed, Vintage Invalid (0) n/a
1 bed, Condo $1904 (305) Up 7.0% $1100 / $9500
1 bed w In-Unit laundry $2058 (161) No Change $1275 / $9500
2 bed, Vintage Invalid (1) $1550 / $1550
2 bed, Condo $2741 (237) Down 2.0% $1300 / $6500
2 bed w In-Unit Laundry $2859 (158) Down 2.1% $1300 / $6500
3 bed, Vintage Invalid (1) $4200 / $4200
3 bed, Condo $5502 (40) Up 1.5% $2000 / $11500
3 bed w In-Unit Laundry $5695 (30) Up 7.7% $2900 / $11500
3 bed Single Family Invalid (0) n/a
Pets**** Dogs OK: $2457 | No Pets: $2295 | Cats Only $2052
Name Brand Neighborhoods*
Avg (Count) Change since Q3 Low / High
Studio $1057 (35) Up 2.7% $975 / $1250
1 bed, Vintage $1677 (10) Up 23.0% $1100 / $2800
1 bed, Condo $1504 (121) Down 1.8% $995 / $2700
1 bed w In-Unit laundry $1537 (35) Down 6.2% $1000 / $2700
2 bed, Vintage $1985 (12) Up 13% $1150 / $2800
2 bed, Condo $2213 (187) Down 2.9% $1150 / $4000
2 bed w In-Unit Laundry $2289 (144) Down 2.7% $1150 / $4000
3 bed, Vintage Invalid (5) $2050 / $4000
3 bed, Condo $2965 (67) Down 1.1% $1300 / $5600
3 bed w In-Unit Laundry $3162 (99) Down 0.3% $1950 / $6000
3 bed Single Family $3696 (16) Up 12.4% $2300 / $6000
Pets**** Dogs OK: $2537 | No Pets: $1973 | Cats Only $1640
Generic Neighborhoods***
Avg (Count) Change since Q3 Low / High
Studio $817 (22) Down 6.5% $550 / $1175
1 bed, Vintage Invalid (5) $800 / $1375
1 bed, Condo $1358 (108) Down 0.9% $800 / $2300
1 bed w In-Unit laundry $1573 (42) Up 5.4% $900 / $2600
2 bed, Vintage $1287 (15) Down 12.4% $800 / $2300
2 bed, Condo $1636 (214) Down 3.3% $650 / $3250
2 bed w In-Unit Laundry $1725 (139) Down 0.9% $920 / $3250
3 bed, Vintage Invalid (7) $1200 / $2850
3 bed, Condo $2087 (58) Down 7.1% $1100 / $3900
3 bed w In-Unit Laundry $2095 (59) Down 5.4% $1150 / $3900
3 bed Single Family $1669 (16) Down 13.7% $850 / $2900
Pets**** Dogs OK: $1902 | No Pets: $1771 | Cats Only $1477

* Downtown: Within 1.25 miles of the intersection of State & Madison, Chicago
** Name Brand Neighborhoods: Lincoln Park, Wicker Park, Bucktown, Wrigleyville / Lakeview
*** Generic Neighborhoods: Uptown, NorthCenter, Logan Square, Avondale, Irving Park, Humboldt Park
**** Average rent rates based on pet policy across all sizes of apartments.

Read more about Name Brand & Generic Neighborhoods.
Read more about why cat-friendly apartments are cheaper.

Stats based on printed rent rates for the fourth quarter of 2012 as listed in MRED LLC’s ConnectMLS for the city of Chicago. Completed rentals only, no active listings.

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-Kay C.

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