Chicago Luxury Apartments Explained for the Rest of Us

Will we soon be seeing articles like this about Chicago?

A Peculiar Answer to a Housing Shortage

The apartment rental pundit blogs are buzzing lately about the future of the Chicago market. In 2011 the Depaul Institute of Housing Studies announced that Chicago would be short on affordable rentals for the next 20 years if we were to start building more stock right at that moment. This year ground has been broken and/or plans announced for the construction of thousands of new apartments in downtown Chicago . However, most of these are luxury skyscrapers. To the outside observer one would surmise that these developers have missed the point. Why would they build a rash of $2000/month 2 bedroom apartments when "affordable" is somewhere around half of that amount?

The answer lies in the availability of funds for projects of this nature. Banks have become far more stringent in lending to any potential homebuyer. For those looking to use borrowed funds to build large scale apartments the available funds are even scarcer. A construction loan large enough to fund the construction of affordable apartments would be due back in full after 5-7 years. While this would be theoretically possible if the units were sold off as condominiums, the "get rich slowly" model of business that accompanies a rental-oriented business model is focused on steady, ongoing cash flow, not immediate gains. A landlord renting out the units at $1000 per month would take far longer to pay off the construction loan than a developer who sold off the units at $200k each.

Unless a landlord has a standing line of credit or large amounts of cash on hand, building affordable apartments remains a pipe dream. The only major source of money to build apartments is coming from REITs, and they're only interested in one thing - getting big cash flow coming in as quickly as possible.

So What the Heck is a REIT?

REITs invest in all kinds of property but today (as usual) we're focusing on residential ones.

REITs (Real Estate Investment Trusts) are large groups of investors who pool their resources to maximize their buying power. A REIT in the US is granted multiple tax breaks as long as they play within the very specific rules outlined by the SEC. They must have at least 100 investors - either individuals or corporations - involved by the end of their first year in business. These guys are big, some of them enormous, and many of them publicly traded on various stock exchanges. There are REITs that focus their efforts on all kinds of different types of property, but for today we're focusing on the ones that build and invest in apartment buildings.

When your apartment is managed by a corporation consisting of at least 100 investors, let alone stockholders, the business model becomes far different. This is the "big box" model of apartment building. The whole process will be run in a manner similar to a Wal-Mart or Microsoft - a jolting contrast to the small, private landlord-tenant scenarios we normally describe here on StrawStickStone. Buildings constructed by REITs - especially the publicly traded REITs - are going to be designed to maximize rents and minimize overhead to the greatest possible extent.

The results, especially in the current booming US rental market, are not to be ignored. Forbes brought attention to the REIT market with their recent profile of market leader Equity Residential, focusing on its high rate of return on the dividends market. Headed by former Chicago Cubs owner Sam Zell, Equity Residential is based in Chicago but currently lists no Chicago apartment buildings in its portfolio. This is the epitome of big-box landlording!

Of course, for tenants this means that you have a fair shot at becoming a stockholder in your own apartment building if you choose to invest in a REIT and live in a luxury high rise apartment building. The lines between rental and condo ownership continue to blur.

Corralled and Contained

Every aspect of these buildings, from their location to their staff hiring policies, is designed to maximize cash flow. Housing is a means to an end. Much like grocery stores that put the milk all the way in the back to encourage unplanned additional purchases, these developments use a scientific approach to renting apartments in bulk.

From a tenant's perspective, there is a definite boundary to the REIT-owned apartments in Chicago. They're concentrated in bulk in the area that runs from Lincoln Park through South Loop and rarely found with street addresses in excess of 2000. The drastic difference in lifestyles certainly exacerbates the gap between the upper and middle classes - this is pretty much deliberate. By cultivating the idea among the upper classes that Chicago outside of the downtown district doesn't even exist, and keeping their residents contained in largely self-sufficient skyscraper communities, they ensure longer stays and high demand.

The Goals and Methods of Luxury Apartment Buildings

Once you know the causes behind each "feature" and "amenity" it loses some of its glossy sheen. Personally I have no problem if you want to live in one of these buildings - I have helped tenants rent in skyscrapers before and will gladly do so again. However, I do prefer my readers to have a clear understanding of their housing arrangements. Let's take a look at some of the guiding principles behind these enormous developments.

1. Minimize rent loss.

Why it's done: Lost rent means lower dividends. These buildings have a higher level of accountability to the stockholders and investors to ensure minimal loss of rent.

How it's marketed: Easy rent payment via credit card or automated bank draft. Unified applications. Lengthy, standardized leases with very few exceptions or additional clauses. High minimum credit score requirements. Mandatory renters insurance. Rent rates set above HUD's limits for voucher-subsidized housing, to avoid Section 8 applicants. The threshold for entry into these buildings is quite high.

The methods work, to a certain extent. One local REIT property management company has brought a total of 18 eviction suits against the tenants in their 2285-unit Chicago portfolio this year. By contrast, a private north side Chicago property manager with a reputation for being gentle on their delinquent tenants has about 900 apartments and has filed 30 eviction cases this year.

2. Maximize potential income.

Why it's done: Most landlords want to make a buck. But when you have to make quarterly reports of your earnings to your investors it becomes considerably more crucial. It isn't about just turning a profit, but about raking in as much of a profit as possible.

How it's marketed: A bank of apartments will always be vacant so that there is always an opportunity to test the market for higher rent rates. Rents for an apartment vary based on the day you move in, how long you stay, and any other number of factors designed to get you to stay longer and move in earlier. Specials are set to run for very short periods of time to force your hand into renting NOW.

Of course, they wouldn't want you saving anything for a down payment, either.

3. No outside payments.

Why it's done: Minimizing the tenants' interaction with outside vendors also minimizes the risk of the tenant comparison shopping other communities. Additionally, by folding in as many daily needs as possible into the rent, the tenant may be able to make the excuse that they can afford to spend more than the recommended 30% of their income on rent.

How it's marketed: Free wifi. Heat included. Onsite gym, dry cleaners, and commissary. Easy transfer from building to building within the portfolio of the same company.

4. Lower energy costs.

Why it's done: If you're going to build a massive skyscraper, the energy costs will eat you alive unless you're very savvy.

How it's marketed: LEED certified construction, renewable materials, large-scale building-centralized heating and cooling, green roofs, specials on certain tiers of apartments to avoid heating too much empty space.

5. Maximize tenant dependency.

Your new landlord, Annie Wilkes.

Why it's done: In an apartment building, turnover costs are the biggest potential hazard to cash flow. You can minimize unexpected maintenance costs by enacting an aggressive preventive maintenance plan, but you can't predict when a tenant will choose to move out. However, Tenants who are unable to take care of their own needs and uncertain of how to obtain outside assistance will remain reliant on their rental environment for longer. Tenants who are frightened of the city will be less likely to move to a classic Chicago walkup building or leave the downtown area. Tenants who form strong bonds with neighbors within the building will stay longer.

How it's marketed: Hire young, white leasing agents who will appeal to the suburban renters that are already likely to be scared of the city. Focus on how safe the building is, with soft emphasis on how dangerous the rest of the city is by contrast. Use construction methods that can only be repaired and maintained by professional staff. Full-service crews provide all of the necessary maintenance care, so that tenants don't have to learn to hire contractors or even change their own light bulbs. Host plenty of social events to encourage the residents to build strong connections within the building.

Is it for you? Maybe.

If you're fine with shopping at big box stores, hate comparison shopping, and aren't terribly adventurous, these buildings will be ideal for you. In Chicago under duress? Go for it. If you need a "destination" address to show off your social status to coworkers, clients or friends, then certainly these properties are worth a look. These buildings provide a reasonably self-contained, sanitized and trendy option for living in Chicago at a very high price.

However, if you're a self-sufficient type who wants to explore the city, learn about its history, save some cash for a new home or fully embrace an urban lifestyle, I'd really recommend that you look for Chicago housing outside of the downtown skyscraper districts.