Downtown Chicago is experiencing the biggest apartment building boom in decades and demand is surging. All the elements are in place for higher property tax values with the upcoming 2015 City of Chicago triennial reassessment.
Builders completed 2,695 apartments in downtown Chicago last year and are on track to finish another 2,269 this year and 4,100 in 2015, according to Appraisal Research Counselors. That adds up to a 33% increase in apartment supply in just three years. And it doesn't include 2016, when another 4,000 units are expected to hit the market, provided they can secure construction financing.
Analysts say the downtown multifamily market has been especially strong because of job growth in the tech sector and the trend for companies such as Motorola Mobility to move their offices downtown from the suburbs.
Increased Occupancy and Rent
The Class A occupancy rate rose to 95.1% in the first quarter, up from 92.6% in the fourth quarter of 2013. The numbers on net absorption are even more impressive. Net absorption totaled 1,013 units, the biggest quarterly figure since at least 2011.
Effective rents at top-tier apartment buildings rose to a record high of $2.70 per square foot, up 7.6% from the fourth quarter. The average Class A downtown apartment rent is nearly 30% higher than it was in late 2009. Owners of Class B apartments are also thriving. Effective Class B rents hit an all-time high of $2.35 a square foot in the first quarter, up 4% from the fourth quarter of 2013.
Downtown rents will likely continue to soar in the near term as landlords seek to recapture anticipated real estate tax increases. Following the 2012 triennial reassessment for the City of Chicago, the equalized tax rate increased over 10%. The 2013 Cook County equalized tax rates may be released as soon as July 1, 2014, and the City of Chicago could be hit with another double-digit rate increase. As a result, potential annual tax increases of this magnitude will only result in lowering property values.
With the anticipated increase in the supply of new apartments coupled with unknown factors of new job creation, absorption levels, the potential for rental concessions, and continued tax increases, the pendulum could start to swing downward at a time when the assessor will be trying to catch up with the most recent upsurge in apartment values.
This situation will require timely professional assessment reviews and appeals in order to control the future real estate tax expense on apartment properties over the next several years.