After five years of renting, Larry and Shamar Aina decided they had enough of the apartment life. In September the Ainas bought a three-bedroom house in the 6800 block of South Wabash Avenue on Chicago’s South Side.
Shamar said the best way to describe the difference between living in an apartment and a house is peace of mind.
“When you live in a home you have plenty of space and room to relax. It seems like certain rooms give you a certain feeling,” she said. “Besides, you feel better when it’s time to pay your mortgage because you know the money is going towards ownership. You don’t get that feeling when you’re paying rent in an apartment.”
With Chicago’s rents rising steadily in recent years, and mortgage interest rates continuing at comparatively low levels, many renters are opting to do what the Ainas did. But, at the same time, many renters who decide to buy are buying condominiums in buildings that used to be rentals.
So, for those who cannot buy or prefer not to buy, 2002 will offer more of the same: Despite a recession, living in an apartment will cost more this year as landlord utility and insurance costs continue to go up, rentals continue to be converted to condos and interest in building new rental buildings drops.
So many factors affect whether rents rise and how much, including the Section 8 program administered by the U.S. Department of Housing and Urban Development.
Chicago’s economic resiliency is itself a contributor. Chicago is among the top choices among investors looking to buy apartment buildings. And, despite layoffs and the recession, Chicago’s job market continues to be attractive.
How much the rents will rise is uncertain. Downtown luxury apartment buildings are seeing the softest rent environment in years and many are offering incentives. But, condo conversions in the neighborhoods, especially in affluent communities, has added pressure for higher rents.
A report by the Chicago office of real estate brokerage Marcus & Millichap says that apartment vacancy rates will remain low, rents will move higher and the value of rental property will increase over the next 12 months.
” . . . In addition,” the report said, “the strong and diverse local employment base combined with lower interest rates will serve to heighten investor interest in the region. The Chicago apartment market, which enjoyed solid growth in both rents and sales prices over the past 24 months, will remain strong over the next year despite slightly slowing job growth.”
“Chicago is on the top of the list for investors looking to buy apartment buildings,” said Alon Yonatan, research services manager for Marcus & Millichap. “Despite rising rents here, it’s still less than New York, Washington, D.C., and San Francisco.”
John Jaeger, vice president of the Appraisal Research Counselors in Chicago, says property taxes are the main reason for rising rents in Chicago.
“As long as Chicago building owners are being taxed at higher rates than owners in other counties, such as DuPage County, Cook County and Chicago in particular will remain an expensive area to live,” Jaeger said.
In 1998, rent in Chicago averaged $815 in Class
A buildings, or those deemed most desirable, and grew to $992 in 2001, a 22 percent increase, according to Yonatan.
The Marcus & Millichap report also states that Lincoln Park, Lakeview and the Gold Coast, three North Side neighborhoods, will have low vacancy and higher rents this year.
“[Area] occupancy is hovering around 90 percent, so the market is still in good shape, although I expect a slow rental growth this year,” Yonatan added, referring to the number of new-construction units coming on the market.
Judith Roetting, executive director of the Chicagoland Apartment Association, an association of landlords, says rents are market-driven and any increase this year will be moderate. “The overall health of the rental market will be dependent on the economy. … How much [rents] will actually rise is anyone’s guess,” she said.
Although many consumers age 30 and up are opting to buy instead of rent, Roetting said, college students and recent college graduates remain the biggest renters in Chicago.
Not many of them will be moving into expensive high-rises downtown, though. Such buildings may feel the pressure to hold rents down “because they are competing against [the rising interest in] condominiums,” said Greg Moyer, regional director for the Chicago office of Marcus & Millichap.
And, as the recession continues, real estate experts say a pickup in new construction won’t occur until late this year or early 2003.
“Don’t expect a whole lot of activity to take place until fourth quarter 2002,” said Moyer. “Gone are those young professionals with great-paying technology jobs willing to pay $2,000 a month for rent. Today, [they] are subleasing their apartments, taking on a roommate or have moved back home with their parents.”
Though sales of newly built condos appear to have slackened in downtown Chicago, conversions of existing rental buildings are expected to continue this year.
The incentive to buy rather than rent continues to fuel condo demand.
Jay Rickey, a single sales executive, pays $800 a month for a studio apartment in the 1900 block of North Halsted Street in Lincoln Park. For that price he gets no utilities, no laundry facility, no parking lot and no doorman.
“I cannot see myself living like this for much longer,” Rickey said. “I have to do my laundry at my girlfriend’s house and go downstairs to the lobby to let my guests in. In the next three to five years, I plan to be living in a house or condo.”
Larry Aina, who bought on the South Side, said, “Living in an apartment means you have limitations as to how you can fix the place up, but in a home you have no limitations. That’s how I like to live,” he said. “Although our mortgage is about $150 more than what we paid to rent an apartment, it is money well spent.”
But, the incentive for condo conversions doesn’t come just from the demand side.
The reason for so much conversion is simple, said Jaeger, of the Appraisal Research Counselors. “Supply and demand is what this is all about. Many owners are selling their properties to condo developers for huge profits.”
Around Chicago, landlords are diversifying their services to include condo development and management.
Draper and Kramer, once known for its apartment portfolio, is now a condo developer and manager as well. Among its downtown conversions, it bought rental buildings at 401 E. Ontario St. and the Grand Ohio at 211 E. Ohio St., and converted them to condos.
Funding for investors to buy buildings, meanwhile, remains available despite the recession.
One lender, Bank Financial, continues to fund deals involving apartment buildings as capital for some commercial projects dries up. The Woodridge-based real estate investment firm provides acquisition and construction loans for apartment investors and developers. One of its recent Chicago deals includes a loan for a 95-unit apartment building at 6104 S. Woodlawn Ave.
“It is definitely a seller’s market right now. Private investors make up the bulk of our customers and probably account for most of the buyers,” said John Manos, senior vice president for Bank Financial.
The story isn’t just in high-end renting, though.
Landlords accepting Section 8 say while the program is good, slow payments from the government often discourage more landlords from participating.
“No one likes to be paid late. Landlords expect to be paid on time each month and not have to wait months later,” said Lorie Highfill, executive vice president of TLC Management Co., which owns 1,100 units in Chicago. “The Section 8 program gives low-income individuals an opportunity to live in middle-income buildings and helps diversify neighborhoods.”
The Section 8 program requires renters to pay 30 percent of their monthly income toward rent while the government pays the difference. For example, if a tenant’s monthly income is $800 and their rent is $600 a month, the tenant pays $240 and the government pays the remaining $360.
A flood of Section 8 vouchers is expected to hit the Chicago market this year as displaced Chicago Housing Authority (CHA) tenants search for new residences.
The CHA is redeveloping many of its high-rise buildings and transforming them into mixed-income complexes.
This means CHA residents such as Valerie Bynum might possibly have to relocate to a new neighborhood or to the suburbs.
“I have lived in the Robert Taylor complex [at 53rd and State Streets] for eight years and now my building is slated to be torn down,” she said. “I am a single mother with limited income and [now] the system expects me to start all over again . . . .”
