This month, the South Side Builders Association invited Jim Kutill and Gail Lissner from Integra Realty Resources (IRR ) to discuss The Chicago Market Outlook.
Q: How will a potential recession impact the real estate market in Chicago?
A: Lower-end buildings will fare worse as they will not be able to sustain capital as easily due to the increase in interest rates.
Suburban:
Overall, the volume of closings were down by 21.3% in September and 35% in October of 2022. However, suburban rent growth has increased by 11.5% with occupancy at 98%. There is not a lot of demand for new typical single-family housing in the suburbs.
The market has seen an adjustment towards townhomes and build-to-rent homes, which are homes/communities specifically built for long-term renters.
Townhome rentals close to downtown in Kane, Kendall, and Will Counties are viewed as opportunity areas.
Downtown Chicago:
Downtown has been seeing a modest increase in 3,000 residential units over the past year stretching from North avenue to Cermak Road. The area of greatest activity will be in the West Loop / Fulton Market with over 9,000 units expected to be developed.
Occupancy downtown is currently at 96% with 1 bedrooms having the greatest demand.
2024 will be a big year for new construction in the downtown neighborhoods due to the shutdown from Covid-19
South Chicago:
There is still a steady stream of apartment sales coming on the market. The south side is still seeing an increase in average market rents. What more is that Section 8 tenants expect condo quality apartments and the vouchers hold a premium over market rent tenants, which help to keep south side buildings running and occupied.
There has been an increase in re-trading with the increase in interest rates within the last 6-8 weeks.
The number of buyers are finding it more difficult to find deals, but they have not seen a drop in contract prices yet.
Banks still want to invest in the south side. However, building debt coverage ratio is worse off than before, meaning people are not receiving as much lending. Lenders are looking to go down their watch list to see who has more equity to make a deal.
A shallow short recession may not see a big change in the market on the south side due to lots of demand for rental apartments.
Overall, we will have to take it day by day to see how the increase in interest rates and possible recession will affect the housing market. However, the bright side is that there is plenty of demand for rentals on the south side of Chicago with limited supply.