HOUSING MARKET TRENDS, DOWNTOWN CHICAGO Spring, 2009 Presented to
474 North Lake Shore Condominium Association Board by
McKim N. Barnes Vice-President, Research and Analysis, Draper and Kramer, Inc.
1
TRENDS IN THE CHICAGO REGION
Let’s look at the region as a whole -----
Draper and Kramer Research
2
Comments: The conditions of a local housing market, like an urban region’s downtown, inevitably reflect trends in the region as a whole. More importantly, they are the product of the mechanics of urban growth – the evolution of what urban and regional economists call an urban region’s “spatial structure.” At the heart of those “mechanics” are changes in the technology and “extent” of a region’s transportation system. If the technology is boats on waterways and wagons on land, you will see one spatial structure; if trains and streetcars on rails; another spatial structure; if automobiles and trucks on highways, still another spatial structure. Spatial structures change as a faster technology is substituted for a slower one. As we substituted a faster rail based system for waterways and wagons, urban regions began to spread out, because faster systems allow people to live farther from their workplace. High central city densities that stemmed from travel by walking and riding in a wagon were less necessary. Central city growth rates decreased and, with the adoption of highway/auto based systems, those growth rates became rates of decline. Adding more “links’ to the system has the same effect. You need only observe the response to the opening of the southerly links of I-355 (Veterans Memorial Tollway) on population and household growth in northwestern Will County.
2
40%
10,000
35%
9,000
30%
8,000
25%
7,000
20%
6,000
15%
5,000
10%
4,000
5%
3,000
0%
Total Population (000s)
Growth Rate per Decade
CHICAGO 10-COUNTY REGION Population, 1950 - 2008
2,000 1950
1960
1970
1980
1990
% Chg. since Previous Census
Draper and Kramer Research
2000
2008e
Metro Area
3
What will be called the “Chicago 10-County Region” consists of the Chicago-Naperville-Joliet, IL Metropolitan Division and Lake County-Kenosha County, IL-WI Metropolitan Division of the Chicago-Naperville-Joliet, IL-IN-WI Metropolitan Statistical Area. The first metro division contains Cook, DeKalb, DuPage, Grundy, Kane, Kendall, McHenry and Will Counties. The second contains Lake County, IL, and Kenosha County, WI. The population of the 10-County region has grown by an average of about 550,000 persons per year since 1950. The baby boom led to high “percentage growth” (the purple columns) during the 1950s and 1960s. The birth control pill and out-migration from the region due to poor economic performance led to low growth rates during the 1970s and 1980s. Economic recovery in the region began in the late 1980s, and that led to strong population growth in the 1990s. The region has been stagnant since 2000, with virtually no job growth (see later slides). The population growth rate (%) is now less than during the 1990s but better than the very tough period between about 1970 and 1985.
3
120.0
3.0
100.0
2.5
80.0
2.0
60.0
1.5
40.0
1.0
20.0
0.5
0.0
Ratio of HH Growth to Pop Growth
Pop'n and HH Change per Year (in 000s)
Population Growth Produces Fewer New Households than in 70s and 80s
0.0 70's
80's Population/Yr
90's Household/Yr
Since '00
HH Chg/Pop Chg
Draper and Kramer Research
4
The 1970s saw the seemingly contradictory trends of low population growth but high household growth.
Some definitions: A household is a group of people who live in a housing unit. The Census defines a housing unit as a place to live that has a clearly separate entrance (like an apartment door) and separate bathing facilities. Dorm rooms, nursing home rooms, and jail cells are not housing units, and people who live in them are not members of a household. To be part of a household, where you live must pass muster as a housing unit. By definition, the number of households equals the number of occupied housing units – kind of like assets equaling liabilities in accounting. Each household has a householder or household head. The percentage of adults who are householders is called the overall household headship rate. There are also headship rates specific to age cohorts. Rising household headship rates lead to more occupied housing units; a decrease in the headship rate leads to fewer occupied housing units. Information from the Census suggests that the nation’s overall household headship rate has been decreasing since the year 2000. This has led to fewer households emerging from a given level population growth. It would appear that housing developers were unaware of this during the construction boom after 2000.
4
CHICAGO’S DEVELOPMENT ZONES
Outer Suburbs
Inner Suburbs
Draper and Kramer Research
5
To analyze Chicago region’s economic and demographic trends, it is helpful to divide the region into 3 “development” zones: the city of Chicago, the “inner suburbs,” made up of the Cook County suburban townships shaded in green in the above map, and the “outer suburbs. For convenience, the above map excludes Kenosha County in Wisconsin. Without Kenosha County, the above area is called the “Chicago 9-County” region.
5
CHICAGO 9-COUNTY REGION, # Change in Household Density, 2000- 2008
MCHENRY MCHENRY
DEKALB DEKALB
KANE KANE DUPAGE DUPAGE
# Chg. Household Density 2000 - 2008(e) 500 to 20,180 250 to 500 25 to 250 -25 to 25 -250 to -25 -500 to -250 -5,230 to -500
(116) (102) (423) (264) (508) (236) (226)
Data Source: Census and Claritas, Inc.
LAKE LAKE
COOK COOK
KENDALL KENDALL WILL WILL
GRUNDY GRUNDY
Draper and Kramer Research
6
The above map illustrates how ALL of the Chicago region’s growth has occured almost entirely in the “outer suburbs.” Downtown Chicago has also seen significant household growth in recent years. We are interested here in “household change,” as opposed to population change, because the change in the number of households equals the change in the number of occupied housing units. As the map illustrates, the demand for new housing units has been greatest at the suburban fringe. A prickly question is how to show demographic change in a way that does not mislead. One frequently sees % change in charts and graphs. But a rural census tract near the urban fringe could have only 100 people. The construction of a subdivision in the tract could add 200 people to make a 200% increase. The same population increase would lead to only a 10% in a tract with a beginning population of 2,000 people. The above map shows the number change in household density – households per Sq. Mi. The large areas of rural census tracts will mitigate the “high % change” effect in areas with low population densities. Note the darker blue area in northwest Will County. Household growth in these tracts stems directly from the extension of Veteran’s Memorial Tollway (I-355) down to I-80.
6
Population Growth by Zone 5,000 4,500 Population (in 000s)
4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 1950
1960 Central City
1970
1980
1990
Inner Suburbs
2000
2008(e)
Outer Suburbs
Data Source: US Census
Draper and Kramer Research
7
The “outer suburbs” were the big winner in terms of population growth as well. Since 1970, the inner suburbs and the city have seen virtually no aggregate population growth, while the population of the outer suburbs has added over 2 million more people.
7
# Chg in Private Sector Job Density
# Chg in Jobs/Sq. Mi. 2001 - 2007 1,000 to 1,680 (4) 500 to 1,000 (3) 50 to 500 (39) -50 to 50 (20) -500 to -50 (41) -3,860 to -500 (16)
Draper and Kramer Research
8
The map shows the changes between the cyclical peak years of 2001 and 2007. (Comparisons should always be made at comparable points of the business cycle.) Noteworthy are the major declines in the zip codes in the southwest of the city of Chicago and the suburbs encircling the city, especially those surrounding O’Hare. The change in the number of private sector jobs has followed the same pattern as population growth. Note that most of the municipalities colored light or dark blue are far from Chicago. In addition to the towns shown on the map, the towns of Willowbrook, Bolingbrook, Romeoville, and Plainfield along Interstate 65 have also experienced very high job growth rates. Unfortunately, the Illinois Department of Employment Security did not report private sector job counts for these towns until 2002.
8
PRIVATE SECTOR JOBS BY DEVELOPMENT ZONE, 1972 - 2008 1,800 1,600 1,400 1,200 1,000 800 600 400 200
CBD
Chicago Outside CBD
Inner Suburbs
Draper and Kramer Research
2008p
2005
2002
1999
1996
1993
1990
1988
1985
1982
1979
1976
1972
0
Outer Suburbs 9
The number of private sector jobs located in the outer suburbs has increased by over 950,000 since 1982, while the count of private sector jobs in the city and inner suburbs has remained (collectively) almost exactly the same. But note how outer suburban job growth flattened after about 1999, reflecting the slowdown of the entire region. The increase of jobs in the outer suburbs has major implications for the market for housing units. According to the “Journey to Work Theory of Residential Location,” commuting time to work is considered a major component of the cost of living in a particular location along with the cash cost of home purchase or rent. On the benefit side of the transaction, most workers like newer housing and lower density. Both are available at the urban fringe. But living on the fringe requires a long work trip when one’s job is located near the city center. The worker weighs the costs against the benefits. Now, let’s say that the worker’s employer moves from Elk Grove Village to Elgin (as San Filippo Nuts did a few years ago). The move relieves the employees of the commuting time cost of driving to Elk Grove Village from, say, the sylvan environs of West Dundee, which is where employees can now live with virtually no commuting time cost. Furthermore, the new subdivisions offer new, modern houses.
9
# Chg in Private Sector Job Density
# Chg in Pvt. Sector Jobs/SM -- 2001 - 2007 1,000 to 1,680 500 to 1,000 50 to 500 -50 to 50 -500 to -50 -3,860 to -500
(4) (3) (39) (20) (41) (16)
Draper and Kramer Research
10
Above is a closer view of private sector job changes in the region’s “central latitudes,” by municipality in the suburbs and by zip code in Chicago. Some downtown Chicago zip codes experienced gains, while others experienced losses. Zip codes immediately to the west and south of downtown experienced increases. The increase in jobs located in these zip codes will make a residence in downtown Chicago more attractive to the new workers who hold those jobs.
10
Housing Construction and Household Change, Chicago Housing Market During the 1990’s and Since 2000
Draper and Kramer Research
11
Now let’s look at housing construction and the change in households in the Chicago market. Recall that the number of households equals the number of occupied housing units. So, to be “in balance,” the number of new housing units constructed less the number demolished should be roughly equal to the change in the number of households.
11
Housing Construction and Average Household Creation, Chicago 10-County Region 60,000 50,000 40,000 30,000 20,000 10,000 0
Total Units Authorized
Net Units Authorized
Avg. Net HH Formation, 1990s
Avg. Net HH Formation, Since 2000
Draper and Kramer Research
2009e
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
-10,000
12
In the above chart, the blue line represents the number of units authorized by building permit and the pink line represents the units authorized less estimated removals (through demolition, combination with another unit, or otherwise) for the 10-County Chicago metropolitan area. The green triangles represent the average annual increase in households during the 1990s, while the orange boxes with yellow X’s represent the annual average increase in households from 2000 to the summer, 2007 New units authorized by permit were roughly equal to the average annual increase in households during the 1990s. But from 2000 to 2006, units authorized net of removals (the pink line) were well in excess of the average annual increase in households. In other words, the number of units constructed exceeded the increase in the number of occupied units. This excess from 2000 through 2007 amounted to about 150,000 housing units. Note that the annual increase in households in the 10-county region averaged about 16,500 from 2000 through 2007. Dividing into a total excess of 150,000 suggests that absorbing the excess could take as much as 9 years. It won’t take that long, because as much as half of the excess will be offset by abandonment and demolition of old housing in poor neighborhoods, especially in the south and west side of Chicago and in poorer “inner suburbs.
12
Housing Construction and Average Household Creation, City of Chicago 20,000 15,000 10,000 5,000 0 -5,000
Total Units Authorized
Net Units Authorized
Avg. Net HH Formation, 1990s
Avg. Net HH Formation, Since 2000
Draper and Kramer Research
2009e
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
-10,000
13
The above chart shows units authorized by building permit in the city of Chicago versus average annual household change between the years1990 and 2000 (green triangles) and since Census 2000 (orange squares). Like the Chicago suburbs, and indeed like the nation, the net units added to the city’s housing stock has been greatly in excess of the average annual change in the number households (as estimated by the American Community Survey – the ACS). Actually, the number of households (occupied housing units) has been declining in the city overall. Of course, this does not mean that ALL parts of the city have been losing households. Some neighborhoods can be gaining while others are losing. (See below.)
13
Housing Construction and Average Household Creation, Suburban Portion of Chicago 10-County Region
Total Units Authorized Avg. Net HH Formation, 1990s
2009e
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 -5,000
Net Units Authorized Avg. Net HH Formation, Since 2000
Draper and Kramer Research
14
Again – housing unit construction in the suburbs was “in line” with net household growth through the 1990s. But after 2000, household growth was lower by about 4,000 per year while housing unit construction was in some years as much as 6,000 units more than was typical of the 1990s. The accumulated excess inventory has essentially led to the cessation of housing construction as of the spring of 2009.
14
Chicago City Housing Inventory (in Thousands)
Source: American Community Survey
Total Housing Units Occupied Units Overall Occupancy Rate
Total Vacant Units
2000
2007
Change
1,152.9
1,188.6
35.7
1,061.9 92.1%
1,022.9 86.1%
-39.0 -6.1%
90.9
165.7
74.7
Vacant for Sale Vacant For Rent Rented or Sold, Not Occ'd Seasonal, Recrational Use Other Vacant
8.1 36.3 9.8 4.5 32.2
20.2 47.1 12.3 9.1 77.0
12.1 10.8 2.6 4.6 44.8
Owner/For Sale Vacancy Rate Renter Vacancy Rate
1.6% 5.7%
3.8% 8.4%
2.2% 2.7%
Draper and Kramer Research
15
According to the American Community Survey (conducted by the Census Bureau), the total number of housing units in the city of Chicago increased by about 36,000 between Census 2000 and the summer of 2007 (the latest ACS estimates available.) During the same period, the number of occupied housing units (households) decreased citywide by about 39,000 units, leading to an increase of nearly 75,000 vacant units and a decrease in the overall occupancy rate by 6.1 percentage points (which is also an increase in the overall vacancy rate of 6.1 percentage points). Almost 45,000 of the increase in vacant units are in the “other” category, which includes a subcategory entitled “Vacant, Primary Residence elsewhere.” Be aware that many owners of housing units in downtown Chicago (typically condos) use them just for “play.” But also be aware that a “renter vacancy rate” of 8.4% is on the high side. Further, the statistics in the above table do not reflect completions of housing units under construction in the summer of 2007.
15
Estimated % Household Change, City of Chicago, 2000 2008
% Chg in Households 2000 - 2008(e) 20 to 8,940 (70) 10 to 20 (46) 3 to 10 (70) -3 to 3 (138) -10 to -3 (361) -30 to -10 (175) all others (5)
Estimates for 2008 by Claritas, Inc.
Draper and Kramer Research
16
Household changes have varied throughout the city. If Claritas’ estimates are to be believed, households have increased in the neighborhoods in and around Chicago’s downtown and have declined elsewhere. The reader might find it informative to return to slide number 8 and note that the neighborhoods in the south side of Chicago are suffering both job and household loss.
16
Estimated % Household Change, Chicago Downtown, 2000 - 2008 Data Sources: U. S. Census and Claritas, Inc.
% Chg. in Households 2000 - 2008(e) 20 to 8,940 10 to 20 3 to 10 -3 to 3 -10 to -3 -30 to -10 all others
(70) (46) (70) (138) (361) (175) (5)
Draper and Kramer Research
17
Zoomed in on Chicago’s central area, this map underscores that Chicago’s downtown housing market is essentially “an oasis of growth.” The decline in households in Chicago’s Gold Coast most likely stems from “unit combinations” – the purchase and renovation of two or more apartments into one apartment. The decline in Lincoln Park stems from combinations and from demolitions of 2- and 3-flates to make way for very large townhouses and mansions.
17
Recent Development, Conversion, and Sales History, Downtown Chicago Condo Market 10,000 8,000 6,000 4,000 2,000 0 -2,000 -4,000 2000 2001 2002 2003 2004 2005 2006 2007 2008 Incremental Units "Offered to" ("Withdrawn from") market
Units Sold = "Absorption"
Source: Appraisal Research Counselors
Draper and Kramer Research
18
Appraisal Research Counselors, which conducts extensive research on the downtown Chicago housing market. In its quarterly publication called Downtown Chicago Residential Benchmark Report, the company reports the number of condominiums being actively marketed at the end of each quarter. The pink bars are the change in the number of these actively marketed condos from one 4th quarter to the next. So, the number of actively marketed units increased from 51,912 in 2005:Q4 to 59,367 in 2006:Q4, an increase of 7,455. A reasonable supposition is that a decrease in the number of units being actively marketed signals greater developer pessimism about the market, while an increase in actively marketed units signals greater developer optimism. Developers were especially bullish on Chicago’s downtown market in 2000, just before the previous recession, and again in 2005, as mortgage market liquidity was also reaching its peak. During 2008, however, market conditions led to the cessation of marketing for a number of planned projects - hence the negative change in the number of actively marketed units. The blue bars are the number of units actually sold. In 2008, buyers defaulted on more sale contracts than contracts were signed, resulting in a negative number of units counted as “sold.”
18
Downtown Housing Market: Basic Demographic & Housing Trends 1990
# Chg. 2000 2008(e) ’00 – ‘08
Population
99,300
121,101
151,882
30,781
Households
54,590
70,083
86,405
16,322
Housing Units
66,546
79,456
104,622
25,166
Overall Occupancy Rate
82.0%
88.2%
82.6%
Excess of Chg. In HUs over HHs
8,844
Data Source: US Census and Claritas, Inc.
Draper and Kramer Research
19
Above are estimates by Claritas, Inc. of the population, number of households and number of housing units. In the area that Appraisal Research Counselors considers to be the “Downtown Housing Market.” All three have grown at very high rates, especially for the central part of an older inner city. Unfortunately, the supply of units appears to have grown much faster than the number of occupied units. But remember that many – but probably no more than half -- of the apparently vacant units are second homes for “weekends in the city.”
19
What Age Groups Supply New Occupants? Households by Age of Household Head Age Range Year
15 - 24 25 - 34 35 - 44 45 - 54 55 - 64 65 - 74 75 - 84
85+
Total
2000
5,498
21,853
14,539
10,702
7,877
5,538
3,314
973
70,294
2008
4,108
20,723
19,859
16,030
12,957
7,065
4,144
1,519
86,405
15,225
-1,994
1,491
2,255
-812
-1,394
-2,768
Change in age cohort Size
Data Source: US Census and Claritas, Inc. Draper and Kramer Research
20
The typical housing market analysis compares age groups at a fixed moment in time, and this sometimes leads to erroneous conclusions about which age groups are the source of a market’s growth. Note the large changes in the sizes of household heads aged 35 through 64. But the correct procedure is to look at the same age cohort – those born within the same set of years. We cannot do that precisely here, because the two points in time are 8 years apart, while the age ranges are 10 years long. But a basic conclusion is readily evident. It is households with heads under the age of 34 that fuel the growth. The largest increase is from the cohort that contains householders aged 15 – 24 in the year 2000 and then aged 25 – 34 in 2008. Yes, the comparison is not exactly correct, but it is close enough. The change in behavior from the 1970s (say) is that these age cohorts do not shrink after age 35 as the result of flight with young children to the suburbs. (Note: this is an additional slide. And in the presentation, I attributed growth to the empty nesters. Yes, some are returning to the city, but the numbers are trivial in comparison to the numbers that are in the suburbs. So, I stand corrected.)
20
Home Price Trends -- Case-Shiller Index (1/2000 = 100.0)
250 200 150 100 50
National Avg.
Chicago
Jan-09
Jan-07
Jan-05
Jan-03
Jan-01
Jan-99
Jan-97
Jan-95
Jan-93
Jan-91
Jan-89
Jan-87
0
Chicago CPI
Data Source: Standard and Poor Case-Shiller Home Price Index Draper and Kramer Research
21
The price bubble that emerged from drop in interest rates in 2000 and 2001 encouraged people to purchase more houses for the purpose of speculation as much as anythign. All speculative price bubbles burst eventually, and the house price bubble was no exception. Chicago’s price bubble (the blue line) was not as severe as those of other markets, and, because these markets, have a greater influence on the overall national price index (the red line), the “national” price index increased much more than Chicago (but, as Prof. William Wheaton points out, there is no such thing as “the nation” in real estate). Why is the Chicago Consumer Price Index (CPI) is on the chart? Housing economists had wondered for some time how house prices have compared over time to the price of a basket of consumer goods. Some years ago, it was discovered that the prices of houses in a neighborhood in Amsterdam had been carefully recorded since the late 1620s. An analysis of the prices revealed that – in the long run – house prices tracked consumer prices very closely. And indeed, that is what they were doing prior to the year 2000, when the upward deviation (the bubble) began. In Chicago, house prices have returned to the “path” of the CPI, which suggests that they will not fall much farther.
21
Condo Price Trends -- Case-Shiller 180 160 140 120 100
Chicago
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
Jan-99
Jan-98
Jan-97
Jan-96
60
Jan-95
80
Chicago CPI
Data Source: Standard and Poor Case-Shiller Home Price Index Draper and Kramer Research
22
Case-Shiller produces a condo price index for only 5 markets, and index numbers are available for only the months beginning with January, 1995. But the bubble in Chicago condo prices is clearly evident. The price index for condominiums in Chicago have not quite fallen to meet the Chicago consumer price line, but the gap will likely close by early 2010.
22
Summary of Chicago Case-Shiller Price Index Trends Peak (date)
% Chg. since Peak
Likely Future Decrease until Floor
All Houses
168.6% of 1/1/00 Price Level (9/2006)
-27.4%
Minimal
Condos
161.0% of 1/1/00 Price Level (9/2007)
-16.9%
-7% (+/-)
Latest Case-Shiller Price indices as of 4/2009.
Draper and Kramer Research
23
The Case-Shiller house and condo price indices each have a base value of 100 for the month of January in 2000. In September, 2006, the price index for all houses in Chicago reached a peak value of 168.6% of the price level in 1/1/2000. By in April, 2009 (the most recent Case-Shiller index available), the Chicago “all-house” index has fallen to 122.3% of the 1/1/2000 level, or was 27.4% below the peak. Chicago’s CPI is also at about 123% of where it was in early 2000 the same level, which is why we believe that any further decreases in Chicago’s all-house price index will be minimal. In September, 2007, Chicago condominium prices reached a peak of 161.0% of their level in 1/1/2000 and have decreased by 16.9% since then. Condo prices should start to follow Chicago’s Consumer Price Index after a further decrease of about 7%.
23
Net Effective Monthly Rent per SF, Downtown High-Rise Apartments Data Source: Appraisal Research Counselors
$2.60
Rent per SF
$2.40 $2.20 $2.00 $1.80 $1.60 $1.40 $1.20
Class A Bldgs
2008:Q4
2008:Q1
2007:Q2
2006:Q3
2005:Q4
2005:Q1
2004:Q2
2003:Q3
2002:Q4
2002:Q1
2001:Q2
2000:Q3
1999:Q4
1999:Q1
1998:Q2
1997:Q3
$1.00
Class B Bldgs
Draper and Kramer Research
24
Effective rental rates – or rents less concessions (free rent) -- in Chicago’s downtown housing market generally follow the economic cycle, rising as the economy expands and falling as the economy contracts.
24
Index of Net Effective Rents in Chicago Downtown Rental Market v. Chicago CPI Components Data Source: Appraisal Research Counselors and US BLS
Effective Rent Index/CPI
1.50 1.45 1.40 1.35 1.30 1.25 1.20 1.15 1.10 1.05
Class A Rent Index Total Chicago Area CPI
2008:Q4
2008:Q1
2007:Q2
2006:Q3
2005:Q4
2005:Q1
2004:Q2
2003:Q3
2002:Q4
2002:Q1
2001:Q2
2000:Q3
1999:Q4
1999:Q1
1998:Q2
1997:Q3
1.00
Class B Rent Index Rent Component of Chicago Area CPI
Draper and Kramer Research
25
But how have Effective Rents in the Chicago downtown market done relative to the overall price level? In other words, have increases in rental rates matched inflation? The chart indicates that rents increase faster than the price level (increases exceed the inflation rate) during cyclical expansions (period preceding 2000:Q4 and from 2004:Q1 to 2007:Q3) and decrease in absolute terms – giving back the “excess” gains received during the expansion (and more) – during cyclical contractions. On balance, however, downtown rents appear to have moved with the overall Chicago price level and not by much more. The chart also shows the Index of “Rent of Primary Residence” for the Chicago metropolitan area. This index has increased by much more than the overall price index. We cannot explain why. We note that downtown rents increased faster than Chicago’s “Rent” index prior to the year 2000 and then fell well below the Rent Index. Downtown rents recovered in late 2007 only to fall again. It does not seem likely that suburban rents outpaced downtown rents, but that is the only explanation that comes to mind.
25
Occupancy Rates, Downtown Chicago High-Rise Apartments Data Source: Appraisal Research Counselors 100.0% 97.5% 95.0% 92.5% 90.0% 87.5% 85.0% 82.5%
Class A Occupancy
2008:Q4
2008:Q1
2007:Q2
2006:Q3
2005:Q4
2005:Q1
2004:Q2
2003:Q3
2002:Q4
2002:Q1
2001:Q2
2000:Q3
1999:Q4
1999:Q1
1998:Q2
1997:Q3
80.0%
Class B Occupancy
Draper and Kramer Research
26
Occupancy rates have also increased and decreased with the economic cycles. Occupancy rates between 96% and 98% are considered “full occupancy.” The downtown market was at “full” occupancy for all quarters shown that are prior to 2001:Q1. Occupancy rates dropped with the 2000-2001 recession and then increased with the subsequent expansion until late 2006, when the glut of new units (both condominium and rental) began to take its toll.
26
Class A and B Apartment Occupancy Rates v. Downtown Chicago Jobs Data Source: ARC and IL Dept. of Employment Security 100.0%
490,000
98.0%
480,000
Occupancy Rate
470,000
94.0%
460,000
92.0%
450,000
90.0%
440,000
88.0%
430,000
86.0%
Downtown Pvt. Sector Employees
Class A Ocupancy
Draper and Kramer Research
2009:Q1e
2008:Q1
2007:Q1
2006:Q1
2005:Q1
2004:Q1
2003:Q1
2002:Q1
2001:Q1
410,000 2000:Q1
82.0% 1999:Q1
420,000 1998:Q1
84.0%
# of Jobs in Chicago CBD
96.0%
Class B Occupancy
27
The history of occupancy rates is not a good measure of demand growth, because occupancy rates can be depressed by excess supply. Developers can be very optimistic and develop new housing units faster even than new occupants arrive (consider Las Vegas). But occupancy rates will certainly decrease as demand decreases. The Journey to Work Theory of Residential Location suggests that persons holding jobs in downtown Chicago would be prime candidates to rent or purchase a downtown housing unit. Accordingly, we should see a drop in occupancy rates when there is a drop in the number of persons employed downtown. The above chart follows that relationship to degree.
27
SUMMARY • Chicago housing markets now face the consequences of a large increase in residential construction volume in the face of a slower increase in the number of households (equal to a slower growth in occupied units) • Census estimates that the number of households may be decreasing in the city of Chicago overall. • Greater downtown Chicago housing market (which includes Bucktown, Ukrainian Village, UIC area, and the South Loop) appear to be a “growth” oasis. Most other neighborhoods, especially the southwest side, are losing households. This stems partially from continued suburbanization resulting from changes in the region’s transportation infrastructure.
Draper and Kramer Research
28
28
SUMMARY (Continued) • Occupancy of the Chicago Downtown Housing stock is fueled by the arrival of households with head aged under 35. • Households with head older than 35 have a greater propensity to remain in the center city than in past decades. • The Case-Shiller index suggests that Chicago’s house price bubble is either “almost” over or over. Prices will return to their historic relationship to all consumer prices and will rise and fall as the price of all consumer prices rises and falls. • Rental rates and occupancy rates of rental properties are following the business cycle as they have historically.
Draper and Kramer Research
29
29
