Continuing their seven-year run, Chicago apartment developers added another 3,800 units to the downtown market in 2016, with an additional 8,700 expected to deliver over the next 24 months, according to Chicago-based Appraisal Research Counselors. While Class A rents are projected to soften in 2017, the combination of higher land and construction costs, tighter lending standards and rising real estate taxes – along with stricter regulations under Chicago’s Affordable Requirements Ordinance – is expected to keep supply in check with demand, extending the current cycle.
How will the market evolve as new buildings open their doors in the New Year? Chicago’s leading multifamily experts recently weighed in on the trends that will drive development and leasing activity in 2017 and beyond. (Note: please see trend headlines below, then scroll down for full write-ups and click here for photos):
- Bigger is Better
- Rightsizing Apartment Amenities
- Co-Living Goes Mainstream
- Luxury Rentals Racing to the Neighborhoods
- It’s a New Dawn for Deliveries
- Seeing Green in Gray
- Not Your Grandfather’s Retirement Home
- Luxury ‘Trickle Down’ Ups Affordable Housing Game
1) Bigger is Better: The number of people opting to rent in the U.S. once again increased in 2016, prompting many developers to up the square footage of their units for the first time in years. In 2017, Fifield Realty Corp. will deliver The Sinclair, a luxury rental development in Chicago’s Gold Coast that will include three- and four-bedroom residences. “The Gold Coast is a neighborhood where renters, particularly high earners, want more square footage,” said Randy Fifield, chairwoman of Fifield Realty Corp. “What’s interesting is the larger units often have only one or two occupants – they just want the extra room. And with the Sinclair’s penthouses, it’s not just that the bedroom count is larger, but all rooms, including the terraces, are bigger for entertaining.”
Forrest D. Bailey, president and CEO of Draper and Kramer, Incorporated, noted his firm’s residential management and leasing division is also experiencing significant demand for larger rentals due to a more diverse renting population. “At properties we currently own and manage, particularly in high-demand neighborhoods, we have more renters looking for three bedrooms or simply more space,” Bailey said. “That’s informing our decision to include more three-bedroom apartments in the overall unit mix and increase the square footage of units at our new rental developments still in the planning stages.”
Renters aren’t alone in wanting more space. At Renelle on the River, a new downtown condominium tower along the Chicago River, residences start at $1,584,900 and offer up to four bedrooms, 4½ baths and 3,434 square feet. “Just because buyers are looking to trade in their suburban home for a city residence doesn’t mean they want to downsize,” said Buzz Ruttenberg, founder of Belgravia Group. “These residences offer all the space of a single-family home but without the maintenance. They have the same mix of casual and formal spaces that people expect in a single-family home, yet are hard to come by in a condominium.”
In the same vein, Related Midwest‘s One Bennett Park, a Robert A.M. Stern Architects-designed ultra-luxury residential tower under construction in Streeterville, will offer gracious three- and four-bedroom floor plans among its 69 condominiums and 279 apartments. Priced from $1.85 million, the condos will average 3,200 square feet. “We’re creating distinctive vertical homes for a range of buyers, including families and empty nesters seeking a downtown lifestyle, as well as those in search of a centrally located pied-a-terre,” said Curt Bailey, president of Related Midwest.
2) Rightsizing Apartment Amenities: While amenities continue to be king among renters, look for developers to move away from the one-upmanship that defined recent market cycles. “Developers will continue to offer strong amenity packages, but the spaces will be more thoughtful instead of putting in an amenity for the sake of having one,” said Aaron Galvin, owner and managing broker of Luxury Living Chicago Realty. “We’re counseling developers to center amenities around building a community within a building, which helps with retention. As the Chicago apartment market becomes increasingly competitive, it will be more important than ever to create connections with, and among, residents.”
Other developers are putting a new twist on tried-and-true amenities they know resonate with renters. For example, Draper and Kramer, Incorporated, is introducing a saltwater pool at EVO, a new rental development in the St. Louis area. “A pool is a must-have amenity for our residents, but we’re improving on it with a saltwater pool that is gentler on the skin because it uses fewer chemicals,” said Forrest Bailey, Draper and Kramer’s president and CEO. “We’re also testing the concept of having the pool open 24 hours a day, so residents are able to make the most of the amenity within their schedule.”
According to Kristin Larkin, ASID and principal at FitzGerald Associates Architects, the million-dollar amenity word is adaptability. “Developers want spaces they can easily convert to other uses when amenity trends shift,” said Larkin. “We’re designing a lot of common spaces for high-tech hobbies, like video gaming as well as ‘vintage’ arcade rooms that include table games like foosball and ping-pong. These areas are configured so they can be easily re-worked as tastes, and technology, change.”
Meanwhile, with affordable apartments in short supply, renovating older apartments to replicate amenities in Class A buildings will be a popular strategy in 2017. “Standard ‘A’ amenities like workout rooms, business centers and community areas are also becoming the norm in the Class B market,” said David Schwartz, co-founder and CEO of Waterton. “These additions not only have a high impact on resident satisfaction, but also translate to rent premiums that enable owners to recoup the costs in as little as five years.”
3) Co-Living Goes Mainstream: With services like WeWork, Uber and Airbnb skyrocketing in popularity, co-living has emerged as a way to make luxury rentals accessible to those who can’t afford to – or don’t want to – lease their own units. “Millennials, including college students and young professionals, want to live in urban centers where jobs and nightlife are steps from their front door, yet many have been priced out of housing in these areas,” said JJ Smith, chief operating officer at CA Ventures. “While co-living is a newer strategy for market-rate communities, it’s a model we’ve been using for more than a decade in our off-campus student housing developments.”
Across the firm’s portfolio, the share of non-student residents in co-living residences has doubled from less than 2 percent a few years ago to 5 percent today. Non-student residents, including transient corporate workers in search of furnished housing, make up as much as 15 percent of the tenant mix at the company’s multifamily properties in urban centers.
Aaron Galvin, owner and managing broker of Luxury Living Chicago Realty, estimates that if units are designed correctly, have the right marketing strategy and are located in a desirable area, developers can potentially achieve more aggregate rent on some unit types than they would in a typical market rate apartment. In turn, renters can lease a bedroom for approximately 20 percent less than what they would pay for a studio in the same building. “This can save hundreds of dollars each month, and these are renters who appreciate the sharing economy,” said Galvin, whose firm recently leased-up “L”, a 120-unit development in Chicago’s Logan Square neighborhood that includes 30 co-living bedrooms.
Apartment-sharing also benefits property owners by reducing vacancy, according to Mark Durakovic, principal of Kass Management Services, which manages the “L” community in Logan Square. “Take, for example, a three-bedroom apartment that has been set up as a co-living unit,” said Durakovic. “In theory, each bedroom would have its own separate lease – ideally with staggered terms – rather than a single lease for the entire unit. This helps minimize or even eliminate loss of rent when someone moves out, as a portion of the unit is still generating income.”
4) Luxury Rentals Racing to the Neighborhoods: While companies like McDonald’s and Motorola are trading the suburbs for the city, luxury rentals are embarking on a reverse commute as they make their way into Chicago neighborhoods. “With land and construction costs rising, developers known for their downtown high-rises are pursuing boutique apartment projects in neighborhoods where land is more abundant and affordable,” said Aaron Galvin, owner and managing broker of Luxury Living Chicago Realty. “Not only is the demand there, but so are the profits. New developments along Milwaukee Avenue are generating rents near $3 per square foot, which was unheard of a few years ago.”
One neighborhood welcoming a new Class A rental building is Wrigleyville. “Most people view Wrigleyville as a fun place to be during Cubs games, but with excellent transit and dining options, the neighborhood also offers the perfect location for new rentals and year-round entertainment,” said Anthony Rossi Sr., president of M&R Development, which is developing Addison & Clark, a mixed-used development across from Wrigley Field. Upon completion in 2018, the project will bring 148 luxury apartments and 150,000 square feet of retail to the neighborhood, including a 10-screen luxury CMX movie theater and Lucky Strike.
And just down the street from Wrigley Field, BlitzLake Partners has begun pre-leasing at Lakeview 3200, a 90-unit transit-oriented development that will house one of the first flexible-format Target stores in Chicago. “Everyone from millennials to empty nesters is interested in this area of Lakeview, yet there has been no new apartment development within a half-mile radius,” said David Blitz, managing partner of BlitzLake. “The addition of buildings like Lakeview 3200 allows renters to enjoy the modern finishes and amenities of a downtown high-rise in a classic Chicago neighborhood.”
5) It’s a New Dawn for Deliveries: Just when multifamily developers and property managers had a handle on the influx of packages delivered to their buildings due to online shopping, new services like Amazon Prime Now have emerged, compelling owners and operators to fine-tune their delivery processes for 2017.
The Habitat Company was ahead of the curve when it introduced its package delivery locker system in 2013 at Hubbard Place, a luxury rental tower in downtown Chicago. Today, the lockers are one of the building’s most-used amenities. “Amazon Prime Now’s one-hour delivery didn’t even exist when we opened Hubbard Place, but our package process works seamlessly with expedited deliveries,” said Matt Fiascone, president of The Habitat Company. “On one hand, technology has created this delivery dilemma, but it’s also part of the solution. We’re constantly exploring how to manage future changes, like the use of delivery drones through Amazon Prime Air and other services.”
With the emergence of companies like Blue Apron, deliveries of perishables also are growing rapidly. “Fresh food delivery is very popular with the 29-39 year-old demographic as they want to eat healthy, but don’t necessarily have the time to cook or the resources to dine out every night,” said Diana Pittro, executive vice president of RMK Management Corp. To keep food fresh, the company is retrofitting some of its existing properties with coolers and adding separate refrigeration rooms to future developments.
Even smaller buildings without on-site staff or coolers are making adjustments. At select apartment communities it manages, Kass Management Services has started offering Doorman, a service through which packages are sent to, signed for and stored at an off-site location until residents schedule a delivery for later that same day or when they are next available. “In buildings small and large, package delivery has become a service that residents expect, so we wanted to find a solution that addressed the need, yet was still economical,” said Mark Durakovic, principal of Kass Management.
But it’s not just an increase in package deliveries that developers need to prepare for – soon, entire services will arrive on residents’ doorsteps. “We already have refrigerated storage to meet the demand of Peapod and other grocery deliveries, but we’re also starting to coordinate the delivery of ‘lifestyle services’ – everyone from Pilates instructors, to dog groomers, to personal chefs – who are providing more of their services in-home,” said Steve Fifield, president of Fifield Companies.
6) Seeing Green in Gray: Looking to replicate their success in the apartment sector, a number of developers and investors that specialize in market-rate rentals are diversifying into a new, but very familiar, segment of multifamily housing: senior living.
In 2015, Waterton, which owns and operates a portfolio of nearly 20,000 apartments and 13 hotels across the country, acquired a 50 percent interest in Chicago-based senior housing developer/operator Pathway Senior Living, marking the firm’s foray into senior housing. “The senior living sector holds tremendous potential for growth and profitability,” said Waterton CEO David Schwartz. “While the wants, needs and lifestyles of this age cohort are very different from those of a typical renter, from an operations standpoint, there are a lot of synergies between the two sectors, making senior housing a natural extension of our core business.”
As some firms invest in existing entities, others are launching their own senior divisions. Drawing on more than a decade of student housing and apartment development experience, CA Ventures formed CA Senior Living in 2012, partnering with many of the same equity partners. The firm opened its first senior community in summer 2016 and has entered into a joint venture with a Goldman, Sachs & Co. affiliate to develop 14 senior housing communities across the U.S. “With capital pouring into the sector, it’s important to move quickly and strategically to grow market share,” said John Dempsey, principal of CA Senior Living.
The demand for senior housing will attract new players well beyond 2017, noted Steve Rappin, president of Evergreen Real Estate Group, a developer of affordable and market-rate rental communities, including assisted living and memory care facilities for seniors. “This diversification was very evident at the National Investment Center for Seniors Housing & Care Fall Conference in Washington, D.C.,” said Rappin. “Almost half of the attendees were experienced real estate developers but new to senior housing – it’s a number that has continued to climb over the past five years and will likely do so again in 2017.”
7) Not Your Grandfather’s Retirement Home: The rising interest in senior housing from developers is bringing more than just capital to the sector – new players also bring new concepts and designs. “Amenities and services that are standard in luxury rental communities are increasingly being incorporated into senior communities for boomers who want to avoid the stigma associated with typical ‘retirement homes,’” said John Dempsey, principal of CA Senior Living, the senior housing division of CA Ventures.
At the firm’s Travanse Living at Olathe assisted-living development in Olathe, Kan., residents enjoy kitchens featuring granite countertops and stainless steel appliances. Shared amenities range from a spa, fitness center and therapy gym, to a movie theater/chapel, library, craft room, teaching kitchen and tech center. “In terms of marketing, it’s similar to student housing in that you’re selling a lifestyle ‒ instead of targeting the future resident and their parents, it’s typically the future resident and their children,” said Dempsey.
David Kennedy, principal at KTGY Architecture + Planning‘s Chicago/Midwest office, agrees that adult children have come to play a significant role in the design of today’s senior communities. “After consulting with their children, seniors tend to gravitate toward communities that feel less institutional and more like home,” said Kennedy. “Even assisted living communities are being designed in a way that makes essential healthcare features less visible, such as wearable nurse-call systems instead of emergency pull-down cords.”
The emphasis on amenities also is leading some developers to take a closer look at existing properties that could easily be converted into senior housing, including former hotels. “The footprint of a hotel is very similar to a senior housing community – from the entrance and common areas, to the layout of individual units, many of which already include a small kitchen or kitchenette,” said Rick Whitney, principal of FitzGerald Associates Architects, which in 2016 helped convert the former Bollero Hotel in Palatine, Ill., into The Grand at Twin Lakes, a senior-oriented housing development.
As new communities open their doors in 2017, existing facilities will undergo remodeling projects to stay competitive, according to Chuck Taylor, director of operations for commercial general contractor Englewood Construction. “Waiting areas are being turned into sophisticated hotel-style lounges where residents can spend time with each other and visitors,” said Taylor. “And outdoors, we’re seeing demand for low-impact amenities like community gardens, fire pits, and walking paths that allow residents to socialize while staying active.”
8) Luxury ‘Trickle Down’ Ups Affordable Housing Game: Class A apartment buildings may be known for their five-star service, but they aren’t alone in upping the ante when it comes to design. To offer a similar residential experience at an attainable price point, affordable housing developers have started incorporating finishes and amenities inspired by those in the newest buildings, a trend that’s expected to continue in 2017 as offerings that were once ‘extras’ become standard.
“Within units, we’ve added wood-inspired flooring, premium-looking cabinets and countertops, modern appliances, and contemporary lighting,” said Steve Rappin, president of Evergreen Real Estate Group, which develops and manages both affordable and market-rate communities. “Common-area enhancements include lounges with fireplaces and kitchens; computer rooms; playgrounds and landscaped courtyards. We’ve found these upfront investments can translate to long-term savings, as residents are more likely to take care of a community they’re proud to call home and also more likely to stay, which reduces turnover costs.”
Like market-rate communities with retail space leased to a restaurant or fitness studio, some affordable housing developments have added a mixed-use component designed to complement its residential units. KTGY Architecture + Planning’s Kennedy notes that while commercial space in an affordable development may attract a different set of users than space in a luxury high-rise, the concept remains the same. “Affordable housing focuses less on entertainment and more on social services, so we’re seeing developments that include libraries and YMCAs,” he said. “Incorporating a mix of uses that address the residents’ daily needs elevates the overall experience.”
Affordable housing is also getting greener as developers realize the value of features like LED lighting, high-efficiency heating and cooling systems, and Energy Star appliances. “Expect to see affordable housing become more energy efficient in 2017 as developers incorporate features that can reduce utility costs by 20 percent or more,” said Jeffrey Head, vice president of community development at The Habitat Company, a leading multifamily property developer and manager in the United States and the largest property manager for the Chicago Housing Authority (CHA),”These cost savings can then be put back into the communities in terms of increased services, amenities or building improvements.”
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