The Chicago multifamily market has had a tough time competing for the spotlight amid a rush to the Sun Belt, but it has a lot going for it. Chicago is a steadily growing market with durable demand that is rarely outpaced by new supply. As a result, its occupancy and rent growth exceed national averages.
In most other parts of the country, deliveries have been dominated by luxury units. Not so in Chicago. The metro area is a well-balanced market where there are attractive rental options for all segments of the population — and for the investors who pursue them.
As a city, Chicago has several advantages that other metros would be hard-pressed to match. The Chicago metropolitan statistical area (MSA) ranks second in the United States for Fortune 500 headquarters and is home to such giants as Archer Daniels Midland Co., United Airlines Inc. and McDonald’s Corp.
Chicago is one of the few major cities in the country that has retained its manufacturing base, but its diverse economy also includes finance, healthcare, trade and utilities. In addition, Chicago is a transportation hub, with a large inland port, the fifth-busiest airport in the United States and all six of the nation’s major railroads.
The metro area also boasts many universities, including the University of Chicago, University of Illinois Chicago and Northwestern University, giving it a well-educated workforce.
The public perception of Chicago has been marred by concerns about crime, but, in fact, its crime rate is average for a city of its size and has fallen sharply in recent years.
Certainly, business has not been deterred. Among major Chicagoland projects in the works are the massive 128-acre public-private Illinois Quantum and Microelectronics Park on the South Side; a $7 billion, 55-acre mixed-use development called the 1901 Project on the Near West Side; the $6 billion, 53-acre mixed-use development called Lincoln Yards on the North Side; and the $2 billion, 4,080-unit redevelopment of the Cabrini Green sites on the Near North Side.
Regs and Costs Keep Supply in Check
Systemic factors that define the Chicago multifamily market include zoning, regulation and labor costs that keep development from getting too far out ahead of demand, as it has in the less regulated Sun Belt.
There were an estimated 9,900 rental units delivered in 2024, slightly more than 1 percent of the 758,000 units in the market as a whole. Although deliveries were double the historical average, absorption was not far behind. In fact, according to Yardi Matrix, absorption exceeded deliveries by nearly 600 units for calendar year 2024.
As a result, the vacancy rate in metro Chicago stood at 4.3 percent at the end of 2024, comfortably below the national average of 5.4 percent. And rent growth has been strong. Yardi Matrix reports that the Chicago market achieved annual rent growth of 3.3 percent in 2024, the fourth-highest rate nationally.
Rent growth is projected to slow to 2.7 percent in 2025 but is expected to pick up in the following years because construction starts have fallen dramatically over the past year. The 443 construction starts in the fourth quarter of 2024 fell by over 75 percent from the cyclical peak that occurred in the second quarter of 2023.
Renters Drawn to The Loop, Burbs
The bellwether for Chicago is the Loop, its downtown center. Even before the pandemic, people had been abandoning the Loop, with their employers not far behind. COVID-19 significantly accelerated this process. Thanks to city policies that have made revitalization a priority, the area has begun to turn around.
In its January report, the Chicago Loop Alliance revealed that Chicago ranks fourth among major U.S. cities in terms of its return-to-normal office occupancy. The city averaged 50 percent of its pre-pandemic occupancy, trailing only the Texas cities of Austin, Dallas and Houston. The apartment sector is also experiencing a renaissance. The downtown area was responsible for a quarter of Chicago’s multifamily absorption in 2024. Meanwhile, the Loop, along with Streeterville/River North and Evanston/Rogers Park/Uptown, was one of the top areas for new construction in 2024.
Chicago has also been allocating funds to support office-to-residential conversions. Some of the Loop’s most iconic buildings are currently being repurposed and are scheduled to add more than 1,000 units, about a third of which will be affordable housing, when they begin leasing up in 2027.
But even as downtown Chicago has enjoyed a resurgence, so too have the suburbs, thanks to hybrid work arrangements. The Lake County/Kenosha, Evanston and Naperville submarkets all posted rent gains above 4.8 percent year-over-year in the second quarter of 2024. Developers are also eyeing Aurora and Joliet, both of which have benefitted from corporate expansion and significant employment growth.
These suburbs have a lot to offer millennials and Gen Z, including excellent schools, varied housing and a range of entertainment options. At the same time, they are within striking distance of all that the city proper has to offer.
But members of these demographic cohorts may not be ready to own a home, creating opportunities for apartment investors and developers. In 2024, there were large sales in Elk Grove Village and Aurora.
At the same time, Yardi Matrix reports there are 8,100 units under construction in suburban Chicago, approximately 4.3 percent of the 2023 existing inventory. The newly opened Station 250 in Mundelein, a northwest suburb, is representative of these projects. Designed for transit-oriented tenants, it features 160 luxury units.
Outside Investors Step Up
If Chicago’s multifamily investment sales have slowed in 2024 — as they have across the country — it is primarily because interest rates have remained stubbornly high. (The 10-year Treasury yield — the benchmark for permanent, fixed-rate financing in commercial real estate — closed at 4.6 percent on Feb. 26, nearly the same level as a year earlier). Cap rates rose in 2024, ending the year at an attractive 6 percent.
Until recently, the Chicago multifamily sector was an insular world. Most investors were local, and there was little interest from institutions and those outside the area. While institutional interest has grown, it remains relatively muted. Investors from other parts of the country are filling the void. They are drawn to Chicago by its strong market fundamentals.
Essentially, Chicago is a large, steady and predictable real estate market that has flown under the radar for too long. For multifamily investors looking for higher cap rates, solid demand and strong cash flow over the long term, that’s a real plus.
— Igor Zhizhin is director of small-balance loans with Lument. He is based in Chicago. This article originally appeared in the January/February issue of Midwest Multifamily & Affordable Housing Business.