On July 7th, 2010 the Institute for Housing Studies (IHS) at DePaul University in Chicago released the “Cook County Rent and Vacancy 2010 Q1 Report”. The report noted most submarkets of Chicago and suburban Cook County continue to see high vacancy rates and decreasing rents.
In the first quarter of 2006 Chicago and Cook County vacancy rates were 3.1% and 3.6% respectively. The rates bottomed in Q4 2006 at 2.3% and 2.5% respectively. The recession did not officially begin until December 2007 according to the National Bureau of Economic Research (NBER officially states when an economic contraction begins and ends). However, vacancy rates were already on the upswing by the early part of 2007.
According to the Bureau of Labor Statistics (BLS), the Illinois unemployment rate bottomed in October and November of 2006 at 4.4%. This was the lowest IL unemployment rate since April 2000.
By the first quarter of 2008 Chicago vacancy rates reached 4.1%.The rate continued to climb to a peak of 9.1% in the second quarter of 2009. By the first quarter of 2010 the vacancy rate fell to 7.8%.
The IHS report also discussed the Chicago and Cook County nominal rent rate of change by calendar quarters from Q1 2005 to Q1 2010. The rental price determined in the report is based on a hedonic rent index model. The IHS defines the model as “the average rent level that occurs in each period, after controlling for observable attributes.” The attributes include items such as location, age, building size and size of unit.
In Q1 2005 Chicago rents approximated $978. By Q4 2007 Chicago rents peaked at $1047. By Q1 2010, Chicago rents returned to the 2005 level of $978.
However when the report parses Chicago into five subsectors: Central, North, Northwest, West and South, some variances of rent changes are found.
In 2007 The Northwest and South subsectors reported an increase in rents by 5.0% and 6.2% respectively. 2009 and Q1 2010 (annualized basis), the West was the only subsector to experience increasing rents. As of Q1 2010, only the South is experiencing rental pricing above the 2006 level.
The IHS theorizes the rental stability in the South subsector may be due to an increase in demand for rental units as the South and West subsectors report the largest foreclosure rate in the city. As stated in the IHS report “At one extreme, these foreclosures may have increased the demand for rental units (by people displaced from their houses by foreclosures), and rents may have responded accordingly.”
The IHS notes high unemployment as the other factor causing an increase in rental demand. “high unemployment can cause households to explore more economical housing options in markets with lower rents. So one possibility is that demand for rental housing in the West and South could increase, to at least some extent, resulting in a lesser decline in rents.”
Another piece of evidence supporting potential rental demand is the July 2010 Chicago-Gary-Kenosha region CPI report showing an increase of rent from July 2009 to July 2010 of 1.9%. In Q1 2010, the IL unemployment rate stood at 11.5%. The June preliminary unemployment rate reported 10.4%.
As rents continue to decline and vacancy rates increase, there is another variable also in play: condos that can’t be sold are now utilized as rental units. In the last few years developers were gearing up for delivery of condo buildings. As the real estate market softened, the units have been listed as rentals, thus creating a greater inventory of rental units, causing a decrease in rental prices and increasing the vacancy rate.
As many are currently asking, where does the housing market go from here? Will the continued soft real estate market begin to force rental prices higher? When will the NBER officially call an end to the contraction? How long will it take for the unemployment rate to fall?
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