If you’re familiar with the Lincoln Park skyline, especially the view coming from downtown then you know SoNo, a condo building located at 860 W. Blackhawk. What you may not know is that the developer of this building had planned a second condo tower with the address of 840 W. Blackhawk. When the condo market took a turn for the worst, however, developers Bill Smith, Gordon Segal and Stanley Nitzberg decided to turn the second tower into apartments. The second building which broke ground earlier this year already appears to have a buyer lined up for their 324 unit apartment building; Prudential Real Estate Investors, LLC.

While exact prices haven’t been disclosed yet, the building is expected to fetch around $345,000 to $355,000 per unit. This rapid sale again begs the question: “Is the multi-family market in a bubble?” I’ve written about the rapid increase in apartment building construction in Chicago before, but now I need to comment again.

While I do believe we Class A Apartment Buildings are in “bubble mode” I do not see a massive crash in the market. Right now, we are seeing all the beginning signs though of a bubble. Developers are starting to build very quickly. Upon getting approval for their building at 500 N. Lake Shore Drive, Related Midwest broke ground immediately. Financing for them was a piece of cake, at least in comparison to the financial difficulties still plaguing construction today. Unlike condo buildings, apartment buildings do not need to wait to pre-sell 30% of their units before breaking ground. Because of this developers are able to get projects off the ground very quickly. Right now we have over 2000 apartment units under construction in the downtown and great downtown area. Plus there are almost triple that amount in the planning phase!

I don’t see a falling out in this market to the point of building defaults in the next year or two. However, after that we may start to see some. Right now buildings are being priced on pro-forma levels of rents that are predicted to increase substantially over the next couple years. With this massive influx of rental inventory about the hit the market in coming years, apartment owners will start to lose their edge. Rent prices have increased in double digit amounts year over year in the downtown market. While these prices are still cheap in Chicago compared to other major markets (LA, NYC, London) it becomes a basic function of economics. People have a finite amount of money and that is it. You can only push them so far. With interest rates remaining low buying is starting to look pretty attractive. I’ve already had several clients this year decide to buy instead of rent. These were people who were in the market, initially thinking of renting and after evaluating prices decided it was beneficial to buy. Only time will tell how long this “apartment bubble” can remain before popping.