How to Understand the Rental Market in Chicago

As with any free market the forces of supply and demand control the market. In Chicago leasing we have two types of properties: Institutionally owned apartments (typical large rental buildings) and privately owned condos. As a Realtor it is very easy for me to track the data of privately owned condo rentals since the majority are reported real time on the MLS. From experience, I also find privately owned condos a much better indicator of the health and stability of the rental market. The reason for this is that an individual owner is affected much quicker and greater by changes in supply and demand than a hedge fund that may own a 500 unit building. Here is an example:

If a single owner has a unit up for rent for $2,000/mo and it is vacant for 2 months, this is $4,000 in lost income which equates to 16.67% decrease in their yearly revenue.

If an apartment building that has 500 units and 5% are vacant for 2 months, this would only equate to a loss of 10% of their yearly revenue.

An individual owner wants to get money as quickly as possible because they may only have 1 or 2 units. If the individual owner lowers her rent by 10% it only affects that individual unit or others in the building; but what does she care? She doesn’t care if other units in the building lower their rents to compete with her, she only cares that her unit is rented quickly. Whereas if an apartment building started to lower rents on 25units out of 500, the lower rent may become the new “standard” for that building putting the rest of their revenue at risk.  A 500 unit building has a vested interest in leaving a unit vacant for an additional month and foregoing current cash-flows in order to keep rents in that building at a certain level. The loss of cash today will be made up tomorrow.

It is for this reason above why I find the individual condo market a LEADING indicator of the rental market versus the institutionally owned apartments which I consider a lagging indicator.

Soon to be posted, on the Rental Statistics tab will be my comparison of 2011 rental data by neighborhood versus 2010. I have compared a full year of data by unit size using number of bedrooms. I have eliminated  any listings on the market for over 150days as well as any listings that were never on the market for rent and only placed on the MLS to give MLS credit. Since we cannot verify the true market time for these listings they were not included.

There are 3 stats that will be compared with each neighborhood year over year and they are: Number of Units Rented, Average Market Time, and Average Rent Price. Since I have personally eliminated any “extreme” data I find the average price to be more accurate than the median price.

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