Glamorous downtown Chicago is bustling with the impressive influx of top corporations moving into downtown. However, apartment buildings are beginning to feel the effects of over-saturation and landlords are having a tough time renting their downtown spaces. With more buildings coming online in 2017, the increase in supply should cause rents to deflate as vacancy rates rise.
The Dance of Supply and Demand
There is an inverse correlation between rent prices and vacancy rates — as vacancy rates increase, rents decrease. This relationship remains consistent as a higher supply means more options for potential renters. When the market is saturated with choices, then landlords cannot leverage a limited supply for higher rents. The simple economics of supply and demand will continuously cause a rise and fall of rent as new apartment buildings are brought online.
New Apartment Buildings in 2017
Rent in Logan Square is jumping up to nearly $2.50 per square foot. Unfortunately for renters, that is low compared to some downtown apartments that reach $3.03 per square foot. Thankfully, capitalism is working for the renter, and developers will complete roughly 12,600 apartments spanning across 2016 and through 2018, according to Crain’s Chicago. The new rush of available spaces coming online will pump the brakes on the rapidly inflating rent prices. The grip landlords currently have over rent prices may soon loosen in order to fill units when the inevitable flood of open spaces hits the market in the near future.
Enter the Tenant-Friendly Era
As time marches forward, so do rent prices. For nearly seven years straight tenants have experienced rent hikes. New corporations moving to Chicago means many of their employees will relocate closer to their jobs, further increasing competition for open spots. However, the timing works out well with the large amount of apartments opening up over the next few years, which means rent prices are unlikely to see a significant rise for a while.
Chicago’s real estate market is moving along at a healthy rate. While prices are inflating faster than renters would like, new apartment buildings are coming to the rescue and will relieve the rapidly rising rent. With the market potentially flipping to a tenant-friendly one, the upcoming years will be an excellent time to seek a place to live in historic downtown Chicago.
Regardless of whether rent continues to rise, owning for long term is always a better financial option. If you or someone you know are looking to sell or purchase a residence we encourage you to speak with Lisa Kalous.
3) How is my rental rate determined? The cost of a space is determined by several extraneous factors. Whether the market is down or up, square footage is the only really reliable way to gauge your rental fees. Office and retail spaces are calculated on a per square foot/per year basis. Industrial rents are usually per square foot/per month.
So you finally found the space you were dreaming of. Now it is time to work out the details beyond the first year’s rent. Each particular aspect of the lease has its own importance and to ensure the security of the great new spot you are locking down, do not just skim over all the nuances.
Tenant Advisory Group is your advocate when a landlord may be out of bounds with your lease agreement. Bill Himmelstein, founder and CEO of Tenant Advisory Group offers these five topics as ways to protect yourself before you sign on the dotted line.
1) Free Rent
The amount of months that the space is occupied and no rent is paid. Rent is the most obvious factor of the lease and a broker who understands the market is able to maneuver several months of free rent for you. The market standard for long term leases is to receive one month free per each year of the lease. So, if you sign a 6 year lease, then you should be expecting to get 6 free months.
2) Tenant Improvement Allowance
For the tenant who is looking to build out the available space, ensuring that the lease allows you to make those improvements and have them paid for by the landlord is critical. There can be a cash allowance which will go toward hiring a contractor. The amount that is allocated will depend on your financial stability as well as the terms and duration of the lease.
As landlords are in a constant effort to get the most bang for their buck, you need to be sure that there are clauses protecting you from unreasonable rent increases. Having a yearly increase over the course of the lease or a specific percentage by which rent can rise keeps you from losing control of your budget.
4) Securitization (security deposit)
All landlords will seek some sort of securitization on their leases. When a landlord knows the tenant well or believes that the tenant does not carry much risk, the security deposit becomes reduced. However, if you hold greater risk to your leased space, then it will be important to the landlord to securitize a portion of their out of pocket expenses to ensure that the landlord is protected and comfortable if there are any major issues. This deposit will allow for money to be refunded back or credited towards your rent as long as the tenant is not in default.
5) Termination Option:
The termination option is an extremely valuable piece of the negotiation. Your landlord will not offer this unsolicited. For leases that are longer than five years, it is critical to have termination rights. By negotiating this into the lease, if the rates dip below market value, then you will be able to exercise the right to terminate and move or use it as leverage to reduce your rate. Likewise, if rates have risen above your current levels, a right to terminate can be used to ensure you maintain below market rates.