▶ Charting Downtown Chicago’s Residential Potential and Predicting an Upcoming Supply/Demand Problem (Don’t Say “Bubble”)

 

If you live in downtown Chicago, you’ve likely noticed the abundance of cranes around you. Cranes signal new construction, and new construction can signal a healthy, booming economy. At the same time, even the dumbest economist in the room knows that too much construction can lead to bad things. The question for Chicago is: are we building too much?

KIG Analytics Officer Marc Rutzen recently created a video signaling that indeed there may be too much being built.

The video predicts the purchasing or leasing of multifamily units as they become available to market. In the video, the “towers” represent a new development when it first offers its units to market for purchase or leasing (i.e. no units sold yet). As the units in that development begin to be leased or purchased, the “tower” in the video shrinks.

The rate the “tower” in the video shrinks is dependent on that one economic factor everyone so much loves and adores: demand.

I got the chance to speak to Marc about how “demand” was predicted for purposes of his illustration. As Marc explained: the video presumes demand equal to 3,500 units being leased or purchased annually in Chicago’s downtown neighborhoods. That number comes from KIG’s analysis of data produced by the Appraisal Research Counselors (ARC), which has tracked historical demand for multifamily housing units in Chicago for the past 20 years.

As you watch the video and come to October 2017, you’ll begin seeing what every developer fears: an abundance of high towers (i.e. large supply) that aren’t shrinking very fast (i.e. stagnant demand). What’s happening is that as more units become available at this time, they all must compete for a limited share of demand.

If you’re a developer, or just a person frightened by the economic impact of overbuilding, there are a few things to keep in mind. Firstly, this video keeps demand stagnant over time. If demand for multifamily units in these neighborhoods grows, then concern for oversupply is decreased. Secondly, Marc mentioned that they had to guess when developments not yet under construction will be complete as to offer their units to market for purchasing or leasing. This means that as the video progresses towards 2018, the supply at any particular moment might not actually be what’s available when that moment arrives. In other words folks, this is a prediction.

While yes, only a prediction, it certainly can be a great tool for developers. As Marc pointed out: “A developer may look at this and make informed decisions about when to push for construction to be competed and have their units available to the market. A developer that believes in the analytics may look at a month like October 2017 and make decisions to avoid their development going to market at that time.”

To check out more videos from KIG analytics, click here.

Zachary Pollack

Author: Zachary Pollack

Zachary is a lawyer by day and architecture buff by night. At the office Zachary focuses his practice on working with commercial real estate developers and developers focused on subsidized housing projects. Although Zachary grew up in Kansas City, Kansas, he had his heart set on Chicago ever since visiting as a child and being in awe of the city's skyscrapers. Zachary lives in Old Town. On weekends you can find him strolling the streets checking out progress on all the construction sites. Feel free to get in touch with Zac at zpollack@krasnowsaunders.com

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1 Comment

  1. “At the same time, even the dumbest economist in the room knows that too much construction can lead to bad things.”

    Even the dumbest economist knows not to apply a normative judgement in this situation. Oversupply is bad for developers, but great news for renters & buyers!

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