Apartment Builders See Opportunities in Suburbs

by Alby Gallun, agallun@crain.com

After shunning the suburbs for much of the past decade, apartment builders are returning to places like Elmhurst, Orland Park and Evanston, filling the void created by the condo crash.

With rents blowing past pre-recession levels, a construction boom that started downtown this year is spreading to suburbia, where it has been difficult to build apartments in recent years due to community resistance and a lack of profitable opportunities.

But those obstacles are fading amid a mega-shift in the housing market, as many suburban officials give up on proposed condominium projects anchoring downtown redevelopment plans.  More than a dozen apartment projects are in the works, with one developer estimating that the suburbs could gain as many as 2,000 units over the next 18 months, nearly 10 times the annual average since 2003.

“What’s happened is a lot of communities know that they’re not going to get that big condo building downtown, so they know that if they are going to get anything built in the next seven or eight years, it’s going to be an apartment building, ” says Chicago developer Tony Rossi, who’s scouting suburban sites.

The push into the suburbs underscores the vibrancy of the local apartment market, which, unlike office, retail and other sectors, is strong enough to support development.  It also represents a solution for suburban officials aiming to boost property tax revenue and jump-start stalled downtown revitalization plans.

Yet developers will need to charge high rents to generate decent returns, and it’s almost certain that some projects won’t live up to their optimistic projections.  In a best-case scenario, the market will continue on its recent tragectory; in a worst, demand for apartments will fall just as supply jumps, sending rents and occupancies down.

Whatever the future holds, landlords are enjoying the present: suburban apartment occupancy rates are at their highest level in four years, and net rents hit a new record high in the second quarter, rising 5.2% from a year earlier, according to Appraisal Research Counselors, a Chicago-based consulting firm.

Developers betting on a boom include Chicago-based Amli Residential, which broke ground on a 214-unit project in south Evanston last month, and Morningside Group, another Chicago firm, which plans to build 190 apartments in downtown Elmhurst and 295 in downtown Wheaton.  Marquette Cos. plans projects in Buffalo Grove, Lemont and Naperville, where the company is based.

Apartment developers have stayed away from the suburbs for the past several years, in part because many local officials have given them the cold shoulder.  Developers long have griped that suburban governmentsdiscourage apartments, motivated by perceptions that they attract lower-income transients and social problems.

“There was a certain stigma associated with rental housing, but I think that stigma is going away, ” says David Strosberg, Morningside’s president and managing principal.

Back in the Game

Many suburban officials favored condos over apartments before the bust, and condo developers drove up land prices so much that apartment builders couldn’t afford the best sites.  At the same time, apartment rents were too low to justify new construction.

As a result, developers built an average of 225 apartments annually in the suburbs from 2004 to 2010, down from 1,721 in the prior eight years, according to Appraisal Research.

Orland Park is so eager to get development in its downtown going again that it is providing $38 million in bond financing and $23 million in tax-increment financing for a 295-unit apartment building on a site once set aside for condos and townhouses.  The developer, Indianapolis-based Flaherty & Collings Properties, plans to break ground next month.

“All the assumptions and all the typical things you’d come to believe in the development world were upside down with the panic and downturn of 2008, ” Village Manager Paul Grimes says.

Ultimately, the success or failure of many projects will depend on hiring by employers nearby, says Greg Mutz, CEO of Amli Residential.

“We will hit a dead end in the apartment market if we can’t create jobs and households,” he says.

Dave Matthews contributed.