"Chicago has a substantial number of condominiums under construction in the Downtown market," Crocker says. "In addition, there are enough high-rise rental buildings under construction to meet the demand in good times. With sluggish job growth and economic worries, condominiums will not be sold and may be put back in the rental pool."

Equity Residential's Chicago portfolio includes 3,780 units in eight communities. Just one, Cobbler Square loft development in the Near North neighborhood, is in Chicago. The others are in Bloomingdale, Glendale Heights, Lisle, Naperville--where it has three projects--and Palatine. For now, it is offering rent concessions of $250 to $2,000 to prospective tenants at the suburban properties, but just $50 for a free appliance at Cobbler Square. However, Crocker's view suggests other Downtown property owners may be forced to dish out heftier incentives to lure tenants beginning next year.

"This overhang, coupled with a market that will produce too many high-rise rental buildings, will continue to create a very soft market across 2002 and 2003," Crocker says.

Nationwide, the market for multifamily rental buildings continues to be strong, buoyed by low interest rates and heavy attention from pension funds, Crocker says. Equity Residential's only second-quarter acquisition was at a 7.54% capitalization rate while its sale of 13 older properties was at a 9.15% cap rate. "The market for high-quality product is extremely competitive," Crocker says.

The REIT reported second-quarter funds from operations of $1.31 per share, up 8% from the same period a year ago, as revenue increased 11.5% to $544.4 million. But the results could be better if more acquisitions were available. "The inability to purchase properties at what we believe is a desirable cap rate. . . is creating a greater drag on earnings than expected," Crocker adds.