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CHICAGO-The Chicago region’s multifamily market softened slightly in Q3. It will weaken further in future months, analysts say, as economic hardships begin to take a negative toll on occupancy and rental rates. While occupancy rates in the market have held steady around 96% for the past few years, experts say, they have fallen to less than 95% and will continue to fall into Q4 and 2009.

“In the past few years, we have had increases in occupancy in the Chicagoland area,” says Greg LaBerge, acting regional manager with Marcus & Millichap. “We have had decreases in vacancy in the last several years and rents that have grown at a sizable clip in both the city and suburbs. Things haven’t turned entirely negative by any stretch, but 2008 is really a point in time where we certainly have seen things slow down, and this is the first year in some time that we’ve had job losses.”

Ralph DePasquale, associate partner with Hendricks & Partners, agrees, saying his company has already seen a few-percentage-point hit to occupancy rates in submarkets throughout the Chicago area–decreasing rates from the mid to low-90s. “The Chicago market in the short term is going to be a little more demanding, but in the long term, it is going to be very strong,” DePasquale tells GlobeSt.com. “You’re already seeing little to no development in the suburban market and a cutoff in development in the downtown Chicago market after next year. This is going to bode well for the apartment market, and we still see a strong market going forward long term.”

However, stopping development may have come too late to prevent a negative toll on occupancy rates, some analysts suggest. For 2008, developers will have added nearly 2,000 units into the market, according to Marcus & Millichap research. LaBerge says the many apartment developments in progress only stand to lower occupancy rates further. “The majority of projects being worked on downtown are very big projects,” LaBerge says. “In 2009, you’ve got a significant number of units that are going to come online. This certainly is going to impact overall vacancy.” LaBerge says most of these projects will offer 200 or more units.

LaBerge says in recent years, occupancy rates have held steady around 96%, but that he expects a downturn in the next six months to a year. He says he expects to see occupancy rates fall by at least half a percentage point or more in the next year. “It’s no great mystery or surprise to anyone that lending and the credit crisis has impacted our business,” LaBerge says. “It’s made deals more difficult to transact and it’s put more buyers and sellers on the sidelines wondering what the right move is.” However, he says the fate of occupancy rates remains to be seen, subject to the outcome of several competing factors.

LaBerge says one thing working against the market are the speculative buyers who purchased condos intending to flip them to make a profit. “When the market turned south, the owners realized they couldn’t flip them, so now they must rent them,” LaBerge says. “On the other hand, the median home price in Chicago is still so high that people can’t afford to buy, so there’s no choice but for renters to stay in buildings longer. Because they can’t come up with down payments, they’re renting longer and staying in buildings they’re comfortable with, and that absolutely is working in favor of the market. So you have a balance, and I don’t know which of those is going to win out.”

Rental rates are also taking a hit from the market’s downturn. “Going back the last few years, you’ve seen owners able to raise rents up to 6% a year,” LaBerge says. “What we’re seeing now forecasting into 2009 is that rents are not entirely flat, but they are going to grow much less.” LaBerge says he expects that moving forward, building owners will only be able to increase rents by no more than 3%.

DePasquale says the company is also seeing an increase in concessions, which may result in a net effect of rent decreases. “We’re not seeing much in terms of rental increases in the next six-to-12 months, but we don’t see rates really dropping anything too dramatic from the current levels,” he says. “We don’t foresee a big downturn in occupancies either, and the market is probably going to hold around where it’s at–steady in the low-90s overall. We’re still seeing a fair amount of demand on the investment side from investors. Capital markets are making it a little more difficult to get deals done, but there still is plenty of capital out there if you have the equity.”

LaBerge too says the challenging market offers unique opportunities, the likes of which have not been seen in recent years. “Many people are very bearish and negative about the market with all the news happening, but when you look at the apartment research report, there certainly is no doom and gloom,” LaBerge says. “Lending is still available in the $1 million to $10 million range, and while the economic fundamentals are not as strong as recent years, they are still strong compared to the past 20-year average. This market provides opportunities for sellers looking to sell properties and buyers looking to buy properties. Unlike in years past when there was so much velocity that the market didn’t require a tremendous amount of skill to transact in, this market rewards knowledge, skills and due diligence.”

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