Everyone is a Landlord

Now that we are getting into Feb numbers, the picture becomes a little more clear. Activity in the market is much hotter than what the February numbers indicate, but it is nothing compared to Q1 of 2022 or 2021. Closed sales are down a whopping 38%, and I expect this to continue so long as rates remain elevated above 6%. Median sales price is down 3.1% YoY. Not surprising but again, February is a transition month so just something to keep an eye on. 

We are still continuing to see stronger absorption rates for condos relative to SFH’s in 2023. Closed sales for condos are actually up 24% from Jan 2023, while closed sales for SFH’s are down 5% from Jan 2023. 

Condo inventory fell about 5% from Jan 2023 to Feb 2023. This isn’t very normal, but it did happen in 2021. But 2021 was also a bizarre year… Prior to that, we hadn’t seen inventory actually decrease from Jan to Feb since 2013. Inventory almost always goes up from Jan to Feb for condos no matter the market. This is particularly odd considering that inventory in 49 of the 50 major metros has increased. 

So how do we explain this? I think the main explanation for this is that a lot of owners who didn't sell last year just decided to rent out their unit instead of selling for market value. More and more people are becoming landlords. I am definitely seeing an uptick when it comes to my clients as well. Rents haven’t gone down in the city and with everyone on 3% mortgage rates over 30 years, why sell when you can have someone cover your mortgage? Sure, you are seeing inventory climb in most other cities across the US but we're just not seeing it here in Chicago. Chicago has been resilient. 

I have navigated this conversation more times than I could count in the past year. I tell everyone the same thing: Not everyone is meant to be a landlord, but you won’t know if you have the stomach for it if you don’t find out. It’s 1:45 PM on 3/23, and I have already had 2 conversations today with different owners who are not able to sell their unit for what they want and will likely end up renting it out. This has been happening at a great scale in Chicago. Everyone is becoming a LL. 

This is exactly what happens when you have too many mortgages this deep “in the money”. It’s called the “lock in effect”. These properties will likely remain off market until sellers are able to get what they think their property is worth. This is one of the key problems with today’s market… Sellers place a higher value on their property than buyers because their monthly payment is so low and they have options. 2023 likely won't be the year that sellers will value access to that equity over their low interest rates. 2024, maybe...

This is why it annoys me to no end when the housing doomers say “well if inventory was at normal levels, the residential market would tank”. Well, for one, inventory isn’t at normal levels here in Chicago, and there are a lot of reasons for that. Sure, what you are seeing in Chicago is different than a lot of other major markets in the US, but we also didn't see the same big swings those other markets experienced. They're the same people are so focused on demand, that they don’t even think about the supply side of things. We could very well see interest rates go up with prices in the short term just because it could take even more inventory off the market. 

It will be interesting to see what happens this summer with inventory. I guarantee that if we didn’t have so many owners rent their units, we would have seen an uptick in condo inventory for Feb. Instead, we saw a downtick, which is not normal. This is because most leases signed are going through May-July, and it’s a lot harder to sell a unit that is tenant-occupied. This is why I think we see condo supply really tick up more than normal in late Q2/ early Q3. It really just depends on how many of these owners want to keep being LL’s and whether or not it makes sense for them to sell based on where the market is. Regardless, some of those sellers will likely test out the market again this summer.  

My gut tells me that we are going to see another record year for renewals… Last year we saw insanely high renewal rates, which is in part why rents exploded to the upside in Chicago. For context, I manage the leasing of a handful of portfolios here in downtown Chicago that add up to around 100-125 units. So far, about 75% of tenants are renewing their leases, and I am not getting any pushback on rent. These properties are not below market rent either. For the units not being renewed, I am not having any issue getting an additional 5%-7% in rent, although I am having some difficulty in the West Loop primarily because of all the new construction so far in 2023. 

Last year was an absolute dog fight when it came to rentals. It wasn’t uncommon to see some units getting 5-10 applications and renting for 20% above ask in rent. I think a lot of renters are borderline traumatized from the experience and for that reason will be more likely to renew, which is another reason why I expect rents to go up in most markets.