Quote:
Originally Posted by aaron38
Why limit construction? It's supply and demand. We all know how insane rents are now. 600sq ft. studios are renting for more than my 3bd home mortgage, including property taxes. If landlords start having trouble filling apartments, it's really quite simple. Drop the rent.
That would benefit the economy nicely, give people more money to spend each month.
I really hate the NIMBY collusion we get where existing property owners try to limit supply to boost their own value.
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Apartments are built to make someone or some institution money. The degree of apartment building in Chicago is directly related to the rising rents that we've seen over the past few years. Rents rising FAR faster than inflation or incomes - and those excess dollars are making people money (we invest for public pension funds, and have been having a hay-day with apartments the past few years). Those rents are driving the cap rates down and making investors thirsty to invest in apartments, which is making developers thirsty to develop apartments.
It's all supply and demand at the end of the day of course, but rents have been rising so much that there's a bit of a bubble, or at least historically looking at it rents have gone up more than they rationally should. At some point you have squeezed as much out as you can. Rents will plateau, people will refuse to pay more, and they'll spread out to cheaper areas, or get condos, etc. They will react and do something other than pay ever increasing rents.
That's what we're seeing now - and that's what we should see. The higher the rents go above incomes and inflation the harder the correction, or the more sternly the faucet will be shut off.
When the rents stop going up, the returns on investments will plateau, investors will move on from apartments, developers will turn away as the money dried up, and apartment building will stop. Hopefully it just morphs into condo development, which isn't as lucrative because you don't have investors making money off the cash flows - people own the buildings - so it's only based on what a developer can make regarding sales prices of the units.
Cap rates are not decreasing anymore, rents are not increasing (correlated), investors realize apartments have been squeezed about as much as they can, and THAT'S what will start to reduce the construction of these buildings.
Of course this all changes if you have a constant supply of demand for the new units, but at some point rents have to stop going up SO much, and then it's a trade off of people desperate for new units causing construction, and investors and developers not wanting to build because they aren't getting the returns they want.
It's not as much how many people want an apartment, it's how much people will pay for it.
The other issue is ALL these apartments going up are LUXURY apartments. They're extremely expensive and that's going to be another limiting factor. No one wants to build an apartment for middle class people at middle rates. They want to charge thousands for a unit and get those $$$$ and those high returns. What's crazy is people just keep on ponying up thousands and thousands a month, and developers are getting rich off it all.
I just can't see it going on for more than another year or two. The unique thing in Chicago is all the high paying corporate jobs that downtown keeps hogging away from the suburbs.
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