The massive apartment construction boom in downtown Chicago is starting to show signs of saturation, and rents will likely start to decline by fall, Appraisal Research Counselors reported Tuesday.

Rents fell about 14.7 percent during the fourth quarter to $2.89 a square foot for the top-quality, or Class A, apartments and to $2.52 for the Class B apartments that are considered to be the next rung down. But for the full year, rents rose 2.85 percent for Class A and 4.13 percent for Class B apartments.

So far developers have been reluctant to lower rents for new apartments even though the number of empty units has increased slightly, but "record supply and occupancy have tamped rents down a little," said Ron DeVries, vice present of Appraisal Research.

DeVries said 2018 could represent a peak in Chicago's apartment market, however. The supply of rental units "will exceed demand and keep rents in check," he said.

People who sign leases in brand-new buildings are likely to be offered deals such as a couple of months of free rent.

By the first quarter of 2018, DeVries expects "a lot of angst in the market" as there is a sense of "a bubble."

There are now 8,005 rental units in 23 buildings under construction and 10 other buildings in the process of getting potential renters to sign leases. By early 2018, the number of units in new Class A and B buildings will be 40,000 units, or 150 percent more than in mid-2005.

So far downtown has been able to absorb new apartment construction fairly well because employment has been growing, especially in such areas as the West Loop, where McDonald's headquarters is relocating from the suburbs and where Google has offices. In 2015, employment in the city grew by almost 80,000 jobs, but that slowed to 59,167 new jobs in 2016, noted Gail Lissner, vice president of Appraisal Research Counselors. Downtown has 120,000 housing units including rentals, condominiums and townhouses. Rentals made up 92 to 100 percent of new residential units added each year from 2011 through 2016, she said.

To buy or rent? In the Chicago area, both press the limits of affordability Gail MarksJarvis

Families trying to decide whether they would be better off buying or renting a three-bedroom home in the Chicago area face a tough decision: Both renting and buying require more for monthly payments than what the average wage-earner in the region can afford, according to a study released Thursday...

Families trying to decide whether they would be better off buying or renting a three-bedroom home in the Chicago area face a tough decision: Both renting and buying require more for monthly payments than what the average wage-earner in the region can afford, according to a study released Thursday...

(Gail MarksJarvis)

Occupancy, or the percentage of rentals leased, was 92.5 percent in the last quarter of 2016. That was down from 93.5 percent a year earlier but still healthy.

There will be enough demand downtown to absorb 2,800 units in 2017 and 3,100 in 2018, but that's far short of the supply, according to the report. In 2016 there were 3,830 new units. In 2017, 4,100 are expected, and in 2018 an estimated 3,900 are expected.

As the opportunity to fill new rentals declines, developers will consider whether it will be best to build more rentals or condominiums. That analysis already is occurring, although few developers have been able to find ways to make new condo construction profitable enough because of skyrocketing construction costs, taxes, limited available land and lenders often requiring developers to pre-sell many units — frequently 50 percent — before being willing to provide construction loans, according to the report.

"When the easy money stopped, condo construction went away," said Steve Fifield, chief executive of Fifield Cos.

Since the housing bust in 2009, there have been almost no new condo units built, and those that have been constructed are in relatively small buildings compared with the high-rises of the early 2000s. The units built have been relatively large and ultraluxury, priced around $1 million or more.

"The days of the $300,000 two-bedroom units are gone," said Alan Lev, chief executive of Belgravia Group. "The best we can do is around $400,000, which is unfortunate because we are pricing people out of the marketplace."

gmarksjarvis@chicagotribune.com

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