Market Conditions: Could A South Loop Condo Recovery Be Coming Sooner Than We Think?
Crain’s recently analyzed the downtown Chicago condo market over the last 5 years and put together a report on the Great Chicago Condo Bust.
According to Crains, 4 out of 10 condo projects proposed or under way in 2007 wound up in financial distress.
In retrospect, 2007 “was the beginning of the end, and stupid deals were going on,” says Garry Benson, president and CEO of Garrison Partners Inc., a Chicago-based residential consulting and marketing firm. “Stupid deals fall first, and they were exceedingly stupid at the end.”
No surprise, the South Loop was hit the hardest.
Of the 129 downtown condo projects on the market five years ago, 53, or 41.1 percent, have run afoul of their lenders. The greatest concentration of distress has been in the South Loop, widely recognized as the city’s most overbuilt neighborhood. Twenty-six of 44 South Loop projects, or 59.1 percent, have been financially troubled at some point in the past five years. That includes three condo towers in the Central Station development taken over recently by a group of lenders and New York-based developer Related Cos.
The good news is that the market, though far from healthy, is in the early stages of recovery. Condo sales in the city are rising again, and developers have chipped away at the glut of unsold units in recent years, either by slashing prices or renting them. In 25 buildings being marketed in 2007—19.4 percent of the total—all or some units have been rented rather than sold, according to Crain’s analysis.
The number of projects in loan trouble has fallen, too, as lenders have seized failed developments or restructured defaulted construction loans.
“I think distress is something that is going to be behind us very shortly,” says Gail Lissner, vice president at Appraisal Research Counselors, a Chicago-based consulting firm. “There are very few buildings left in the market that still fall in that category.”
According to Appraisal Research, sales contracts on new downtown condo units actually peaked in 2005. It appears they hit a bottom in 2011.
- 2005: 8162 units
- 2007: 3724 units
- 2011: 410 units
- First 6 months of 2012: 377 units
But never fear, the experts are saying baby boomers will spur demand.
As the market recovers, rented units in condo buildings will be the first to go on the market, Mr. Benson says. And he doesn’t think that day is too far away: Demand will come from baby boomers who want to sell their homes in the suburbs and move downtown and young professionals who are tired of renting, he says.
“It’s a demographic issue like it’s never been,” he says. “We can’t avoid it. We’re going to have another run.”
Will those of you holding onto those 1-bedroom starter condos in the South Loop be able to sell sooner than you think?
The complete guide to Chicago’s condo collapse [Crain’s Chicago Business, Alby Gallun and David Lee Matthews, October 8, 2012]- be sure to check out the map of all the developments.
Before one can even imagine any sort of regular recovery developers first won’t be owning buildings renting them out.
” Will those of you holding onto those 1-bedroom starter condos in the South Loop be able to sell sooner than you think?”
Dont P-tease me 🙂 Considering my luck, we would either sell too early or too late.
Buy now or be priced out forever!
“In retrospect, 2007 “was the beginning of the end, and stupid deals were going on,” says Garry Benson, president and CEO of Garrison Partners Inc., a Chicago-based residential consulting and marketing firm. “Stupid deals fall first, and they were exceedingly stupid at the end.””
I wonder what Gary was telling clients their prospects were in 2007. Also be sure not to miss the Garrison Insider, brought to you free by Garry Benson. Such as this classic:
http://garrisonpartners.com/garrisoninsider/real-estate-consulting/garry-benson-are-you-insane/
“Demand will come from baby boomers who want to sell their homes in the suburbs”
My inlaws would be prime candidates but they have little interest in moving from their burb. Of their many friends, I think there is just one couple that has a condo downtown.
The downsizing thing can make sense but wonder if anyone has really tried to size the market.
I live near UIC, which is outside of the South Loop and I’m not seeing any signs of life and if anything prices are still going down. I am happy where I am though and having low property tax is nice. If I was renting out my condo, I would likely want to wait until the rental bubble burst before selling.
Isn’t part of the problem with a recovery in the South Loop the sheer number of foreclosures that are still coming down the line?
This article focuses on the developers who either were foreclosed and/or sold and the building became a rental. What about those buildings where they finished on closings and then the bust hit?
We’ve seen all the foreclosures in 1720 S. Michigan, 1620 S. Michigan and now I’m seeing a bunch in the “newer” buildings like the Marquee. So, yeah, some of the developers problems have wound their way through the system but the problems of the individual homeowners look to continue for years.
I’d say that the article and its premise is about as overly optimistic as the condo sales market was in 2007 and do not think that the droves of suburbanites will be buying downtown. They would be better off doing something like Portico or Inspirato.
Those are a new twist on a time share. I think that they are called “members only” vacation clubs. They lease properties in cities and resort areas around the country. A suburbanite can drop the down stroke of <10K then pay a yearly dues to get Costco type pricing on nightly rates at big homes, condos, or hotels. Both of them have units in the Trump Chicago.
It is a much lower risk reward proposition for the empty nester. They can buy that downtown experience with very limited risk, use it as much as they want, and then travel to other places with 1 to 8 bedroom options when they get bored with downtown Chicago. They can use it to entertain friends and family which is often the goal of a second home purchase.
In my opinion it is a much better risk reward than a one bedroom sloop condo. That is static and a fixed cost. The other is dynamic and an adjustable cost based on the users own demand, desire, and cash flow each year.
I love all these “the boomers will buy them” comments. My parents are boomers and the last place they want to spend their retirement is downtown Chicago. My mom is moving to Arizona and my dad is moving to South Carolina. There is no way that they are going to roll into Chicago and pay outlandish taxes to the likes of Karen Lewis, Rahm, et al. Sure, some really rich boomers will want some nice property in places like downtown Chicago, particularly in places like Streeterville, River North or Gold Coast, but as long as Helicopter Ben continues to siphon off investment income from those folks to help the Treasury Dep’t fund the deficit, Boomers will far and away be in wealth preservation and conservation mode, not “I’m going to retain a place down south and a condo in Chicago.” See Japan 1991-present for an example of how old people invested primarily in fixed income investments that yield 0% respond to having virtually no interest income. If you want to bank on a boomer bailout, do it in the lower tax states in the southwest or Florida, SC, NC, etc., not downtown Chicago.
I have four separate empty nest family members who bought condo’s downtown. One lives downtown now, the others all intend to.
The more prudent financial advice columns a few years ago frequently answered the oft’ asked question: “Should I buy a larger house to accommodate my family/kids/grandchildren when they visit?”
The most often answer was “No.” One columnist said: “You can put your entire family up at the Ritz for cheaper than it would cost you to buy a larger home.” And there’s a lot of truth to that. Even if you spent $10,000 year putting up family members at the Ritz, that’s still cheaper than paying taxes and a mortgage on space in your home that goes unused 95% of the year.
I always think of that answer when I hear about boomers buying up condos. Boomers could stay at the Ritz (or the Drake, W, etc) in the loop more or less as often as they want for much cheaper than purchasing a condo outright. I think most boomers realize this and that’s why we haven’t seen the surge in boomers purchasing in-towns, second homes or outright moving downtown.
My octogenarian aunt moved downtown in her 70’s as an experiment. Although she’s not a boomer, it’s the same concept. Elderly moving into the city. She lasted 4 or 5 years but she found that living in a nice condo in the suburbs suited her needs just fine. She makes it into the city just fine, and quite often for her theater subscriptions, but pays for parking, or takes the train instead. SUre, that’s just an anecdotal story, but it has relevance to the boomer moving in the cities.
I don’t think boomers will be guying 1 BD. More likely 2, for guests and kids.
” Vlajos (October 10, 2012, 9:21 am)
I have four separate empty nest family members who bought condo’s downtown. One lives downtown now, the others all intend to.”
YMMV.
“I always think of that answer when I hear about boomers buying up condos. Boomers could stay at the Ritz (or the Drake, W, etc) in the loop more or less as often as they want for much cheaper than purchasing a condo outright. I think most boomers realize this and that’s why we haven’t seen the surge in boomers purchasing in-towns, second homes or outright moving downtown.”
I always think of *clio* saying the same thing, here.
“Even if you spent $10,000 year putting up family members at the Ritz”
That works, so long as you live nearby the Ritz. Otherwise, you and/or your visitors end up spending a lot of time getting to and fro. And, if they’re visiting for more than a couple of days, and especially if they and/or you have kids, unless your visitors are the sort who can rent out massive suites at hotels, with large living room areas/kitchenettes/etc., such that the hotel can serve as base camp during the visit, it can be suboptimal.
There is a real dearth of quality hotel options in areas where most people actually live. In LP, we had relied heavily on the Belden-Stratford (which is within walking distance to us, has living rooms/kitchens, and is much cheaper than even the non-luxury Mag Mile hotels), but it’s no longer renting hotel rooms. That leaves the Hotel Lincoln. I really can’t fathom why some developer didn’t try and acquire the LP hospital grounds for a hotel (there’s a tremendous need for it, it would mean less traffic, wouldn’t burden local schools, would create jobs and tax revenue, yada yada).
“There is a real dearth of quality hotel options in areas where most people actually live.”
Are people buying a lot of pied a terres in elp?
“is much cheaper than even the non-luxury Mag Mile hotels”
Doesn’t that suggest there really wasn’t taht much demand?
Are boomers buying condos, yes.
Will they save the market, no.
The real estate of the South loop is looking a lot like the the real estate of South Florida, waaaay overbuilt….
http://www.boston.com/bigpicture/2010/09/human_landscapes_in_sw_florida.html
yee of little faith oilc, boomers are the GREATEST GENERATION, or did you forget?
my mistake, apparently boomers are the children of the greatest generation. but with those kind of genes you cant bet against them either.
You got it half right CH. Boomers are part of the “think they are the greatest” generation.
“Doesn’t that suggest there really wasn’t taht much demand?”
I don’t think so. Demand at the non-luxury Mag Mile hotels is driven by tourists and business travelers.
The Belden was in need of updating. But it was always fully booked, at least on the weekends. Our visitors typically had to book rooms about 6 weeks in advance in order to secure a weekend room. Honestly, I think a lot of residents in LP were unaware that the Belden was a reasonable option. (We had visitors staying at the crappy places on Diversey, and the one on Surf, for a year or so before giving the Belden a try.)
“You got it half right CH. Boomers are part of the “think they are the greatest” generation.”
funny, that’s why I always assumed that brokaw book was about them.
“Demand at the non-luxury Mag Mile hotels is driven by tourists and business travelers.”
I.e., most of the people who stay at hotels? I’d just think if there is such pent up demand for hotels in lp that room rates would reflect it. Maybe it’s just that the belden stratford was not charging enough, but still.
Any potential hotel in that area would also have to deal w prob much less demand during the week, which I’d think is typically when hotels make their money.
“why I always assumed that brokaw book was about them”
Brokaw’s a tweener–too young to be of the “greatest generation”, too old to be a boomer. Silent?
Where else will rich boomers move after their kids move out and/or they get divorced/one dies? Are they going to stay in their 4,000 sqft 1 acre lots all alone? No way. Unless they were really good to their kids (which is unlikely – we’re talking about boomers here), they are moving to smaller units to live alone in the city or to retirement homes. Lower expenses, less maintenance, smaller space… it will happen.
“Lower expenses, less maintenance, smaller space… it will happen.”
Have to find someone to pay more the $400k for that “4,000 sqft 1 acre lots” for it to result in soaking up the SLoop inventory, tho.
Things are going to get interesting when the rental bubble bursts. How many condos are currently staying out of foreclosure because the owners are able to rent the place at a price that allows them to break even or write a small check every month? If rents drop and that monthly check doubles or triples, then what? Are people going to move back into that 1 bed place with little johnny (who is no longer in a crib) sleeping in the closet again? Do you move your family into a cheaper place to further subsidize your tenant? Do you go short sale/foreclosure?
Boomers could have had it all but they got greedy and most now are worse off for it
Fred – Rental prices going down will probably mean housing prices increasing. The other alternative would be a deluge of new rental towers. There definitely are rental towers going up but not in the numbers required to seriously affect rental prices (those places going up are all high end also). The bursting of the rental market bubble (if it happens) could look more like 5-10 years of no rental increases rather than a quick 10-20% drop in rents.
Where’s G? He/she could probably find some boomer stats for us.
keep in mind that theoretically, you are paying down that mortgage each month so that eventually you can unload that property. Yeah you won’t get every $1 back but maybe you get away without having to bring money to the table.
“How many condos are currently staying out of foreclosure because the owners are able to rent the place at a price that allows them to break even or write a small check every month? If rents drop and that monthly check doubles or triples, then what? Are people going to move back into that 1 bed place with little johnny (who is no longer in a crib) sleeping in the closet again? Do you move your family into a cheaper place to further subsidize your tenant? Do you go short sale/foreclosure?”
Yes, but what if you are already living paycheck-to-paycheck? Let’s say your tenant’s lease expires and you re-rent the place the following month for $100/mo less, you still have to come up with the difference. Even if you are paying towards your principle and over time can get to a point were you can sell without bringing money to the table, on a purely monthly budget perspective that money still has to come from somewhere.
Hope I’m not too late to stir up this pot. I really had my eyes opened recently when I analyzed the market times of condos on the market. It plummeted dramatically because those Museum Park condos got pulled out when they were bought up Related Midwest:
http://www.chicagonow.com/getting-real/2012/09/chicago-condos-not-sitting-on-market-as-long-as-we-thought/
With those out of the equation the market times really looked reasonable. And if you look at the market times of condos that sold (I need to do a post on this) that has dramatically dropped as well. Properties are selling really fast.
And the sales numbers continue to be really strong, with strong contract activity suggesting continued double digit sales gains in the short run. All this with record low inventory levels: http://www.chicagonow.com/getting-real/2012/10/7th-straight-month-of-double-digit-home-sale-gains-for-chicago/
And on a national basis at least the shadow inventory has been on the decline now for 2 years. On a local basis the % distressed sales is in line with recent history.
re: Portico etc. “They can buy that downtown experience with very limited risk”
If they’re anything like timeshares and vacation clubs, there’s massive risk of annual fees going up, up, up and up. Some of these things, you pay off your purchase cost, but you’re still subject to $2,000 annual fees to take your “free” vacation you supposedly already paid for.
Some boomer stats, courtesy of The Economist, sounding much like HD:
“Young workers also cannot expect decades of rising asset prices like those that enriched the boomers…. Economists at the Federal Reserve Bank of San Francisco, found in 2011 that movements in the price-earnings ratio of equities closely track changes in the ratio of middle-aged to old workers, meaning that the p/e ratio is likely to fall. Having lived through a spectacular bull market, boomers now sell off assets to finance retirement, putting pressure on equity prices and denying young workers an easy route to wealth. Boomers have weathered the economic crisis reasonably well. Thanks largely to the rapid recovery in stockmarkets, those aged between 53 and 58 saw a net decline in wealth of just 2.8% between 2006 and 2010.
“More worrying is that this [Boomer] generation seems to be able to leverage its size into favourable policy. Governments slashed tax rates in the 1980s to revitalise lagging economies, just as boomers approached their prime earning years. The average federal tax rate for a median American household, including income and payroll taxes, dropped from more than 18% in 1981 to just over 11% in 2011. Yet sensible tax reforms left less revenue for the generous benefits boomers have continued to vote themselves, such as a prescription-drug benefit paired with inadequate premiums. Deficits exploded…. [E]ach American born in 1945 can expect nearly $2.2m in lifetime net transfers from the state—more than any previous cohort.”
http://www.economist.com/node/21563725
Go Boomers!! Beat those college-debt-burdened, PBR-drinking, bike-riding, Pitchfork-attending Millenials into the ground! What have the Millenials ever done, besides vote overwhelmingly for Obama? We boomers built this city — “on Rock n’ Roll” — and on heavily subsidized credit loan growth.
Woo-whoo!
USA! USA!
This is why if you’re a generation X/Yer, you better start maxing your Roth IRA and Roth 401k contributions. Because magic 8 ball says taxes are goin’ up. Of course not nearly as much on social security/retirees, because there will be so many of them and old people vote.
“Properties are selling really fast.”
It depends. In certain locations- yes. (mainly because inventory is so darn low.) In other areas – like Edgewater that we were just talking about- not so much. Check out the single family homes in Portage Park. No real estate hotbed there. The luxury bracket also has like 15 years worth of inventory- so none of that is selling “fast” at all.
Distress properties continue to sell fast though. And if a property is priced “right” it is going under contract pretty quickly.
I keep telling people- if you want to sell, list right now. There’s little competition for condos in the GZ.
Where’s JMM (suburb cheerleader)?
With gas going to $5 per gallon, it’s soon going to cost $100 to fill up an SUV. Chicago GZ has alot going for it. Did anyone notice the Crain’s RE article about office vacancy rates in the far suburbs vs. DT? Allstate just demolished a 500,000 sq. ft office complex, because they couldn’t sell it after 4-5 years on the market.
Housing starts: great chart, funny/sad at the same time…..housing recovery in context:
http://www.jsmineset.com/wp-content/uploads/2012/10/clip_image002_thumb8.jpg
“I keep telling people- if you want to sell, list right now. There’s little competition for condos in the GZ.”
I agree. Problem is, for those of us looking to make more of an “incremental” move up (i.e., basically, just into a 3 bed, and not necessarily our long term, “dream” home), there’s nothing we’d want to buy once we sell. If we were moving to the burbs, it would be another story. But it the city, there’s so very little to choose from in the expensive-but-not-rich bracket, e.g., a nice 3/2.5 condo or TH/RH in ELP or the NEGC for around $600k. This is a great time to be buying a 2/2 in the SL or RN, and a fantastic time to be buying a $1-2 million SFH on the northshore (and perhaps in LP). In the middle (o.k., upper-middle), there’s just not much to work with.