Market Conditions: New Construction Condo Sales Remain Challenging Downtown
Not surprisingly, 2009 wasn’t a great year for downtown condo developers.
According to the Chicago Tribune, sales in the downtown market were pumped up by the first time home buyers credit and price reductions by developers. (“Downtown” is designated from North Avenue to Cermak Road to Ashland and Lake Michigan.)
There were almost 1,900 closings in 2009, which Gail Lissner, an Appraisal Research vice president, labeled as “a really good sign” but much of that likely was for condos put under contract during pre-construction marketing programs. The other piece of good news from the report is that the pace of closings increased from one quarter to the next during 2009.
But it’s unclear whether that’s a trend that will hold. Only 572 new units were put under contract last year, relatively flat with 2008, and price discounts, aggressive advertising and the federal government’s first-time buyer’s tax credit are largely thought to have had a hand in generating those sales. Before 2008, the number of contracts written for new construction regularly topped 3,000 units annually.
The outlook for new product in the next few years appears grim as the market is still trying to absorb the new units from the last 5 years.
This year, six new buildings will be completed and ready for occupancy downtown, bringing 1,200 units to the marketplace. That compares with a record 3,600 new units finished in 2009, according to Appraisal Research Counselors’ year-end report.
But in 2011, only two high-end properties, the 86-unit Ritz-Carlton Residences and the 198-unit Lincoln Park 2520, both Lucien Lagrange-designed projects, are scheduled to deliver. As of right now, there are no condominium developments scheduled to be completed in 2012 and beyond.
The article states that the walk-away rate from new construction contracts is anywhere from 25% to 50% which will mean even more product coming on the market than the contract numbers indicate.
Pipeline for new condos downtown drying up [Chicago Tribune, Mary Ellen Podmolik, Feb 19, 2010]
“As of right now, there are no condominium developments scheduled to be completed in 2012 and beyond.”
This means that supply will be tight in the upcoming years. Demand will not be abated and will only continue to rise. We are at the bottom and if you don’t buy now you will be kicking yourself forever. You may even be priced out forever, especially when interest rates rise.
The shadow rental market downtown is at least 6,000 units in addition to the 3,000-4,000 units for sale and in foreclosure. As the owners of the shadow rental market continue to lose money as rents decline, more and more units will enter the for sale market. This will result in no effective change in supply over the next 24 months, despite the lack of new development. It could take 5 years to clear this market, maybe more.
I’m sort of with homedelete on this one, with some caveats. I think it’s likely that prices may continue to fall. However, at the same time I think rates will rise.
David, Welcome. I think HD’s tongue was in his cheek.
Nice spin Mary Ellen.
I think demographics will also play a big role in whether the existing inventory gets depleted. Young people coming out of college face a very challenging job environment. Many will be hard pressed to even afford a rental, let alone buy property.
When I came out of college (early 90s), most students had very low student loan balances. At the most a couple grand. I didn’t know anyone with over 10 grand in loans. So my generation entered the housing market with largely clean slates.
Nowadays, student loan debt can easily top $100k. With that type of anchor, how can a new graduate even enter the housing market?
Bob Toll says, “Live at home with your parents until you’re 40 so you can afford a nice house”
Bob Toll said that parents will kick their children out of their homes after the birth of the second grandchild, and they will make “them pay for the house that we paid for. And that house will cost them 45 to 50 percent of their income.”
“Sonies on February 22nd, 2010 at 10:05 am
Bob Toll says, “Live at home with your parents until you’re 40 so you can afford a nice house””
Ergo, very slow housing markets in the ‘green zone’ where college grads want to live.
The rental market is great for renters. Deals everywhere.
Nowadays, student loan debt can easily top $100k. With that type of anchor, how can a new graduate even enter the housing market?
I think prices downtown will drop another 10% by the end of the summer. Rents will also decline another 5-7%. People should make some offers below asking and see if the owner takes it.
The problem is all the people who have to bring money to the table to close.
Yes, the problem is all the people who have to bring money to the table to close. I could sell my place if I could/would bring $25,000 to the table.
better start pinching those pennies
I am a relatively recent grad, with 10k in student loans, relatively secure job, and DO NOT think the prices will drop another 10% on decent places, maybe only on those which people do not want, but definitely not on places less than 300k (which college grads should be looking at).
Eventually, things will balance out since there is not much new construction and the current availabilty of places on the market is, well, crap, justifying a price fix.
Does anyone have practical experience with selling a property and taking back a promissory note for a senior debt position? Seems like it could be a fine way to become a “capitalist” and bankster, and then get one’s property back for a song via foreclosure!
I work with a bunch of 20 somethings (they’re my law clerks) and let me tell you, the job market for college grads (which my law clerks are or will be soon) is terrible, just absolutely horrendous.
Your situation cannot be extrapolated to college grads in general.
And most of the college grads I’ve seen are looking at the housing bust, their burdensome student loans and the lack of work – and they’re mostly choosing to rent.
“#drew on February 22nd, 2010 at 11:15 am
I am a relatively recent grad, with 10k in student loans, relatively secure job, and DO NOT think the prices will drop another 10% on decent places, maybe only on those which people do not want, but definitely not on places less than 300k (which college grads should be looking at).
Eventually, things will balance out since there is not much new construction and the current availabilty of places on the market is, well, crap, justifying a price fix.”
“And most of the college grads I’ve seen are looking at the housing bust, their burdensome student loans and the lack of work – and they’re mostly choosing to rent. ”
They must be doing okay, if they aren’t choosing to live in their parents’ house.
Only time in my life it was easy to get a job as a recent college grad was back in 1999… I don’t see that kind of employment boom happening again in my lifetime, but I do see hard working college kids moving up in the world after their first few crappy jobs (like 90% of us had)
Nothing like a recession to separate the good schools from the bad schools. Really points out how important choosing the right undergrad, major, and college internships are super important.
Time to get that MBA from the U of Phoenix to enhance your competitive position in today’s employment market.
homedelete – If interest rates rise significantly, prices will have to fall in order for people to afford the monthly payments. Fact. The best time to be an all cash buyer is when interest rates are high, not low like now. If you take out a 30 debt on over priced condos, you will be living there for a long time or take a hit.
Now is a good time to rent or buy. Regardless of which you choose, you’re likely to be paying less than the owner or seller.
Regarding the high-end properties scheduled for 2011. What’s the latest status on the Spire and Shang-Ri-La hotel/ residence?
“What’s the latest status on the Spire and Shang-Ri-La hotel/ residence?”
D.E.D. dead, dead, dead. Shangri-La with no hope, at all (Shangri-La pulled out many months ago), Spire with some fantasy hope.
I’m still sad that Shangri-La won’t be built (Waterview Tower). While I couldn’t touch some of the floorplans with a very long stick, I found them to be thoughtfully designed and would have liked to see the building completed – perhaps for a future purchase down the road. How sweet would a terrace on the 83rd floor be? (windy of course)
“Waterview Tower”
Waterview was a cool building. And it’s soooo unlikely to turn into anything anytime soon–much less a 1000 ft hotel/condo tower.
I still prefer the 1/4 built skeleton to the vacant lot. It would be nice if they could sort things out enough to at least run the parking garage as a garage.
I’m actually quite surprised work hasn’t been done to convert this to a parking garage if its possible. You’d think the incremental investment would be minimal compared to the cash flows from the parking garage.
I guess the vulture investors are just waiting for the parent and related entities to go bankrupt so they can swoop in and get the structure for pennies on the dollar.
Sometimes vultures need to wait a lil’ while for their meal to die I suppose 😀
“I guess the vulture investors are just waiting for the parent and related entities to go bankrupt so they can swoop in and get the structure for pennies on the dollar.”
Multiple liens–$80mm+ for mechanics and $20mm+ for BofA (lasalle). last I saw, someone suggested that the property is $15mm+ underwater.
Because the Waterview was so tall the elevator core is huge. There aren’t that many parking spaces when you add the aisles for accessing the spaces. At the end of the day it really doesn’t make sense to be a garage…
“At the end of the day it really doesn’t make sense to be a garage…”
Well, sure, but I’m Not suggesting that someone invest in it, just that I’d like to see it used for *something*.
Also, 512 spots–the number I find in a quick look–isn’t so very few. The Greenway garage just north on Clark is about 900 spots.
Girlfriend has friends recommending Astoria Tower (S.Loop) to her. Any thoughts?
“Any thoughts?”
Tell you gf to get a new circle of friends?
I don’t do rentals so I’m not that familiar with what’s out there but every time I check out the rents on larger places (~3,000 sq ft+) I’m not finding any bargains. I’m still seeing asking prices of $2/SF per month except outside of the downtown area or in less desirable buildings. Even SKY55 is at $2/SF. Granted, there are more places for rent these days but if there are bargains out there I’d like to know where they are.
Gary,
$1.75/sf at Vetro including parking:
http://chicago.craigslist.org/chc/apa/1601928663.html
Doesn’t include the $500 gift card either, which should lower that a bit more. Exclude the parking and it drops to $1.63/sf.
Thanks, Bob, but the thing is that’s 1350 sq ft. I think the rental glut must be in the smaller square footage. When I look for 3,000 sq ft it seems to be a different story. The other thing is I see buildings like SKY55 (no doubt nicer than Vetro) maintaining $2 and I’m amazed.
“The other thing is I see buildings like SKY55 (no doubt nicer than Vetro) maintaining $2 and I’m amazed.”
It likely has to do with the cost basis of the owners. At some point the owners aren’t going to be willing to absorb a deeper haircut/CF hit. As Vetro was made more affordable than most via the auctions its not surprising it is able to offer rental rates that few other newer highrises can compete with.
EJ
Astoria Tower has one of the better locations in the South Loop, and great views from many of the units. Some details on current offerings here:
http://yochicago.com/reviewing-astoria-towers-new-deals-for-2010/14141/
And video of the penthouse views here:
http://www.youtube.com/watch?v=hhjxpfSrnNI
And, yeah, Cribabies (pronounced with a long i), Astoria Tower’s a client of ours.
Uh, any potential tenant will be looking at a March 1 move in date. This FB is losing a healthy chunk of money every month this it sits vacant. You would think he’s lower the rent to get somebody, anybody, in there to stem the losses.
“$500 gift card if rent by December 31,2009 and Move-in Fee waived!”
You would think that, wouldn’t you HD?
But, surprisingly, I see this all the time. I see rental units that have been on the market 5 or 6 months (NOT the $3000 units) just sitting there- empty- waiting for someone to rent them. It’s a loss of thousands of dollars when they should just lower the rent by $100 or $200 a month to get someone in the property.
I don’t understand it for the life of me.
The market is telling them they’re not priced right (if it sits like that for that long.)
Must be why I’m not a landlord.
Um, there is no correlation between interest rates and housing prices. /sarcasm
John the old one wrote: “If interest rates rise significantly, prices will have to fall in order for people to afford the monthly payments. Fact. The best time to be an all cash buyer is when interest rates are high, not low like now. If you take out a 30 debt on over priced condos, you will be living there for a long time or take a hit.”
“The other thing is I see buildings like SKY55 (no doubt nicer than Vetro) maintaining $2 and I’m amazed.”
Anyone know if the management companies are negotiating on rents in major buildings?
“Um, there is no correlation between interest rates and housing prices. /sarcasm”
But where are the studies? Won’t someone think of the studies?
“Adults aged 18 to 29 are almost twice as likely (31%) to be underemployed as 30- to 49-year olds (17%) and 50- to 65-year-olds (17%) are.”
http://www.gallup.com/poll/125960/Underemployed-Report-Spending-Less-Employed.aspx
31% underemployment rate for 18-29 year olds? Factor in burdensome student loan payments and you have a recipe for an overindebted, underworked younger generation. Not good for high rise condo sales, great for television sales in parent’s basements.
“31% underemployment rate for 18-29 year olds?”
It’s a bogus group for employment data. It really should be 22 or 23 to 29.
“Factor in burdensome student loan payments”
At least a third of those, in that age-range, who will ever have student loans, have no payments *now* b/c they haven’t incurred them yet or are in school. Which just furthers the first point that the data is suspect.
i was looking at some 2/2 upscale downtown condos, both brand new construction and buildings less than 10 years old. Example — Walton on the Park, 2 W. Delaware. They must have a lender or a dreamer dictating the prices, which are sky-high.
The new construction units I have looked at are consistently 25% + more money than the resales. Although the assessments are higher in the resales, as someone pointed out, those figures may be deceiving once the building is up and running. Plus if the building does not get properly sold-out, the future owners will be paying the freight for accumulating problems.
On the other hand, it is my opinion that you aren’t going to get something for nothing in a resale short sale or foreclosure which seem to be increasing in number. With rare exception, those units are dogs. You need the money and patience to make them right once you are in there.
So are you expecting to pay less for a new car than the same used car? Because that’s what you’re doing, buying a used house… or a new one…
Yes, but I’m not sure that the “new” premium is at all justified, particularly when the life expectancy of the asset is 75 years or more, vs. less than 8 years for an average car. Actually, I believe the new premium is based on constuction costs and developer profit, not on true value in terms of amenites, view, location, space, etc. Another example from recent posts – 10 E. Delaware — very costly for what you get, not justifying the “new” premium (which wears off quickly).
So if someone were thinking about a South Loop or South Michigan Avenue 2-bed condo in one of the “newer” buildings, what would people recommend? Which of the more upscale, nicely designed buildings would seem to have some of the better deals?
Jim:
I can’t exactly answer your question, but when we were looking last year we instructed our agent that we were not interested looking at new buildings. We wanted a building with a well functioning HOA; a record of good management; a nearly 100% occupied building; and one where the developer had already fixed all the problems.
New buildings look nice, but are risky. Subsequent buyers may pay substantially less than you; the developer could go bankrupt and leave you with a host of problems; or the building could be mostly empty for years.