Market Conditions: What If Construction Stops on Your Condo Tower?
What if you had put down a deposit for a unit in Waterview Tower several years ago? How long would you be willing to wait for your dream unit?
Construction has halted on the building on Wacker Drive in the Loop.
Crain’s updates construction developments at several of the new highrises in this week’s issue. According to Crain’s, Waterview Tower is 67% sold.
Owners in many buildings are in limbo land, waiting for construction to be completed. Crain’s highlights these five:
- Chicago Spire
- Lincoln Park 2520
- Waterview Tower
- X/O Condominiums
- Solstice on the Park
From Crain’s:
Manish Shah is all too familiar with this bind. He agreed in December 2006 to buy a two-bedroom unit at the GlasHaus development, 1327 S. Wabash Ave., and plunked down $24,000 in earnest money.
At the time, developer Piedmont Group Inc. told Mr. Shah that the sale of his $440,000 unit would close in the second half of 2008. But in an Oct. 20 letter to buyers, Chicago-based Piedmont pushed the date back.
Construction is delayed, and units won’t be ready for delivery until at least autumn 2010.
Until then, Mr. Shah, 35, figures he’s stuck.
“The money that’s locked up is opportunity lost,” he says. “I’ve been trying to get out of (the contract), but I can’t.”
A buyer who bought on the 50th floor in the Spire is patiently waiting out the delays, the article says. But buyers in other buildings aren’t so accomodating.
A “drop-dead” clause — which gives buyers a way out without forfeiting earnest money if a condo isn’t delivered by a certain date — can be a useful shield. But most sales contracts don’t contain such provisions unless the buyer’s attorney insists on them.
Mr. Shah and two other buyers say their GlasHaus sales contracts have no such out.
It’s definitely frustrating,” says Amit Pathak, 25, who put down about $18,000 on a $361,900, 852-square-foot unit in July 2007.
Marilyn Engwall shares that frustration. She agreed in January 2006 to pay $330,990 for a 900-square-foot, 17th-floor unit.
Now, she’d like Piedmont to return her $16,545 in earnest money. She says she needs it to pay for repairs to her Albany Park bungalow, where she’ll live for at least another two years until her condo is ready.
“I guarantee I’m not the only one in this situation,” says Ms. Engwall, 43. “I would love to move there, but it’s not going to happen anytime soon. And I need that money now.”
Stuck in condo limbo [Crain’s Chicago Business, Jan 26, 2009]
Chicago Spire Update [Crain’s Chicago Business, Jan 26, 2009]
Lincoln Park 2520 Update [Crain’s Chicago Business, Jan 26, 2009]
Waterview Tower Update [Crain’s Chicago Business, Jan 26, 2009]
X/O Condominiums Update [Crain’s Chicago Business, Jan 26, 2009]
Solstice on the Park Update [Crain’s Chicago Business, Jan 26, 2009]
LP2520: “Units sold: 145 (48%) as of third-quarter 2008 | Avg. price per sq. ft.: $885” “Aug 2007 40% sold”
Basically in 1 year (aug 07 – sept 08) they were able to sell 8% of the inventory. Good luck selling the other 1/2 @ $885 sqft. beautiful building and unreal locale. wake me up when i can get my hands on a 2/2 for $425K.
On a totally unrelated note the Case Shiller numbers just came out. Long term trend graph here:
http://blog.lucidrealty.com/chicago_real_estate_statistics/
A few tidbits. Prices down 12.5% from last year. Prices down 16% from the peak and back to May 2004 levels – except of course for Lincoln Park and Lakeview where prices never go down unless you didn’t buy smart or happen to have bought a place that goes down in value, in which case you must not have bought smart.
Hey Gary the axes are off. You have them as the month the index was released instead of the month they represent. The graph still illustrates the basic trend though, of course.
Do condo developers do any demographics research when planning construction? Seems like they would have noticed that Chicago doesn’t have enough 250k +/year people to accomodate all these high end condo developments.
Lauren, what about all the biglaw attorneys, doctors and consultants? They all want to buy overpriced condos in downtown chicago.
Gary, thanks for collecting all this data.
I understand that Chicago does have a large chunk of high end buyers left (not talking about the “boiler room” brokers and I-bankers) but I still wonder do developers do any type of research before construction breaks on these high end developments?
Who needs market research when you have so many market saviors?
1. baby boomers
2. foreigners
3. 2nd home buyers
4. the rich
5. Suburbanites
6. new law grads
7. pro athletes
8. parents of Depaul students
9. 3rd home buyers
As a 1,3 & 8 that just hurts!
I know quite a few BigLaw people who will be earning significantly less money than expected in 2009. Bonus reductions and pay freezes (in some places both). This is not the demographic to be asking to swoop in and save the housing market.
Seriously, does anybody has inside info whether these morons do any demographics research when planning construction? This is not a rhetoric question. I am just curious.
The last couple years of housing bubble failure stories would tell us that most developers’ market research consists of seeing another developer making a killing on some building and deciding he’s going to do the same. It’s an approach that works until the market stops going up, kind of like how it was so easy to make money buying .com stocks from about 1998 to 2001. Market downturns expose legions of failure and incompetence.
Thanks Pete – I was wondering what their approach was and it’s obviously one that doesn’t involve looking at worst case scenarios.
**A “drop-dead” clause — which gives buyers a way out without forfeiting earnest money if a condo isn’t delivered by a certain date — can be a useful shield. But most sales contracts don’t contain such provisions unless the buyer’s attorney insists on them.**
Too bad buyers are often two excited to lose money to listen to thier lawyers!
All I have to say is 330k for 800 some square feet and you DESERVE to be in this situation you idiot.
Plenty of new construction contracts do not contain mortgage contingencies so there’s no return of earnest money if the buyer cannot get financed. I’m handling one right now. Which in my opinion means the developers had a feeling that the option arm gravy train for anyone with a pulse would end sometime soon.
Lauren + Crazy Frog.
Yes, they do the research but they begin with the answer and then get the facts needed to support that answer. Sweet huh?
The real question is what were the loan underwriters thinking when they signed off on all of these loans? Or even the appraisers?? Its quite simple actually, their wallets… Everybody was incentivized to “get the deal done”. Whether were talking a 1 br condo, a 60-unit residential project, or even a $2 B 100 retail asset portfolio… it was all the same attitude and of course, they ultimately will all have the same result. Some will unravel quicker than others, but five years from now everybody will be looking back at this period and saying “DUH!”.
ze- couldn’t have said it better myself.
Ze, do you mean they do research using Steve H logic:
“RE in LP never goes done, unless you don’t by smart. I am smart; hence if I buy some RE in LP it will never go down.“
crazy frog,
To answer your question: they are builders and do what they know how to do best–they build. Blame the banks who gave them construction loans.
a 10:36am – amen!
Pete at 9:51 is onto something, but can you still blame the developers for wanting to stay in business for an extra couple of years? Even if the fundamentals aren’t and won’t hold up, so long as theres little equity in your business to begin with why not just stay in business for another couple of years, enjoy some more paychecks, and burn through the banks debt?
Afterall if you’re going BK as the endgame (and many builders are and sr mgt knows this), only your creditors should worry about the residual value of your business. Thats why its so infuriating these banks are getting bailed out!
Bob: “To answer your question: they are builders and do what they know how to do best–they build. Blame the banks who gave them construction loans.”
Bob, I agree the argument that banks are to blame for approving those loans, but this does not remove the guilt from the builder. Builders had the choice what to build and what part of the demographic to target with their product. And all of them decided to target the 250k+ demographic, which is not so big in Chicago to begin with. This is the point that Laura made.
It is similar to the market strategy of GM: they can have higher margin profits building Humvees, but how many people will buy one.
But crazy frog,
I am betting that building lower priced homes is likely barely profitable, ie: your profit is much more sensitive to environmental variables, # of units sold, etc. Think about it: it costs probably almost as much to build moderate or lower cost housing than it does ‘high-end’ housing (land costs excluded).
Building homes for the higher end is likely less risky overall as there is more margin and thus room for error, in a vacuum that is. The problem is that they all thought alike and saturated this segment.
I’m glad the developers built too many condos targeting the $250k+ demographic. The laws of supply and demand will soon take over and those expensive condos will soon be marketed towards the $200k-$250k demo (slightly larger) and eventually to the $150-$200k demo (even larger). Soon enough I’ll be able to live in an upper-class residence for an upper-middle class price. Patience my friends, patience. Prices are sticky on the way down in case you haven’t noticed.
“As a 1,3 & 8 that just hurts!”
Driskill,
There’s still more you can do – see #9.
Ze, yep, just like M&A.
This is yet another downside to buying in a heated market. In addition to the high prices, you have to take whatever crap contract terms the builder forces on you. I can imagine builders being completely unwilling to negotiate anything when buyers are lining up at the sales center, checkbooks (or loan apps) in hand.
“it costs probably almost as much to build moderate or lower cost housing than it does ‘high-end’ housing ”
As evidenced by many of the condos we see here (e.g., “luxury” condos that are 800 sqft and look like Home Depot displays), this is defintely true. However, in SFHs, there is more cost difference b/t low-cost homes (at ~1500 sqft) and high-end homes (at ~4000 sqft), especially as you add genuinely high-end features and finishes (hell, top-end appliances alone can be $50k more than basic models; and the price range of tile is astonishing).
Bob,
No the axes are correct. The most recent Case Shiller data point is for November 2008 and that is how it’s labeled. But the labels are pretty compressed so it is hard to read.
Lauren,
I once saw the marketing plan for Sky 55, which is an apartment building, not a condo. I was actually impressed. It was as thorough as any corporate marketing plan might be. I would imagine this is pretty typical of what would be required of anyone trying to borrow hundreds of $ millions. However, any plan is only as good as its assumptions.
Bob: “Building homes for the higher end is likely less risky overall as there is more margin and thus room for error, in a vacuum that is.”
Bob, this sounds to me like saying: building Humvees is less risky, than building Chevrolet Cavalier. Sure it is less risky, if you build not more than the market can absorb, but what happens with the risk when you build 3 times more Humvees that the demand for them?
“Seriously, does anybody has inside info whether these morons do any demographics research when planning construction? This is not a rhetoric question. I am just curious.”
Suzanne researched it!!!
Sonies, you are right. They asked Suzanne and she told them: “You can do this!”
LMAO!
Dont underestimate the power of the government and FED. They will do anything in their arsenal to prop up real estate prices (ie one of the remaining industries not yet outsourced).
In the long run we will all pay with a weaker dollar and less purchasing power to buy Chinese goods.
You renters gloat like you are ahead of the game. Your dollar denominated assests in the bank with be paper money in no time. Keep saving as the Fed pumps out more and more money. 🙂
Real estate may not be the best store of value since it requires maintenance and whatnot, but it will always be worth something. I am amazed at the animosity towards people who bought that the peak of the bubble. Who cares if they lose their ass and/or earnest money.
On large scale projects, a lender will always ask for an appraisal on a new project it is going to finance. This is always done by a third party firm. Within the appraisal there is a ton of demographic information, market analysis, competitor set, and of course what they value the project at.
“appraisal … by a third party firm”
And these appraisers were always truly independent and under no pressure whatsoever to “hit the number”. Never. So above reproach that they made Blagojevich feel dirty in his own mind.
Maybe it’s because I overanalyze everything and don’t take many risks, but it seems like a lender would do a little research before funding a project. For example with Trump Tower, one would think that Deutsche Bank would have taken an hour to see how many people (besides athletes and doctors, which seem to be the only stable jobs right now) in Chicago can easily afford his $1050/sq ft before forking over 640M. I understand that when his plans were announced, even homeless people could get a mortgage but they clearly weren’t thinking “what if”.
“Deutsche Bank would have taken an hour to see how many people in Chicago can easily afford his $1050/sq ft before forking over 640M”
The place was underwritten based on the initial pricing; there wouldn’t have been any expectation that prices would crack $1k/ft. To the extent that there is an issue with re-payment of the construction loan, it is b/c of either (1) lotsa a peopel failing to close on their units or (2) Trump being Trump and doing shady things with the proceeds. The risk of loss on that project is on the Mezz lender(s) and Trump with his equity stake.
Sonies,
I am not often serious but I was with my response. They do the analysis but begin with the answer. They then find whatever research will support it even if it’s something like extrapolating a one month increase in wealth ad infinitum. Whatever it takes!! I shit you not.
Lauren,
If all the lenders are jumping off a cliff together, so to speak, why should they do research? They knew they would get bailed out. Its heads they win tails the taxpayers lose. And guess what, tails finally came up.
Do you think the senior mgt of DB would have done anything differently at the time? Not hitting their short term earnings targets would’ve likely not caused their options to be worth a lot, which they could then exercise and cash out.
Its all a timing game. Make your green while you can, because as Chuck Prince once said: “when the music (liquidity) stops things are going to get more complicated, but right now the music is still playing so we’ll continue dancing”. LMAO he called that one right. I wonder what beach on what island he is now reading a nice book on while he laughs at the blind idiot bagholders of C common stock and 401k investors?
“differently at the time” should’ve read “differently at the time knowing what we know today”
“As evidenced by many of the condos we see here (e.g., “luxury” condos that are 800 sqft and look like Home Depot displays), this is defintely true. However, in SFHs, there is more cost difference b/t low-cost homes (at ~1500 sqft) and high-end homes (at ~4000 sqft), especially as you add genuinely high-end features and finishes (hell, top-end appliances alone can be $50k more than basic models; and the price range of tile is astonishing).”
anon, you’ve trumped the Trump on your sg ft numbers. Take a zero off. But perhaps you may be right in a couple of years, after trillions more is spent.
It is a shame; I thought the floorplans for the Waterview Tower were laid out well. And there’s that one penthouse with more outdoor space than most 2 bedrooms have indoors, but 60-70 stories up. Absent hitting the lottery I could never have justified/afforded the payment + assessment + taxes + incidentals (ever try getting breakfast downtown on a Sat? hotel prices for pancakes, yay!) but it was nice to dream.
Wicker-remember Economics 101 : A surplus in supply causes a drop in price 🙂 You might be closer to that waterview tower than you think.
Ze Carioca said;
“I am not often serious but I was with my response. They do the analysis but begin with the answer. They then find whatever research will support it even if it’s something like extrapolating a one month increase in wealth ad infinitum. Whatever it takes!! I shit you not.”
Exactly, like Suzanne when she’s selling homes!
“Soon enough I’ll be able to live in an upper-class residence for an upper-middle class price.”
What a loser.
Can I state the obvious?
But why would any individual salesperson / realtor / banker / appraiser / underwriter give a fuck whether or not you can afford the home? They need to close the sale to make money. No point in you guys making fun of them for doing what they are supposed to do. The only person truly on your side is your attorney.
Is that the best you can do???? hahahahahah Your only response to declining home prices is “what a loser?”
“Turd Ferguson on January 27th, 2009 at 9:32 pm
“Soon enough I’ll be able to live in an upper-class residence for an upper-middle class price.”
What a loser.”
Coming from the guy who calls himself “Turd”….
“Turd Ferguson on January 27th, 2009 at 9:32 pm
“Soon enough I’ll be able to live in an upper-class residence for an upper-middle class price.”
What a loser.”
Thurd, you are always accusing HD of name-calling and now this??? Why? HD just states the obvious. The longer he waits, the better the deals are.
Turd-Please enlighten me on your logic. Waiting for condo prices to fall to the level that they should be (->saving money) is idiotic. Which means that, in your opinion, buying an overpriced P.O.S. and being underwater is smart?! No comment lmfao
“Seriously, does anybody has inside info whether these morons do any demographics research when planning construction? This is not a rhetoric question. I am just curious.”
The answer is no. Condo development (on a large scale 1999-2006) in Chicago is relatively new, so these people didn’t have systems in place per se. The people who definitely do this kind of analysis are retail developers and retail stores. Walgreens’ RE dept. has this kind of thing down to a science (1,3,5 mile radius, median income, etc.)
But honestly, I underwrote plenty of condo development deals as a VP for a company that looked at tons of JV’s, land sites, etc. and it never came up.
Now that I think about it, the banks didn’t really pursue or investigate it either.
Thanks Dan. This is really insight info.
DD: “you’ve trumped the Trump on your sg ft numbers. Take a zero off. But perhaps you may be right in a couple of years, after trillions more is spent.”
You misunderstood–I was talking about the actual square footage, not the cost/sq ft. “High-end” single family homes are a *lot* larger than entry-level SFHs. So, a H-E SFH costs ~twice as much to build as an E-L SFH, even if the $$/sqft are identical.
A “luxury” 1000 sqft condo does not cost anything like twice as much as a E-L 1000 sqft condo, so the profit margin for “luxury” condo developers is much higher than for “affordable” condos–that’s fundamentally the way that Invsco makes money–buy a basic apartment building, spend very few dollars upgrading it, sell for large permium as “luxury”.
anon, sorry about the misunderstanding. But large SFHs do cost less per square foot than a comparable in quality small house. Custom finishes will always add $$, but the effect on building costs is less on a large SFH. Hence the tendency for developers to build large SFHs and realize a larger profit.
Your point on condo costs rings true. HE and LE condos tend to cost the same to build, with extra costs for interior finishes on HE condos. Profit margins on HE condos tend to be much greater, as a premium can be had for those HE interior finishes. Some buildings also have features that increase costs. The Trump Tower’s curtain wall is very high quality and is worth extra, but perhaps not worth $1,000/sq/ft.
I think American Invsco had many ways to make money, not only the one you described.
“the effect on building costs is less on a large SFH”
Sure, but not 2+:1, as the ratio of area is: i.e., a 4000 sq ft house might be (e.g.) $75/ft where a 1500 sq ft house would be (e.g.) $100/ft–because the most expensive elements are in both houses. But a really H-E SFH also has a bigger lot, so the land costs are a partial trade-off there, even before you get to the expected “upgrades”.
Trump was planning to make money with his initial pricing. If he had sold out pre-construction and had everyone close at their contract prices, he would have made money. From the Tribune in January 07: “As of November [2006], residential asking prices [in TTC] ranged from $998 to $1,343 a square foot, compared with $400 to $750 in September 2003, according to Appraisal Research Counselors.” It was priced to make money at the original prices; there were some budget issues with increased material costs, etc., but nothing like 60% higher. The current pricing of Trump is purely based on Trump’s ego and greed.
“HE and LE condos tend to cost the same to build, with extra costs for interior finishes on HE condos.”
Sure, concrete, steel, and copper will cost the same but many high end condos have other features other then finishes that add to the cost. Mechanical systems – 2 pipe heat/cooling vs 4 pipe, vertical fan coils (which take up floor area) vs horizontal (hidden in the ceiling), Drywall ceilings vs exposed concrete or skim coat, sound insulation between floors and walls…the list can go on and on but I don’t want to get more technical.
Gosh, I thought living in Trump Tower was worth $1,000/sq ft. After all there is only one Trump.
Anyone who buys new construction with a two-pipe system has to have their head examined.