Condo market: Hanging tough?

Worry, sure, but sales remain healthy; builders 'still bullish'

"Very good": At Metropolis, 8 W. Monroe St., 90% of the 170 units have been pre-sold, says developer Keith Giles.

What if they build it — condominiums in and around Chicago, that is — and nobody comes?

Amid a continuing binge in local condo construction, developers ponder this question as the residential real estate market — in the face of rising mortgage interest rates — begins to show signs of slowing.In white-hot cities such as Miami and Las Vegas, condo construction has gotten so far ahead of actual demand in recent months that bankers have stepped in and called a halt to high-profile projects before ground could be broken. With slowing appreciation rates and waning interest by speculators, some observers predict that a condo "correction" is on tap for Chicago next.Yet sales remain healthy so far, and there is no evidence of financial turmoil among builders. In fact, they are betting big that fears about the market are overblown.

"We're still bullish on condos. We think metro Chicago is a solid marketplace," says Christopher Huecksteadt, a director with Metrostudy in Hoffman Estates, a research firm that tracks real estate trends in big cities around the country. "If we were adding new condo units to the market and they weren't selling, that would be cause for concern. But that's not happening here."

ndeed, developers appear to be flourishing. Keith Giles, co-owner of Frankel & Giles in Chicago, won't finish up work on Metropolis, his 16-story, 170-unit condo tower at 8 W. Monroe St., until late summer. But already more than 90% of the units, priced as high as $1.5 million, are sold.

"I think we'll be completely sold out by summer," Mr. Giles says. "

Last year was the best year for condo sales in the history of Chicago, and the market appears to still be very, very good."Some critics remain unconvinced, however. Cook County's population actually dropped by 73,000 people between 2000 and 2005, new Census Bureau data show. Freddie Mac, the nation's second-largest mortgage company, based in McLean, Va., predicts that overall U.S. home sales will drop 8% this year. In many cities, condo developers are facing critical overbuilding scenarios.In Miami, 25,000 condos are under construction and another 25,000 planned — in a market where about 2,500 units sold annually over the past decade.

"Chicago has been a fairly steady and stable market compared to Miami, but if home sales turn down this year at all, that could change," warns Jack McCabe, a residential real estate consultant based in Deerfield Beach, Fla. "I don't think there are enough high-income households in Chicago to support all the expensive condos being built. There is a good chance that Chicago is going to undergo some correction."

Other observers doubt that conclusion. In downtown Chicago, there were 8,162 new condo sales in 2005, according to Appraisal Research Counselors, up from 6,298 the year before. Gail L. Lissner, a vice-president at the research firm, estimates there are currently 8,400 more condos under construction, with 6,700 of those are pre-sold.

"Some of the condo units that don't have buyers yet won't be finished until 2007 and even 2008," Ms. Lissner says. "There is still plenty of time to get them sold."

After that, she has been able to identify another 4,150 condos planned but not under construction yet; more than half have been sold.Conclusion: Chicago has 12,500 condo units either under construction or proposed, reasonable considering last year's sales total and the long lead times on high-rise towers.

"We've had increasing sales and a low inventory of unsold condos," Ms. Lissner says. "That tells you supply and demand are in reasonably good balance."

New construction sales only tell part of the story, though. Has the supply of new product hurt resales of existing condos? There is, after all, now a pool of some 60,000 units downtown overall. But again, no danger signs: In January, condo resale prices in metro Chicago were up 9.1% over the year-earlier January, according to Metrostudy.

"The metro area added 50,000 new jobs last year, and we should add another 50,000 jobs this year," says Mr. Huecksteadt of Metrostudy. "That's keeping the housing market strong."

A few years ago the local condo market, as it was elsewhere, was propped up, in part, by "flippers."

Speculation, by some accounts, represented close to 20% of condo sales here at one time. Most experts figure the ratio is now below 12%. But the speculators haven't disappeared.Tim Duquette, a sales representative with Rubloff Residential Properties, recently put down a deposit on a $284,000 one-bedroom condo soon to break ground at 847 W. Jackson Blvd. Mr. Duquette figures he may rent out the unit for a while before he sells it.

"Monthly rental rates on condos are up 18% in the past 18 months," he says. "There is still great demand for condo living, and they do make a good investment."

Such talk is enough to encourage developers to forge ahead. Jameson Realty Group of Chicago is spending $80 million to build a 39-story, 34-unit condo tower at 50 E. Chestnut St.President Charles Huzenis had just eight units sold — prices range from $2.3 million to $3.1 million — before he broke ground early in March, but he figures to sell at least 15 or 20 more before the building is finished in late 2007. That will more than cover the cost of his construction loan.

"We've looked at the demographics, and the fact is, there are 160,000 people in Cook County with net worths of $1 million or more," he says. "There is enough wealth here to support this kind of condo construction. The demand is so good this spring that it's surprising even us."

Still, some developers worry about competition in hotbeds such as the South Loop. Russland Capital Group Inc. is hoping to break ground soon on a 28-story, 268-unit tower at 1400 S. Michigan Ave. So far, some 60% of the condos are sold.

"We'd like to get to 80% before we start construction," says Alexander Vaisman, a general partner in Russland. "The problem is, there are six or eight other condo buildings going up in the neighborhood. Sales are still good, but we're feeling some pressure from the competition."

©2006 by Crain Communications Inc.