Trader pays over $7.25 million for Elysian condo

By: Andrew Schroedter May 17, 2010

(Crain’s) — An options trader is taking a gamble on the Elysian Hotel & Private Residences, paying more than $7.25 million for a condominium in the Gold Coast skyscraper that he hopes to flip for more than $10 million.

Igor Chernomzav, a co-founder of Hard Eight Futures LLC, bought a 12,000-square-foot unit on the 56th and 57th floors of the 60-story tower at 11 E. Walton St., which also features a 188-room hotel, according to property records.

Mr. Chernomzav, 33, who paid cash for the five-bedroom, two-level condo, plans to remodel the unit and put it back on the market, according to Tricia Fox of residential real estate firm Keller Williams, which brokered the sale.

The asking price will be between $10 million and $11 million, Ms. Fox says.

This is the second unit Mr. Chernomzav has purchased in the Elysian, after paying a reported $8.18 million in March for a 52nd-floor unit, which he is also remodeling. Whether he also plans to flip that condo could not be determined.

A spokesman for Mr. Chernomzav declines to comment.

Mr. Chernomzav started Chicago-based Hard Eight in 2004, five years after earning a philosophy degree from Princeton University, according to his firm’s Web site. Originally from San Antonio, he began his career in 1999 as an options trader for Susquehanna Investment, part of suburban Philadelphia-based Susquehanna International Group LLP.

For his recent purchase in the Elysian, the entrepreneur bought a contract for a unit signed several years ago by a speculator represented by Ms. Fox. The identity of the speculator and how much Mr. Chernomzav paid for the contract could not be determined.

But Mr. Chernomzav is paying developer Elysian Worldwide 25% less than the speculator’s original asking price of $9.5 million for the unit, which features a 25-foot living room ceiling and 360-degree views.

Zaga Arsic, also of Keller Williams, represented Mr. Chernomzav.

The deal is a sign that the high-end market is improving as sellers cut prices, says Craig Hogan, managing broker of Keller’s Gold Coast office.

“If the price is right, people will come look,” he says.

Mr. Chernomzav has paid the highest prices for units in the Elysian, surpassing the $6.88 million that James McNulty, former CEO of the Chicago Mercantile Exchange, paid in January for a 7,400-square-foot condo on the project’s 37th floor, according to property records. Mr. McNulty didn’t return a call seeking comment.

Buyers have closed on 31 of the 51 residential condo units in the building, says developer David Pisor, who in November was forced to abandon a plan to also sell the 188 hotel units in the building.

Another 15 residential condos are under contract, says Mr. Pisor, president and CEO of Chicago-based Elysian Worldwide LLC, who adds that sales traffic has picked up in the last 45 days.

“It was pretty brutal there for a while,” he says.

Terrific cocktail party with Signature Properties from Naples, Florida at TRUMP INTERNATIONAL CHICAGO

Here are a few pictures to share - January 15th we co-hosted a terrific cocktail party with Signature Properties from Naples, Florida at TRUMP INTERNATIONAL CHICAGO – over 130 people attended. The 20 degree below temperature was a reminder of why a place to escape to in Naples, Florida would be a very wonderful idea! Many prospects and several buyers attended and all commented on the terrific DVD which started with a chilly day in Chicago where the clients boarded a jet and ended on the same day, basking in sunshine and sipping a cocktail on the beach. The homes were also terrific – views, finishes, from $1million (Dunes) to $5m (Moraya Bay) - the ones directly on the water (Moraya Bay) are over 5000 sf!


View and reflection









Maxine Kroll, owner of Maxine Salon, husband architect Ron Bari, Tricia Fox Realtor Jean Hagerty









Liz Griffin and Craig and Erin Dunstan of Wheaten, buyers at the Moraya Bay Project










Frank DiJohn, entrepreneur/business owner and Mel Greenberg, entrepreneur, furniture business









Tricia Fox, and Glenn Griffin, Developer, Signature Properties, Naples, Florida












Jerry Nerad, hotel owner and original owner of parcel where development is and Ann Nerad and Patrick Griffin, Developer

What $1,000,000 Will Buy

If you are willing to take Sharm El Sheik in Egypt over Manhattan, you will get a lot more for your million bucks! Check out this entertaining slide show at Forbes showing exactly how far this sum will get you in today's international market.

Time to Rebalance?

Check out these investment tips from the master of Yale's endowment, who has a few ideas about how to keep your cool even in bad times.

Foreigners Investing Heavily in U.S. Real Estate

For the first time, U.S. cities rank one and two in the top five places assigned by the Association of Foreign Investors in their annual survey. New York is number one, followed by Washington D.C. in a tie with London for second place, followed by Paris and Shanghai.

Oops? They Did It Again

The Federal Reserve has cut interest rates again. See the NY Times coverage here. As NPR's "All Things Considered" explained on Monday, bad real estate numbers can be good news for Wall Street: this access to quick cash is just what investors were hoping for. Are there more cuts to be expected in the near future? Watch this space. For more on what the cut means for consumers, go here.

United We Fall?

The "Today's Papers" header at Slate was so cute, and apt, that I had to steal it -- with the addition of a question mark. The point, of course, concerns the nausea-inducing drop in world stock markets as an indication that the global market is more interdependent than perhaps many of us would like: European and Asian investors seem to be unnerved by rumors of an imminent U.S. recession. As "The New York Times" puts it, in a passage "Slate" cites as well: "The angst about the United States belies the popular theory that Europe and Asia are not as dependent on the American economy as they once were." It might be more precise to say that what it belies is the theory, popular or not, that Europe and Asia do not believe themselves to be independent of the U.S. Whether that accurately reflects the facts is another matter, and one that remains to be seen. Of course James Carville's law of politics -- "It's the economy, stupid"-- becomes, when applied to the economy: "It's psychology, stupid!" --But there may still be time for investors to rally and come to their senses, a possibility the Times acknowledges with its follow-up article today: "To Some, the Widening Crisis Seems Driven By Fear, Not Facts."

Looking for a Good Investment? Follow the Artists

Business Week is running an interesting feature on the way that artists tend to upgrade neighborhoods -- until they add so much value that they (or at least the struggling ones) price themselves out of a home (e.g. Greenwich Village in New York). The magazine has put together what it calls the top ten places for artists. I'll ruin the suspense and tell you that Chicago is not on it, but the trend holds for our city as well!

Sam Zell and the Tribune Company

Check out this New Yorker profile of one of Chicago's most interesting personalities who almost single-handedly put REITs (Real Estate Investment Trusts) on the map.

Scary or Merry?

Click the above to read the NY Times coverage of the Fed's decision to lower the interest rate!

Florida Withstands the Real Estate Hurricane

"The New York Times" has an interesting piece today on Florida real estate, a market in which Chicagoans too have a stake!

Listen Up: Real Estate Guys on OPM

Click on the link for informative radio shows on real estate topics that you can listen to on your computer or download onto MP3 players. The most recent topic is "Using Other People Money to Invest" -- it's well worth a listen.

Mortgage Malaise

How do pessimistic reports on the national housing market translate into opportunities for investors? Click on the link to find out, and don't forget to let us know your opinion.

Why investors should consider real estate

This article struck a chord with me (I hope you like it too):

Thursday, April 12, 2007
By JEFF D. OPDYKE
The Wall Street Journal

With housing prices softening and subprime lenders tanking, investors have been running from anything that smells of real estate. But they may be bailing too quickly, as some parts of the sector are still doing well.
New money going into mutual funds that own real estate has plunged to just $2 million a week, on average, from nearly $400 million a week as recently as mid-February, according to AMG Data Services. Investors in droves are also selling off their shares in real-estate investment trusts, the publicly traded stocks of companies that own everything from apartment buildings to medical centers and shopping malls.

But in some cases, jittery investor sentiment isn't a good proxy for the strength of the underlying assets. It is true that residential real estate is struggling in many parts of the country. But commercial real estate is driven by job growth and the economy, and both are relatively healthy. In fact, commercial-building occupancy is growing nationally, while rents are up about 4.25 percent in the past year, according to Los Angeles-based CB Richard Ellis Group Inc. Midtown Manhattan set a record in March for the city's highest rents ever: $69.99 a square foot, on average.

There is another reason to think twice before fleeing the real-estate sector. From a financial-planning perspective, real estate is an asset that investors should have in their portfolios over the long term. That is because real estate serves as a counterweight to inflation, while REITs, according to data from research firm Ibbotson Associates, have a low to moderate correlation with stocks, meaning Wall Street's trends tend not to impact REIT trends.

Investment pros routinely agree that a portfolio should have between 5 percent and 20 percent invested in real estate that isn't a primary residence. But "real estate" encompasses everything from single homes and duplexes, to skyscrapers and apartments, to strip-malls, medical offices and assisted-living centers scattered around the country.

So where to invest, given the meltdown in some parts of the sector? The options are growing. Just last year, the Chicago Mercantile Exchange began trading futures and options tied to the movement of the S&P/Case-Shiller Metro Area Home Price Indices that track housing prices in the U.S. as well as a variety of cities, including New York, Miami, Chicago and Las Vegas. Meanwhile, just last month, Santa Monica, Calif.-based Dimensional Fund Advisors launched an international real-estate fund that provides investors access to markets where REITs are growing in popularity, including Singapore, Hong Kong, Japan and Turkey.

Here are some of the options to consider:

Real-Estate Mutual Funds and ETFs
The easiest means for creating instant diversity across regions and property styles is to buy a real-estate index mutual fund such as Vanguard's REIT Index fund, or an exchange-traded fund such as the iShares Dow Jones U.S. Real Estate Index fund. Both are low-cost options for owning broad exposure to various types of REITs, and both have fared well over the past year, though each has fallen off in the past couple of months as real-estate woes have mounted.
The drawback: You won't see the potentially big price pops you could by owning individual REITs or even the stocks of home builders.
Sector REITs

Not all real-estate sectors fire on the same cycle, since different sectors play off different economic drivers. Office properties, particularly in urban locations, currently offer the best opportunities, says Bob Gadsden, portfolio manager at New York's Alpine Woods Capital Investors, which runs the Alpine mutual funds. He says companies such as Vornado Realty Trust, in Paramus, N.J., and Boston Properties Inc. are examples of the REITs investors should consider.

Those companies operate in land-restricted markets such as New York City, San Francisco, Boston and Washington, D.C., cities "where there's limited ability to create new supply," says Ken Heebner, portfolio manager for the Boston-based CGM Realty Fund who singles out the same two REITs.

Apartment REITs also offer some potential, as former homeowners slip back into the rental market in the wake of the subprime debacle and the exploding number of foreclosures. The increasing legion of renters is pushing demand higher, allowing apartment companies to raise rents. That is a good combination for leading apartment REITs such as Home Properties Inc. in Rochester, N.Y., and Denver's Archstone-Smith, said Gadsden.
Yet the foreclosure woes are dumping increasing numbers of homes into the residential property market at marked-down prices, and some are certain to land in the hands of real-estate investors who will turn them into rental properties. That means affordably priced rental homes will be competing against apartments for tenants. That is potentially bad for apartment REITs, said Heebner. Moreover, once the subprime crisis abates and interest rates fall again, renters will again become homeowners.

International REIT Mutual Funds
These operate just like domestic REIT funds, but they own real-estate trusts in various countries. A number of financial planners are now including them in client portfolios because "they provide another level of diversification," says Lance Alston, vice president at JWA Financial, a Dallas planning firm that in the past month has begun putting about half of its clients' real-estate exposure in the Dimensional Fund Advisors' International Real Estate Securities Portfolio.

Just like the U.S. commercial property market, commercial real estate globally is doing well amid a strong world economy. CB Richard Ellis global data show that rents are moving up by as much as 30 percent in some markets, while vacancy rates are falling.

Jeremy Mitchell, a financial planner in Sun City, Ariz., says his firm this year has been buying shares in Cohen & Steers International Realty Fund for clients because "you're putting a ceiling over yourself by focusing just on domestic REITs."

The risk: The REIT market in many countries is nascent, as is the local real-estate market. If global economies crumble, real-estate prices — and REIT prices — will come down.

Private REITs
Unlike REITs that trade on Wall Street, private REITs are generally available only through financial planners, advisers and brokers. These REITs typically maintain a constant share price — often $10 a share. And they generate income through their yield, often in the 5 percent to 7 percent range, and provide capital gains only when the portfolios are liquidated, sold to other real-estate companies or go public.

Dean Harman, a financial planner in the Woodlands, Texas, has been putting clients into a handful of private REITs, such as KBS, Wells and Hines real-estate investment trusts.

The benefit: income as well as price stability. When the Dow Jones Industrial Average fell more than 400 points in February, "the value of my clients' REITs didn't move," Harman said.

The drawback: a lack of liquidity. Private REITs allow withdrawals only occasionally, often once a quarter. Moreover, they generally require a holding period of at least one year, and for a few years after that the REIT generally redeems the shares at a discount to the original purchase price.

Home-Builder Stocks
These stocks have been hammered in recent months, yet companies like D.R. Horton Inc., Toll Brothers Inc. and KB Home might not be such a bad play for long-term investors. Their business doesn't need escalating home prices to succeed. They just need volume. It will take some time, but once the subprime and foreclosure shakeout has passed, the builders' stocks — all down roughly a third in the past year — could be fashionable again, says Ernie Ankrim, chief investment strategist at Russell Investment Group in Tacoma, Wash. "If housing prices stay soft, you'll see price declines in land and raw materials, giving the builders stronger margins."

International Real Estate

For a great informative study from the National Association of Realtors (NAR):

http://www.goldcoastresidences.com/internationalsurvey

Condo Hotels: What to Check Out Before You Check In

About 20 years ago on the high seas of south Florida's real estate market, many dated condo hotels lacked quality and prestige. The scourge of changing tax laws made them less attractive investments and many conversion projects were sunk.

In the late 1990s came The Mutiny, a hotel that took over the condo hotel concept, according to Joel Greene, president of Condo Hotel Center, an Internet real estate broker.

The owners of the apartment building in Miami gutted their property and turned it into a condo hotel or condotel, reintroducing the concept to the area and generating a pirate's plunder for its buyers, with unit prices increasing 10 times from beginning to sell-out. Other developers began following suit, revamping old hotels or constructing them brand new.

"Today there are approximately 60 or more condo hotels at various stages of development in Florida," says Greene. "By 2008, there will be several hundred condo hotels, located throughout the U.S. and around the world."
But before eager adventurers raid this ship, they must be aware of what they are getting into, says Greene, or be fooled by a treasure that falls short of the legend.

Condo Fever

A condo hotel, as defined by Greene, is a large, usually high-rise property located on prime real estate and operated by some of the biggest hotel names like Trump (TRMP) , Marriott's (MAR) Ritz-Carlton, Starwood (HOT) and Hyatt. It is usually used as a second or vacation home.
Unlike a traditional hotel residence, however, the condo hotel unit allows individual owners to place their unit in the hotel's rental program when not in residence. The revenue generated from the rental program is split -- usually 50/50 -- between the hotel operator and the owner.
Despite the slowing real estate market, condo hotels are continuing to thrive, largely because 74 million baby boomers are looking for places to spend their money.
"Condo hotels are part of at least 1% of every hotel project currently being built," Greene notes. Condo Hotel Center is contacted by three or four new developers each week.
"It's a win-win situation for all parties concerned," says Greene. But beware if you believe you'll reap a queen's ransom, because you're in for a disappointment.

Buyer Basics

A condo hotel unit is a hassle-free investment on prime real estate. When in residence, five-star amenities are at the owner's fingertips; when the owner is not around, the hotel maintains the property. Perhaps most enticing, however, is the ability to generate income through the hotel's rental program, helping offset ownership expenses.
To maximize profits from appreciation, buy your unit in preconstruction stages, Greene advises. Early buyers of the Trump Chicago condo hotel, for example, saw a 95% increase in the selling price before the building was 75% sold out, he notes.
But if profit, not pleasure is your concern, consider becoming a landlord.
Condo hotels are not registered as securities and can't be sold as investments, says Andrew Robins, partner in the lodging and gaming practice at Proskauer Rose. Buyers should view them as vacation spots with benefits, not buried treasure.
Generally, your unit will generate some revenue to offset ownership costs, but don't expect sizeable annual returns. Under Securities and Exchange Commission regulations, developers can't guarantee occupancy rates or revenues, so a premium brand name will generate higher rental income, but the accompanying pricey operating expenses can surprise and frustrate residents.
"Growth makes me cautious because not every hotel will work as a condo hotel," says Howard Nussbaum, president and CEO of the American Resort Development Association.

Appreciation depends on the destination, he says, so do your homework.

Developer's Duel

For the developer, condo hotels make good financial sense because they can recoup much of their construction costs up front, even breaking even upon completion of the property, says Greene.
The developer receives approximately 50% of the revenue form the condo hotel rental program and retains whole ownership of the property's meeting facilities, spas, lounges and restaurants.
But despite the allure, hire a good attorney, Nussbaum cautions.

"The recent proliferation [of condo hotels] has made for a level of popularity and desire that creates the opportunity for mistakes," he says.

The biggest challenge for developers, says Robins, is how to reconcile the need of a branded hotel to control the guest experience with a unit purchaser's typical rights.
The legal structure varies by state. In Florida, for example, the condo unit owner has very little input as to how the building is maintained and operated in order to assure that the hotel standard is upheld. The developer retains control over the look of the building in carpets, lobbies and hallways.
"The theory behind the [Florida] model is that the buyer of the unit doesn't want to buy just any condo unit ... but rather a brand [that meets] certain standards in terms of physical and operational qualities of the unit and building," says Robins.
In the New York market, says Robins, the level of control a condo association retains over common areas can't be altered in most cases, and unit owners have more control over operating expenses.

"There is a lack of certainty of the brand's ability to really control the standards," says Robins, but New York is such an attractive market that developers and branded operators are willing to take that risk.

Most importantly, developers everywhere must avoid focusing on the economics of the rental program, lest they violate SEC regulations.

Prime Land and Hot Sand

The risks involved for all parties aren't stopping the wild crusade of condo hotels around the globe with condos in Mexico, Panama and Costa Rica leading the way because of their attractive price ranges. A Trump studio unit in Fort Lauderdale, Fla., for instance, costs about $700,000 but a similar sized Trump unit in Panama City may only cost around $300,000.

"Trump is the number one developer [in the business] ," says Susan Greene, marketing director for Condo Hotel Center. "His stuff is just gold."

The 423 residences in Trump Tower Honolulu sold out in one day.

Some of the best deals today are found in Dubai, says Joel Greene, "where theme parks that will total more than twice the size of Orlando's Walt Disney World are currently under development."
In the U.S., Greene recommends Las Vegas, specifically Vdara, a planned condo hotel in the MGM Mirage (MGM) CityCenter.
Koloa Landing, a residential resort community in Kauai, Hawaii, will complete its 323 resort condos by 2009.

"We're trying to raise the bar as far as luxury," says sales director Jeff Skinner.

The property will be a refreshing change from the dated hotels in the area, and Skinner predicts 80% of the residents will participate in the rental program.
And deeded fractional ownership residences, like The Ritz-Carlton Residences, combine residency with the legendary services of the Ritz Carlton Hotel Company, including personal chefs and concierge services.
"Instead of paying $5 million for a slope-side vacation home in Aspen, this new breed of buyer is purchasing a three-bedroom residence at the base of the mountain for approximately $300,000 and using it for four weeks or more a year," says Ed Kinney, vice president of corporate affairs and brand awareness for the Ritz-Carlton Club.
In short, if you want a prime vacation spot without hassle or strain, a condo hotel is smooth sailing -- just leave the treasure map at home.

Copyright

By Annika Mengisen

TheStreet.com Staff Reporter

Investing Blog

Check out this great resource!

Generation X May BoostSagging Real-Estate Market

By Kristen Gerencher From MarketWatch

The housing market may be in a slump, but the industry's long-term trends look promising as younger generations begin to buy and trade up. That was the consensus among a group of consultants, analysts and developers speaking at the recent annual meeting of the Urban Land Institute in Denver.

Rising affordability concerns in some home and rental markets remain a challenge, but the generations coming up behind the baby boomers are giving home builders a run for their money, experts said. With more immigration and people living alone, demographic shifts are pressing developers to reconsider what's worked in the past.

Generation X, typically defined as those born between 1965 and 1979, comprise a little more than half of the market for newly constructed homes, said James Chung, president of Reach Advisors, a Boston-based marketing strategy and research firm.

But that doesn't mean the homes that lured baby boomers, born between 1946 and 1964, are meeting the needs of the 30-somethings shopping now.

"Generation X is in the heart of their entry-level home-buying years and are just now entering their peak trade-up years," Chung said. "They haven't yet stolen the thunder of the boomers when it comes to trade-up homes. It's a big shift coming up for home builders and developers."
Partly because many Gen-Xers are buying into the market after the run-up in housing prices began about a decade ago, they tend not to be as moved by deluxe kitchens, huge square footage and "prestige addresses" as their older counterparts are, he said.

"It's the trade-off generation. It's no longer sort of the live-large mindset," Chung said. "They're living under different economic realities than their predecessors. They carry 70% more debt than the baby boomers did at that point in their lives because of the cost of housing.... Almost all of that is housing debt."

Many are forgoing master suites and separate wings for kids and adults and instead seeking smaller footprints with space designed for family usage rather than individual usage, Chung said.
The market has yet to catch up with their particular demands, he said. "What we're seeing is a fundamental mismatch between what these buyers are wanting and what the market is offering. They're settling for what's available vs. finding what they really want."

As for Generation Y, also know as the echo boomers who were born after 1980, it's premature to draw conclusions, Gadi Kaufmann, chief executive of Robert Charles Lesser and Co., a real estate advisory firm, said during a ULI panel discussion on what young consumers want.

"Gen Y is going to be in student housing and rentals for the next six years," he said. See how student housing has changed today.

More solo dwellers

Also affecting home builders and developers is the rise of nontraditional households, Kaufmann said.

The portion of people living without a spouse or roommate ballooned 23% since 1980, he said. Only 22% of households were made up of a single person living alone 26 years ago compared with 27% in 2005.

A 57% rise in single-parent households and a 26% decline in the percentage of married couples with kids -- 23% last year compared with 31% in 1980 -- has further changed the housing landscape, Kaufmann said.

There's also more migration from expensive cities to less costly areas, as well as people moving away from their hometowns, he said.

Southern states and those bordering pricey ones, such as Arizona and Nevada, are the beneficiaries of home buyers who can't afford or become disenchanted with higher-priced areas such as California and the Northeast, he said.

So-called second- and third-tier cities with populations of 300,000 to 1 million are attractive to the youth market and poised for growth, Kaufmann told the audience. "Some of the most exciting towns in America are those second-tier cities."

Young people also tend not to mind close living, he said. As more people live alone and wait longer to marry and start families, many in their 20s and 30s are drawn to compact apartment and condo units in urban areas where they can interact with their neighbors.

The growth of the Hispanic population also portends shifts, though what kind remains unclear, Chung said. Latinos currently have a homeownership rate in the high 40% range compared with about 72% for whites. "If they move up in homeownership at a faster rate, that's going to be very positive for the home market."

Love affair continues

Whether the housing market has hit a bottom or not remains controversial.

Last week, the U.S. Commerce Department reported that the nation's economy grew at a preliminary annual rate of 1.6% from July through September, its slowest pace since early 2003 due to cooling in the housing market.

In a survey done in October by Reach Advisors, 41% of 500 consumers looking to buy a house in the last 12 months or planning to look in the next year said their plans to move were affected by market conditions, compared with 27% of consumers who said so in July 2005, Chung told ULI attendees at a panel discussion on the risks and benefits of homeownership.

The portion anticipating a drop in home prices was 32% last month compared with 13% in July of last year, meaning that two-thirds still don't expect price drops, he said. What's more, 93% said owning a home remains a strong or acceptable long-term investment.

Though the housing market may be in the doldrums, Chung said he's confident Americans' love affair with homeownership will endure even after this recent extreme swing in demand. "From 2003 to 2005 it wasn't just a love affair with your primary home. It was a torrid affair with real estate. It was your home plus your home on the side."

Still, a balance of owners and renters is desirable because homeownership isn't for everyone, Ron Terwilliger, chief executive of Trammell Crow Residential, a builder and manager of multifamily housing based in Atlanta, said during the same ULI panel discussion.

"You're better off renting unless you're going to be in a home for at least five years because of the costs of getting in and out," he told attendees.

"The reason this cycle went up so high and flattened so quickly is more speculative buying than I've seen in my 35 years in the business," Terwilliger said. "It's unfortunate so many people bought intending to flip."

It will take time to regain equilibrium, he said. "There's a lot of pain going on in the investment community."

Copyright © 2005 Dow Jones & Company, Inc. All Rights Reserved
-- November 07, 2006

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.

Glut reaction?

Sellers acknowledge that market has slowed, but buyers see opportunity in the 'G' word

By Mary Umberger Tribune staff writer
Published September 17, 2006

In the condo market, "glut" is becoming a four-letter word--at least for sellers.The once-exuberant market isn't dead--drowsy, maybe, but not dead--and it's a brilliant time to be a buyer, real estate experts say."Buyers are expecting more. They know it's a buyer's market," according to Deerfield agent Honore Frumentino. "The sellers who are willing to play ball are getting their homes sold."The ones who still think Santa Claus is going to come down the chimney--their homes are going to still be sitting there."What she, along with many other Chicago-area agents, means is that the eager seller needs to spruce up and price right to get the deal done, because there are a ton of condos on the market.To be precise, there are about 12,000 condos in a "ton," that being the number of units for sale (excluding townhouses) throughout metropolitan Chicago at the end of August, according to the Headrick-Wagner Appraisal Group of Naperville.That doesn't, however, count those for-sale-by-owner and some new units whose builders don't market through agents, according to Chip Wagner, president of Headrick-Wagner."There are large developments coming on the market that aren't being reflected on the MLS," Wagner says.Whether that's a "glut" is debatable: Some consider the market "balanced" if there's a four-month supply of homes for sale. That is, it would take four months to sell the inventory if no other properties were to come on the market. Others see it "balanced" with a six-month supply. Headrick-Wagner estimates a 6.1-month supply of condos in the overall Chicago market, just outside the more generous definition."Overall, we're almost double what we were last year in Naperville," agent Gail Niermeyersays of inventory. "And market time is probably double what it used to be--four to five months."But by the same token, I just sold one luxury condo and one so-called regular condo," she says. "People just have to be patient."And realistic, the agents say. Homeowners must pay close attention to sales prices of comparable units, and they may have to throw in some incentives--offering to pay the buyer's condo association dues or closing costs, for example."I tell sellers to watch the market to see what the last [comp] sold for and get yourself down to that sale price so you can be the next one," Niermeyer says.Such price adjustments tend to be easier said than done."People get used to things selling at a certain price level," says Palos Park broker Doug Blount. "They're reluctant to give up what they think they've gained."Frumentino says it's generational. "The younger sellers are listening more [to suggested price changes] than older sellers," she says. "Older sellers are still banking on making a killing without doing that much."Overall, though, Blount says, sellers appear to be adapting.For example, since the beginning of the year, asking prices for condos and townhouses in his southwest suburban marketplace--Orland Park, Palos Hills, Palos Park and Palos Heights--have gone up 6.2 percent, he says.But between June and the end of August, those asking prices inched up 2.8 percent, indicating that sellers are being more aggressive to get buyers' attention, Blount says.Sales prices, though, didn't dip commensurately: The average for the long period and the more recent one were essentially the same, he says."There's more negotiation," he says. "Buyers are coming in a little lower, but sellers are negotiating pretty tough, hanging on to their [lowered] price."That equilibrium may change, though, if inventories continue to pile up while would-be buyers wait and see, a phenomenon that even the National Association of Realtors acknowledges."Psychological factors are causing some buyers to remain on the sidelines, waiting for prices to stabilize or for more favorable news about the market and the economy," said David Lereah, NAR's chief economist, as he announced Sept. 1 that contracts to buy all types of homes in July were down 16 percent from a year earlier.Craig LeMoyne knows it's a buyer's market, so he took his time this summer looking for a condo after a job transfer to Chicago from suburban Detroit. He traipsed through an estimated 60 units before settling in early September on a two-bedroom place on the North Side. But the deal fell through, and now he's thinking about becoming a renter again."Some of these units are just ridiculously priced," LeMoyne said. "They don't realize the market has changed."He had good reason to be deliberative in his search: He lost about $20,000 when he sold his home in Dearborn."I bought four years ago, and it was a hot market then," he said. "The market tanked. I'm very gun-shy. I don't want to make the same mistake."Though his new job is on the South Side, LeMoyne shunned the South Loop because he worried that it's overbuilt.He's hardly the first to wonder aloud about the condo-filled neighborhood, where sales outshone all other downtown areas in 2005 and through the first quarter of this year, and then dropped off, according to a report from Appraisal Research Counselors, which specializes in tracking development in downtown Chicago.In the second quarter of this year, about 2,000 units were completed, being marketed or proposed by developers there, accounting for almost half of all such condos in the broadly defined downtown area, said Appraisal Research vice president Gail Lissner.And there's more South Loop construction on the way. Nonetheless, Lissner predicted the neighborhood would continue to command a "solid market share," with demand driven by the major retail development underway along Roosevelt Road.Downtown housing, in general, has exploded to more than 80,000 units currently from 48,000 in 1990. It may top 100,000 by 2010. Sales are tending to keep up, according to her company's report.Investors have played a significant role in those sales throughout the housing boom, and Lissner and the report's co-author, Ron DeVries, worry about how much "flippers"--investors who attempt to resell units right away--will weigh on an overall slowing market. So far, they say, concerns about investors who just walk away, leaving their purchase deposits on the table, haven't played out, they said.Flippers are impossible to quantify because sales contracts and property-transfer data don't spell out the intentions of a buyer, analysts say. But industry studies of quick-turnaround sales and other indicators suggest flippers may have been involved with as much as 30 percent of sales in some of the nation's "superheated" markets, according to David Berson, chief economist for Fannie Mae. Anecdotally, flippers were very active in some parts of Chicago at the height of the boom, though they're not a significant presence in the condo market now, according to local agents."The investors have disappeared," said Arlington Heights agent Mary Zentz. "Now, with the market slowed down, there is just no opportunity to have the easy sale. They can't find the fast turnaround."Baby Boomers also are credited with fueling the condo market, and industry experts expect that to continue.Frumentino, for one, expects Boomers to continue to downsize from single-family homes as their nests empty and they approach retirement. "We'll still have a lot of Baby Boomers who want to make lifestyle changes, and it won't matter [for them] what's happening with the economy."She says that sales of condos and townhouses throughout the North Shore are down about 10 percent down from last year, with 202 going under contract last month, down from 226 in August 2005. About 1,600 North Shore condos and townhouses are for sale now, though comparable MLSNI inventory data for last year aren't available, she said."We have about an eight-month supply, and that's not bad," she says. "Until recently, until the boom, it took four or five months to sell anything," she said. "The market is price-sensitive, but it is not dead. If people see value in a home, they're going for it."But "this is not a market that has any forgiveness," Frumentino said. "Everything has to look good, show well, price well."She said the current wave of incentives from sellers may be short-lived."Once we get into 2007, I think they won't be such an issue. In the last part of the year, you always have sellers who don't want to carry [their units] into the next year and are willing to get closed by the first of the year."Such a change would be expected as the market "normalizes," she says."We've just had the longest abnormal market since the '70s. This was a run that nobody could predict and we enjoyed it for a long time, and now we're back to normal."Blount says he's expecting next month to indicate where the market is heading. "I think October will tell us what's really happening. August is typically a slower market, and I'm thinking this year is a more typical year than we've seen for a while."I'm not too concerned at this point," he says. "The market was very strong for a couple of years, and it can't go on forever."Frumentino said the game has shifted to buyers. "It's been a long time coming for them. They had to wait, but now they're flexing their muscles."We're all taking note."

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