Brave New World

Optimism about housing, city proves unshakable

by Barry Pearce

Jameson Realty Group’s Charles Huzenis summed up the mood of  Chicago’s home buyers, builders and sellers as they entered the new year, with one cheery and succinct sentence: “I think the whole show is steady as she goes.”

As the U.S. economy entered the ninth year of an expansion poised to be the longest in history, little could dampen the pervasive mood of optimism about the economy, Chicago and local housing.

Sure, interest rates are edging up.

So what?

Sales of new homes are down 7 percent?

Big deal.

Yes, the Daley administration demonstrates a new way to bilk taxpayers each week, but don’t those new fences look great? And have you seen the shrubs in the middle of Ashland Avenue? He’s doing a fine job.

We have entered the Teflon age, where confidence reigns supreme and all news is good news. Tell a Realtor that interest rates have been rising, that the Fed is likely to bump them up further, and the response is, Good. Just what the doctor ordered. Things are a little hot and if we need to boost rates, apply the breaks gently to housing, so be it.

Local brokers and developers can afford affability. Last year was the best any of them can remember and if 2000 is in the ballpark, actually, anywhere near the ballpark, Southport, say, or even Ashland, they’ll keep smiling.

What does the year ahead hold for home buyers? The real answer is that nobody has a clue. Keep that in mind as you read what the “experts” are saying, experts like Federal Reserve Board Chairman Alan Greenspan, who warned about the economy overheating a day before the Labor Department released figures showing that inflation was near record lows during 1999 despite low unemployment, high wages and skyrocketing stocks.

Even the cynics are beginning to think that past paradigms are poor predictors of what will happen in this economy. And if housing cycles aren’t a thing of the past in Chicago, then at least the previous ones are no longer good indicators of what to expect.

So what do the experts think?

With few exceptions, they predict that 2000 will be another boom year for housing in Chicago, though less robust than the record-setting pace of 1999. Last year, sales of houses, condos and small apartment buildings in the metropolitan area rose to 114,501 units, a 5.1 percent increase over the 108,939 recorded in 1998, according to the Chicago Association of Realtors. Huzenis says that Jameson’s sales volume was up 25 percent over the previous year, which was also a record-breaker. Coldwell Banker’s David Hall says that sales were up 38 percent in his Lincoln Park Plaza office during 1999, after an increase of 30 percent the previous year.

Normally, this far into the proverbial cycle, the housing experts would be preparing for a slowdown. What’s changed?

For one thing, demographics. The baby boomers are aging, and as they hit retirement age they are providing a bubble of new home buyers with changing needs and significant equity behind them. More important is the so-called “echo boom,” the abundant children of the boomers who are just beginning to enter the housing market. These twenty-somethings will be gobbling up condos, lofts and houses in the city for years to come, some experts say.

Simultaneously, advances in technology are fundamentally changing the economy. Why is inflation not a problem despite high consumer demand, an extremely tight labor market and upward wage pressures? The Internet and new technologies have increased efficiency and productivity so dramatically that inflation can be kept under control without boosting interest rates, according to some.

Others think we are due for a hike in rates, but developer Herb Emmerman, of Equity Marketing Services, says that until mortgage rates start climbing over 10 percent, he won’t worry.

“Our interest rates are so low compared to previous years,” Emmerman says. “We had a boom market when interest rates were 10 percent, and that was considered low. What happens is you start selling more three- and five-year ARMs (adjustable rate mortgages). People gravitate towards those products that they can afford.”

Emmerman says his company sold close to 1,000 units during 1999, primarily at his large conversions - 401 E. Ontario and the Grand Ohio - and the new highrise, Museum Place. Recent upticks in interest rates have not noticeably slowed traffic at city developments, according to sales managers, although they say that trends are difficult to discern in the traditionally slow first weeks of the year.

Developers are banking on traffic remaining strong as several massive projects gear up to sell homes in and around downtown.

The redevelopment of the former Montgomery Ward headquarters at Chicago Avenue and the Chicago River calls for at least 2,500 new housing units on the 23-acre site. Developers plan to revive the stalled Central Station development in the South Loop with 800 condos and townhouses to be started in the spring. Magellan Development Group has proposed a $1 billion ten-year plan to redevelop the golf course at Illinois Center with a mix of 6,000 homes as well as office buildings, parks and a school.

Add to these projects, MCL Development’s River East community and the potential for massive housing development on near-Loop sites controlled by Walsh-Higgins Construction and CSX Corp., and even the most optimistic observers may question the amount of product on the drawing board.

Emmerman, though, is not worried.

“The conversion part of the market is merely replacing one type of housing with another (rentals with condos), and during the ’78 to ’82 condo boom, we sold 40,000 units in four years,” Emmerman says. We’ve only sold 8,000 units in the last couple years. The city of Chicago is a large place and can accommodate a great amount of housing.”

John Jaeger, vice president of residential projects for Appraisal Research Counselors, Ltd., cautiously agrees.

“At this point we still don’t see the potential for overbuilding, but if all these projects happen, we definitely want to keep an eye on it,” Jaeger says. “There are thousands of units in these projects, but overall demand is strong right now.”

Another factor feeding the demand for urban housing, especially downtown, is a dramatically improved cityscape. The central city appears safer, cleaner and more vibrant than it has in decades. Formerly vacant industrial buildings have become chic lofts and public improvements range from the new museum campus to a planned theater district. More people want to live in the heart of the city than ever before.

The movement to make Chicago a center for high-tech companies, “Silicon Prairie,” also could bring a large infusion of cash and residents downtown.

“We’re assuming that a lot of the high-tech companies are going to come to Chicago because have they have to access their workforce, and a lot of young people in their 20s want to live in the city right now,” says Huzenis, part of the team working to redevelop the behemoth of the old Central Post Office, which straddles the Eisenhower Expressway, into office space for high-tech users. “We think these workers are going to want to be near work.”

“The Chicago Information and Technology Building, which the city is helping turn into high-tech space for startup companies, could be huge,” Jaeger says. “These startup companies could explode, and they want to be urban, not in the suburbs. These are urban people who want the city nightlife and lifestyle.”

The residences to accommodate such workers have been sprouting on every block, and services and amenities are slowly catching up. In addition to the new Dominick’s at Roosevelt and Canal, major grocery stores are opening in Streeterville, on Halsted in the West Loop, on Wabash in the South Loop, and on Superior in River North. Jaeger also sees the potential for “big box” retailers such as Best Buy and Target downtown. CMC Heartland Partners, developer of Kinzie Station, has reportedly sold a portion of its West Loop site to one of these stores.

Amidst the rosy outlook for Chicago housing, there is some concern among analysts about the high level of investor participation at many projects, buyers purchasing units speculatively to later rent out or sell at a profit. The lack of new rentals, especially in light of the exorbitant prices at new developments, also may hurt the city in the long term. Jaeger, however, says that several new rental projects will be announced during the coming year.

Chicago’s housing market enters 2000 surrounded by the sort of euphoric outlook that only comes along every millennium or so.

“Chicago gets great marks; people want to move downtown and live and work in Chicago,” says David Hall, of Coldwell Banker. “If the school system can continue to show high-profile improvements, and the city remains safe and stable politically...There is a prevailing tone of optimism that is transporting us into a new golden age.”