Slow turning
Builders to focus on deals, remaining units in '04
by Barry Pearce

Buyers of new homes were cautious in 2003, taking their time and hunting for the best possible deals in a market that remained crowded after the building party that ended the ‘90s. For their part, developers continued to nurse hangovers from those heady days and though many scaled back or postponed plans, others pressed forward with ambitious projects that may strain demand in a market that has yet to regain equilibrium.

Around 1,664 new housing units were announced, or added to the downtown market in 2003, according to Gail Lissner, of Appraisal Research Counselors. That’s significantly lower than the 2,848 new units announced in 2002 and the 5,477 units that came on line in 2000.

Developers and the lenders that provide their financing clearly have reacted to a much slower market for new homes in Chicago. While it was common a few years ago for buildings to be completely sold out before the first residents moved in, many completed developments now see the last 10 to 30 percent of their condos (sometimes more) lingering for sale.

“The pipeline is thinning, it definitely is,” Lissner said. “A lot of the deals we’ve been tracking that were potentially coming on line, are being pushed into the future. There was less product announced in ’03 and there will be less in ’04.”

Residential building, experts say, has returned to the more moderate levels of the mid- to late ‘90s and is likely to continue at that pace for several years. In the meantime, as developers focus on selling off remaining inventory, buyers clearly will have the upper hand in 2004.

“Buyers still are expecting concessions,” said Charles Huzenis, of Jameson Development, LLC, builder of Jefferson Tower, a highrise planned for the West Loop. “They want to feel that they’re getting a good deal.”

At Jefferson Tower Jameson currently is throwing in a parking spot, worth around $30,000, with each unit. This remains the most popular incentive, according to Lissner, who says free upgrades are another common perk.

“Either developers advertise them or they don’t, and it’s a hush-hush strategy,” Lissner says. “Buyers are asking for them if they’re not advertised.”

Developer Sutherland Pearsall is including a free deeded parking spot with units at the Grand on Grand, a new highrise nearing completion at 200 W. Grand, and the Gammonley Group is offering free parking at 1111 S. Wabash. American Invsco has joined many builders in offering free upgrades, to condos at the New York, 3660 N. Lake Shore, but the developer also is paying buyers’ taxes and assessments for a full year after purchase. RDM Development is a little more coy at the Venetian, its new highrise at 222 W. Division. Advertisements for the project say simply, “Ask about sales incentives.”

Individual homeowners selling their houses, however, have not been so accommodating. Real estate brokers complain that buyers who purchased property when values were skyrocketing have not adjusted to the realities of a slower market, setting their sights – and prices – too high at resale. The average market time for a condo or townhouse during 2003 was 107 days, up from 100 the previous year.

Buyers of new construction also are taking their time and hunting for the best prices, and the most value-conscious segment of the market appears to be the most active, with affordable one- and two-bedroom units selling fastest. Jameson reconfigured Jefferson Tower to match this trend by including more affordable units – though with upscale amenities – after it started marketing.

Low interest rates continue to make product at the most affordable end of the spectrum competitive with rentals, though a slack apartment market has resulted in plenty of giveaways there too. Many landlords still are offering one to several months free rent as well as other concessions. Occupancy rates downtown have passed 90 percent in many buildings, though the average is still short of the 95 percent or more that landlords would like.

Condominium converters, encouraged by activity in the lower price range and a still tough rental market, have returned after a long absence and will continue to be a significant force in 2004. Current conversions include the remaining units at 1250 N. LaSalle, Delaware Place, 30 E. Huron, Park Place Tower, the New York and the Quadrangle, among others.

Competitively priced and often better located than new construction, many conversions have seen brisk sales. Of course, in a slower market, one of the main benefits of a conversion – immediate delivery – has been undercut by the many units still for sale in new buildings that have been completed.
Lofts too have returned to the city, though in nowhere near their numbers during the ‘90s, when they dominated downtown residential sales. The comparatively small number of loft developments and their generally affordable price point have made these projects popular with buyers.

Paramount Lofts, a 207-unit project at 130 S. Ashland, had reservations on 35 units after a sneak preview, before the sales center had even opened, according to Amy Settich, sales manager for the development, which is being marketed by New West Realty. The project features a stunning sales center and opened with prices starting in the $130s, extremely low for the West Loop. New West offers a similar price range at 15th Street Lofts, a live-work project that also has seen swift sales, at 1503 S. State. At press time, Winthrop Properties had sold more than 100 of the 138 units at Printers Row Lofts, a conversion of loft apartments at 732 S. Financial.

These and other loft projects are likely to do well in 2004, though with one exception, their numbers will remain small. Developers already have converted so many suitable, centrally located loft buildings, few are available. The tight supply of lofts makes the Enterprise Companies’ newest project the loft development of the New Year. University Commons is a conversion of the old South Water Market, near the University of Illinois at Chicago campus. The 11-acre site will include more than 800 loft condos in six buildings, located around 1000 W. 15th and priced from the $210s for two-bedrooms and from the $280s for three-bedrooms. At press time, a sales center was scheduled to open Feb. 14, but the buzz surrounding this anticipated project already was strong.

Given the shrinking but still sizeable number of unsold homes on the market, some observers wondered if builders were being too ambitious with the large-scale projects planned for 2004 and beyond. In addition to Enterprise’s University Commons, Magellan Development Group and Near North Properties are moving ahead with new phases at Lake Shore East, which could total up to 4,850 residential units when complete. Rezmar Development could build up to 5,000 residential units at Riverside Park, a site located at Clark and Roosevelt, and D2 Realty Services has announced plans for up to 1,500 new units at Franklin Point, along the Chicago River in the South Loop.

The Rezmar and D2 plans, however, are at early stages and would not begin marketing for some time. Other large-scale developments, including Central Station, Kingsbury Park, River East and University Village, continue to sell new phases, but these developments already are far along in sales and construction. And the newest master planned development, Lake Shore East, appears to be selling quickly as it unveils new phases in ’04.

At press time, the Lancaster, Lake Shore East’s first highrise, had sold 88 percent of its units and was scheduled for first occupancy in late ’04, according to Joel Carlins, president of Magellan Development Group. The company planned to begin sales for 340 on the Park, a luxury highrise being built as a joint venture with LR Development, in February. Magellan also will begin sales for the Regatta, a 300-unit condo highrise to be built on the Chicago River in Lake Shore East, and for the first 26 “Park Homes,” stacked townhouse-like condos that will ring the central park in Lake Shore East.

Carlins said that though sales were slower in 2003, Lake Shore East has the unusual appeal of offering both a premium location just off of Michigan Avenue and the advantages of an “urban village” that will include condos, apartments, retail, a public grade school, a park and other elements. Sales at this project and Magellan’s other developments have picked up notably in the last month, Carlins said.
“In the last 30 days, even on product outside of Lake Shore East, (sales) velocities and traffic have been improving,” Carlins said. “Part of it is good economic news, low interest rates obviously, and I’m a big fan of Chicago. Downtown has a vitality and a nice mix and it’s a great place for residential development. This reverse trend of people moving back to the city will continue for the next couple of years.”

It’s a trend that benefited Trump Tower, the much touted hotel and condo highrise that will replace the Sun-Times building at 401 N. Wabash. The ultra-luxury tower opened in September and by year-end had sold more than 300 units, priced from the $420s to more than $11 million. Trump Tower was the star highrise of 2003, though it’s unlikely the project can sustain this sort of sales pace into 2004. Some observers wondered, given those lightning sales, how many units were purchased by speculators as investments rather than by buyers planning to live there.

But overall, the highest end of the market, condos and townhouses priced at more than $500 a square foot, remained a small, slow-moving club in 2003. Pricey penthouses have lingered in many buildings where smaller units sold quickly, and projects such as 65 E. Goethe, which started taking reservations on its 21 units in 1999 and still has multi-million-dollar condos for sale, have taken far longer to sell out than anyone would have thought during the boom.

That hasn’t daunted Charles Huzenis, of Jameson Development, which is opening what will be one of the most luxurious of high-end boutiques in 2004. Fifty E. Chestnut will be a 39-story highrise with just 34 units, one per floor above the parking garage base. The condos will be 3,800 square feet, priced from $2.2 million to $2.7 million.

“There aren’t 300 of these, so buyers won’t face a lot of competition at resale,” Huzenis said. “What we’ve seen happen at other high-end buildings is so many people are buying units on (speculation) then having to rent them, so 40 percent of the building is tenants. This is very much a live-in building, and it was based on the perfect location. It’s the type of product many people who live in other buildings around there would like to have, but they have to spend years trying to buy out their neighbors to create this sort of space.”

Huzenis says that one-of-a-kind projects like 50 E. Chestnut should do well in 2004, and Trump Tower seems to be proof of that. Other projects, however, even those with distinctive architecture and amenities, already have suffered from a slower market. Bejco Development lost its River Bend highrise to Lehman Bros. last year despite an interesting river-hugging design that features single-loaded corridors, private boat slips, stunning views and luxury amenities. The project has many pricey units – up to $2.5 million – and has faced stiff competition from developments farther east for the well-off buyers who can afford them.

The good news for buyers in 2004 is that competition will continue the cascade of deals and concessions from builders trying to sell off their remaining inventory of new homes. The amount of inventory should fall throughout the year if builders hold the line on new development.

“The level of sales has returned back to levels more similar to what we were seeing in the late ‘90s, before the big surge,” Lissner said. “All in all, it was a decent year, and we should continue to see good strength in entry-level product. There’s been some very good absorption there…The results were probably patchy, some did extremely well, others were flat. In terms of sheer numbers in the luxury market, there is not an enormous amount of sales. We have to watch that end because a lot of developers are eyeing it.”