CHICAGO—The Chicago region's incredibly active apartment market has received a great deal of attention in the past few years. Much of the discussion has centered around when the number of new rental units hitting the market will finally outrun the currently healthy demand. There has been far less chatter about the market for condos. Many developers and lenders were spooked by the sector's collapse during the Great Recession, and decided to concentrate their efforts in the rental market. But conditions may be changing.
“There has been a limited supply of new condos built,” David Wolf, president of ON Collaborative, tells GlobeSt.com. Most of the recent construction projects were small in-fill projects, or handfuls of ultraluxury downtown projects, along with some luxury projects in the West Loop and other neighborhoods on the downtown's periphery. But a restrictive lending environment and high construction costs have kept the brakes on.
“Everyone we meet with is talking condos,” he adds. “All of the developers want to build them, and there is a lot of pent-up demand for new for-sale product,” but it's a question of making the numbers work. Lenders, however, typically ask that to secure construction financing, developers pre-sell at least 35% of a given project's units, and in most cases prefer a number closer to 50%.
That's a problem, because few investors want to buy condos nowadays, and “most buyers prefer to wait until the product delivers.” Before the recession, “there was a much bigger appetite among buyers to speculate and buy in the pre-sale phase of a project,” and the subsequent confidence throughout the development community that most units would sell meant builders could sometimes get underway with no pre-sales at all.
Furthermore, he says, the construction boom for apartments has helped drive up the costs of both materials and labor, putting an additional burden on developers. And with demand for apartments expected to remain strong, and labor markets tight, “construction costs are not going down any time soon.”
Wolf estimates that in many cases, developers would need to sell units for more than $650 per square foot on average to make a deal work. That means many middle-market and even luxury communities can't get started, even though he sees a lot of demand for both categories, especially in downtown neighborhoods like the West Loop and River North, and in affluent suburbs with great downtowns and transit options, such as Naperville, Winnetka and LaGrange.
“We're in a bit of a stalemate,” he says. Still, he also feels optimistic that change is coming. Illume, a new condo project in the West Loop by LG Development and architect Pappageorge Haymes Partners, for example, will soon open, and its 79 units are almost sold out. In addition, 400 West Huron in River North, a boutique luxury building with 26 units, has also been successful.
Although these are modestly-sized projects, each illustrates to lenders that condo production in Chicagoland is workable under present conditions. And, slowly but surely, that is how the condo market will revive.
“I think this will work itself out deal by deal,” Wolf says. In fact, he sees deals working out today that last year would not have had a chance. One client will soon unveil a new condo community in the Wicker Park neighborhood that will offer units for less than $500 per square foot. “We're now seeing a lot of projects break through that barrier.”
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Brian J. Rogal
Brian J. Rogal is a Chicago-based freelance writer with years of experience as an investigative reporter and editor, most notably at The Chicago Reporter, where he concentrated on housing issues. He also has written extensively on alternative energy and the payments card industry for national trade publications.
