There’s no fire sale in downtown condos — at least not yet.
But real estate developers are switching gears, jockeying to survive a glut of unsold condo units.
No builder wants to lower base prices. But many are offering incentives such as free parking, interior upgrades and special financing. These are price cuts without saying so.
Even high-profile projects have met with mixed success. Some have maintained momentum, while others have stalled.
Developers who are not too far along with new projects are altering them to compete in today’s slower market.
Jefferson Tower is a prime example. Reacting to market conditions, the developer eliminated the 40 two-bedroom units that had been planned for the 24-story project and substituted faster selling one-bedroom units.
Now the building at 200 N. Jefferson St. will have 198 one-bedrooms and one-bedrooms with den priced from $189,800 to $364,800.
“If we had included two-bedrooms, they would be priced in the mid-$400,000s to the mid-$500,000s. That’s a very difficult part of the market,” said Charles Huzenis, partner in Chicago-based Jameson Development.
Jefferson Tower’s changes reflect a much different market than just a couple of years ago.
“New-construction residential sales in Chicago’s central district are off 49 percent from their peak in 2000,” said real estate analyst Tracy Cross, president of Tracy Cross and Associates, Schaumburg. “That area posted sales of 4,693 units in 2000, but the annualized rate for this year should be 2,399.”
By neighborhood, sales in 2003 are projected to drop 29 percent in the Loop, 60 percent in Near North, 44 percent in Near South and 46 percent in Near West, all from 2000 levels, according to Cross.
Despite these gloomy predictions, Cross said, “Recovery is on the horizon. But rising interest rates could undermine that recovery.”
He estimates that for every 1-point rise in mortgage rates, residential sales will drop 10 percent.
“On the other hand, an improved economy could result in more jobs, which would boost home sales. But the question is how many jobs would be needed to offset the negative impact of higher rates,” Cross said.
He noted that some high-profile residential projects “have been doing very well. But are they selling at the expense of lower profile projects? The big problem is projects that sell two-thirds of the units and then slow down. The unsold inventory is a plague on construction loans.”
Gail Lissner, vice president of Appraisal Research Counselors, a Chicago-based consulting firm, said 776 units were sold in the first quarter of this year and 998 units in the second. She projects a total of 3,000 downtown sales for all of 2003.
Lissner said 5,045 residential units will be delivered this year, and 18 percent of those remain unsold.
“Developers are not rushing new programs this year. Announcements of new projects are down in order to allow for the market to absorb the inventory,” Lissner said.
As for what is selling now, Lissner said it depends on the building.
“The conversion of the Blackstone Hotel into condos has been canceled. It was a badly conceived project. The timing was wrong, the location was wrong, the units were too big, there wasn’t enough frontage on Michigan Avenue and that [high] price point had never been tried before in the South Loop,” Lissner said. Condo units in the historic hotel were priced from $2.2 million to $6 million.
On the other hand, the Lancaster — the first building in the massive Lakeshore East development, west of Lake Shore Drive and south of the Chicago River — “has taken off,” Lissner said. “People have realized the potential of the site and want to get in on the ground floor . . . . Residents of the Lancaster will have views for many years, even though they are not paying for them because it’s an interior site. Future buildings will block some views from the Lancaster.”
Lakeshore East is being built on land formerly occupied by a nine-hole golf course and driving range. Planned for seven condo towers and 200 townhouses, it was supposed to get started in the fall of 2001 but was delayed.
“Lakeshore East took a while to get started and the meter was ticking for Magellan [Development Group, the developer] . . . . It’s close to everything, but not at Gold Coast prices, so there’s an upside potential,” Lissner said.
Robert Pontarelli, vice president of sales and marketing for Magellan, said ground has been broken for the 29-story Lancaster, which will have 207 units priced from $290,000 to $900,000 for 700 to 2,000 square feet. Parking in an underground garage will be $35,000.
Sales are at 75 percent, but only 10 percent by investors,Pontarelli noted.
Some may wonder about the timing of launching such a massive project during a sluggish economy and lagging downtown sales.
“We were delayed in starting Lakeshore East because it took longer to get financing, city approvals and closing on the land,” Pontarelli said. “But it’s better to do it now than a year ago. Also, we felt the new site will generate excitement and differentiate us.”
Directly across the river to the north is River East, the huge mixed-use project being built by MCL Cos. Planned for 4,000 residences and 1,000 hotel rooms, it covers several blocks in the Streeterville neighborhood.
“Construction of the second RiverView tower at River East was stalled after Sept. 11 because the financing fell through,” MCL President Daniel McLean explained, referring to the terrorist attacks in 2001.
Work has resumed on the 32-story west tower, where sales have hit 65 percent, he said. Condos in the 134-unit building start at $550,900. Four-level riverfront townhouses range from $1.5 million to $3 million.
McLean said he will start a third tower next spring that will have units of 1,400 to 4,000 square feet, while a fourth tower to begin next summer will cater to younger buyers, with smaller units ranging from 750 to 1,400 square feet.
He said the condo boom started about 1995. As the price of land increased, developers were forced to build tall. “That caused the current glut in high-rises. There is no affordable land left in the downtown area, but the hottest sellers are in the low- to mid-range price range.”
McLean estimated the greatest number of unsold units are in River North’s Kingsbury Corridor and in the West Loop.
“Somebody will buy the Chin site and build there,” McLean predicted, referring to the four-story concrete skeleton of a building that has stood since June 2001on Columbus Drive between Grand Avenue and Illinois Street.
Grand Pier, a project by Chicago-based R.M. Chin & Associates, was to have had two towers, one a hotel and the other condos. Construction started on the hotel and its parking garage, but a financial dispute stopped the work. Lehman Brothers Holdings gained control in foreclosure.
McLean predicts it will take another year to absorb the excess number of downtown residential units. “That won’t do much for the bottom line of developers,” he said.
Lissner said the conversion of the landmark Palmolive Building “is doing very well.” The 37-story office building at 919 N. Michigan Ave. is being converted into 102 condos by Draper & Kramer Inc. Prices range from $650,000 to more than $10 million.
Another building with at a highly visible location is RiverBend. The new-construction condo is located where three branches of the Chicago River meet. RiverBend opened for sales four years ago and is 80 percent sold. Prices range from $371,000 to $2 million.
Lissner attributed RiverBend’s slow sales to the higher price points that limit the number of potential buyers.
The curved building by Bejco Development offers panoramic balcony views as well as on-the-water views from four riverside townhouses. To date, 102 closings have been posted at the 149-unit condo across from Wolf Point.
While RiverBend is targeting affluent buyers, some new projects see greater opportunities at lower price points.
“The current housing market is driven by first-time buyers who are making enough to buy rather than rent,” said Donald Gianone, president of Chicago-based Oculus Development.
“These young people are taking 5- to 7-year ARMs because they might not stay at one place longer than that. Some are buying two bedrooms and renting half the unit. Others, though, are asking for one bedrooms,” said Gianone, who is completing the Metro, a 9-story condo at 1200 W. Monroe St. on the Near West Side.
His next project will be aimed at entry-level buyers who demand smaller, less expensive units. To be built at Jackson Boulevard and Sangamon Street, the building will have one-bedrooms priced from about $160,000 and two-bedroom units at less than $250,000.
“The West Loop is more price-conscious than other areas,” Gianone said.
Explaining the oversupply of residences, he said: “The buildings that are opening now were planned before 9/11. Since then, supply has increased but demand hasn’t.”
“Now units are taking longer to sell and developers are making less money,” Gianone said. “The big players would rather offer incentives than drop prices. But throwing in free parking that costs $25,000 is really a price cut.” Gianone said.
He believes that steadily increasing residential prices in recent years have edged some buyers out of the market. He attributes part of the increase to “leap-frogging of amenities — the trend toward wood cabinets, granite countertops, marble baths, higher ceilings, exercise rooms and extravagant lobbies.”
Huzenis noted that the greatest price resistance in the last two years has been in the $350,000 to $800,000 range. “There has been a lot of job loss in middle management, those who would buy two-bedroom units. It’s not that people don’t want two bedrooms. It’s that they are concerned about their jobs and don’t want to make the leap now.”
Huzenis predicted that even a minimal increase in jobs will lead to rapid absorption of downtown housing.
On the other hand, he said that “high-end, luxury residences have done well, considering the economy. High-end buyers will purchase if they see a great value at premier locations,” Huzenis said.
“The South Loop is a hot spot with good absorption,” Huzenis said, “but a lot of product is available in River North. Well-designed, well-thought-out buildings will do well in the West Loop.”
One architecturally distinctive building on the Gold Coast has recorded six sales in the last two months, according to Christopher Carley, chairman of Chicago-based Fordham Co., the developer. On the market three years, the 24-unit building now has six units left. Designed by architect Lucien Lagrange, it is just off Lake Shore Drive at 65 E. Goethe St.
“It has a good location,” Lissner said, “but it was planned originally as a 32-story high-rise. Then the developer was forced to reduce the height down to eight stories. At that height, it is not a view building with panoramic views of the lake.”
The large units range from $2.8 million to $4.5 million for raw space. Amenities include a 6,000-square-foot rooftop garden.
“I used to think that high-end buyers were insulated from major shocks, but their confidence turned down too after the collapse of stocks and 9/11,” said Carley, explaining the slow sales at 65 E. Goethe.
Another new building that has received praise for its architecture is Skybridge, just west of the Kennedy Expressway at Madison Street.
“Skybridge is a nice building, but it has larger and more expensive units. The mayor and neighborhood groups are encouraging larger units for families. But now there’s a question what’s affordable and what the market will pay,” Lissner said.
