Unlike New York City and some other areas of the country, Chicago's residential real estate market has been slower in recovering from the recession. Nevertheless, signs of a full recovery are on the horizon.
While the number of new condos breaking ground or scheduled for occupancy in Chicago and its surrounding areas may not be enormous, there is still some encouraging movement; developments that had been intended as condos but converted to rental are now for sale. Most of the new residential development that is being built is intended for rental tenants, but that also is a sign that the local market is becoming more robust. Indeed, some of the rentals being built could ultimately be converted to condos as the market strengthens. And renters, industry experts point out, often transition to home ownership as their financial picture develops.
When experts say it's a slow year for development in the Windy City, they're not kidding; just 144 new condo units will come to market this year in Chicago. Compared to the 3,000 or so that were being built yearly up until about a decade ago (and which were still being delivered between 2006 and 2010), it's just a trickle of new growth. Nevertheless, things are looking up for the market. With 2,800 new rental units coming to downtown this year, industry experts are looking at the positives and expecting more.
Last year was a rebuilding year in the Chicago market, and sales of condos inched up, building momentum for some new product to be delivered this year. One project that was long on the market, 235 West Van Buren, sold the last of its 714 units last year. The 46-story building, which broke ground back in 2008, continued to sell throughout the economic downturn, with its last remaining units selling fast. The activity boded well for 2015.
In terms of new development, most of the condo units entering the market in 2015 are high-end, and since there are so few of them available, the impact they will have on prices and availability is still unclear. But industry experts say that lack of an abundance of new product, coupled with high-end inventory coming to market, should increase the confidence of buyers and developers.
"We had an overhang of supply that had been started during the boom in 2008-2010," says Gail Lissner, CRE, SRA, vice president of Appraisal Research Counselors in Chicago. "The market absorbed that inventory and has recovered in pricing. We're now starting to see condo development occurring again."
Players in the development that is going on in and around the city include CMK Development, Magellan Development Group, Sandz Development, JDL Development, and Belgravia Group. These firms are currently involved in smaller projects, although there is one exception. The first new high-rise condo building announced for Chicago since 2007 is expected to begin this year, and it's a joint venture between local and foreign interests.
The Wanda Vista, a $900 million, 88-story riverside tower planned for Lakeshore East, was designed by architect Jeanne Gang and was big news when it recently was announced. The 390- unit condo development is a joint venture planned by Chinese developer Wanda Group and Chicago-based Magellan Development. Wanda Vista should be a game-changer for the market, Lissner says. According to Crain's Chicago Business, the building is the largest condo project announced in the city since late 2007, when CMK announced its 714-unit building at 235 West Van Buren Street.
Market activity is building through other new projects coming to market. Related Midwest recently tapped New York architect Robert A. M. Stern to design a residential tower in Streeterville that will include 100 luxury condos and about 250 luxury rental apartments. Construction is expected to start this year.
A 62-unit townhouse project is planned for the South Loop by Sandz Development and Golub, and a 40-unit project by developer Sean Conlon is planned for River North. Also, a 33-unit project at 1546 North Clark also is planned by a group that includes Howard Weiner, according to Crain's Chicago.
The condos at Webster Square, which is the redevelopment of the former Lincoln Park Hospital that's being done by Sandz Development, are being marketed now by @ Properties. In Lincoln Park, condos are being offered at 2550 North Lakeview Avenue, in a building designed by architect Lucien Lagrange and which includes a 1.25-acre garden designed by noted landscape architect Thomas Balsey. The high-end property includes a sundeck and pool, a spa, a theater, a game room, a library/billiard room, a gym, a tot lot for kids, and even an outdoor play space for dogs.
That the ratio of new condo construction is more than 90 percent rental versus less than 10 percent condo illustrates a market rebuilding with rentals first, while allowing interest in (and prices for) condos to slowly get back on-track. Rentals have been very high, and condos are just coming back in a very small way right now, says Alan D. Lev, president of Chicago-based Belgravia Group, in Chicago. "You won't see any new 200-unit buildings anytime soon," he says. "That's a few years away."
A handful of neighborhoods are seeing significant development. The West Loop, River North and Lincoln Park all are doing well, in terms of new development. The West Loop, which is home to the Google campus, is seeing development in both rental and condo units. Units at CA3, which is done, and CA4, buildings that are part of the CA Condos development there, are being offered for sale now. Both properties are expected to sell fast.
"The West Loop has been particularly hot in rental and sales in the last year," says Andrew Marsh, director of listings/landlord services for Chicago-based firm The Apartment People. "The River North area, which is always hot, is seeing increases in values of 18 percent annually. The market right now is really focused on the rental end of things."
Legislative Impact, and Recovery
While the market is still finding its footing and is not booming again just yet, existing legislation and possible new government initiatives are impacting new residential development in Chicago. Some rehabilitation work on the Blue Line is helping, since the line is a direct artery to O'Hare Airport.
"Properties that are close to the El stations will always be in demand," Lissner says. "Anything being offered today is more upscale."
It's not all good news regarding government initiatives when it comes to the city's condo and HOA communities. There's at least one piece of proposed legislation on deck that the pros say could have a detrimental effect on growth in the market. Some feel that already required affordable housing mandates have had a negative impact on a market where profits can sometimes be thin, and making those requirements stricter will not help matters. Nonetheless, that is what city legislators are considering doing.
The city's Affordable Requirements Ordinance (ARO) mandates that 10 percent of units in a new or rezoned residential development of over 10 units must be affordable, or the developer must pay a $100,000 opt-out fine per unit; the money of which is donated to the city’s Affordable Housing Opportunity Fund. Now, proposed changes to the existing legislation could increase the percentage of required affordable units to 20 percent, while offering developers no cash opt-out of providing such units. Some industry pros say enacting such a law could have a major impact on the market. "We're watching that very closely, and we are very concerned about it," Lev says.
Garrison Benson, a real estate consultant and the CEO/president of Chicago-based broker Garrison Partners, says real estate professionals are paying attention to the efforts to alter the ordinance to require for more affordable housing per building. Across the board, they are concerned. "Changing that ordinance and making it more stringent will kill development," Benson says, noting that the market is still rebounding from a long lull and cannot afford that negative impact. "The new development that's occurring is all first ring stuff. When a market contracts, it contracts from the outside inward. As the market expands, it emerges from the inside, going outward."
But now that the economy is in nearly full recovery mode in other major markets such as New York, what can be said about the impact of the recession on development in Chicago and its closest suburbs? The refrain among industry players here seems to be “wait and see” and cross your fingers and wait a bit more, since the rebuilding is not quite done yet.
"The market is still rebounding," Lev says. "The rental market is hot but the condo market is still in the very early stages of recovery. The condo units being built are 2,000 square feet, 3-bedrooms or larger and higher end, ranging from $700,000 to $2 million."
Other, less tangible factors also are affecting the market. The comfort level of the typical buyer is not what it was years ago, Marsh says, but it is improving. And the improvement in buyer expectations is expected to continue. That resurgence is a gradual process which will potentially take several years more to fully appreciate. These days, it is a buyer's market and will continue to be so, at least into the near future.
"People feel greater confidence moving into a residential property in the city. The suburbs are a different matter—the less affluent communities were hit a lot harder," Marsh says. "The confidence level of the buyer is not what it was years ago."
And as for the deconversion of rental properties back to their original intended status as condo communities, while few rental properties are considering or slated for deconversion these days, that could change, Marsh says. "In roughly five to 10 years, that'll be the next phase," he says.
How long it will continue to be a bull market for development of rental properties, without being as bullish for condo development in Chicago is anyone's guess. But some experts point to demographic factors that could tip the scales towards a bull market. It all hinges on when the Millennials (a generation born between 1980-2000) convert from renters to buyers, says one pro. At its February show, the National Association of Home Builders (NAHB) predicts that 2016-2019 will be big conversion years.
"It's a misconception that Millennials are renters, not homeowners," Benson says. "As they get older and the economy improves, they'll buy homes. And older people from the Baby Boomer generation also will be moving more into the city and into condos, as they become empty-nesters or just want to downsize to an apartment from living in a house."
The consensus among many development and sales professionals in the Chicagoland area seems to be that recovery is proceeding, albeit slowly. If you're looking to buy a condo in the area, now's the time to look—inventory may be down, but the prices can't be beat, and they certainly won't last forever.
Jonathan Barnes is a freelance writer and a frequent contributor to The Chicagoland Cooperator.