Monday, March 03, 2008

FROZEN WITH FEAR,’DOWNTOWN CHICAGO CONDO SHOPPERS ARE WAITING

Like deer staring into your headlights on a lonely Wisconsin road, downtown Chicago condominium shoppers are frozen in time, waiting for the ultimate deal—a condo priced at rock bottom.

That dreary description accurately paraphrases the current state of Chicago’s new-construction condominium market, according to Appraisal Research Counselor’s latest Downtown Chicago Residential Benchmark Report.

“With so much uncertainty in the market, potential buyers are confused, cautious, and deferring purchase decisions,” noted Gail Lissner, vice president of Appraisal Research. “Sales traffic is down overall in the downtown market and conversions of traffic to sales also are down.”

Appraisal Research also noted that media reports of falling home prices nationally continue to hurt the level of confidence of buyers in the market.

“Frozen with fear, potential buyers are afraid of making a bad buying decision while at the same time wanting to purchase only when they are certain that prices have hit rock bottom,” Lissner observed.

Appraisal Research noted that this “uncertainty in the market” is continuing to affect sales despite the most recent Case-Shiller report which demonstrates the relative stability of home values in the Chicago market versus most of the other 20 markets which it tracks. Appraisal Research noted that many newly announced downtown condominium developments are not achieving the sales velocities seen in either 2005 or 2006. “Of the new construction condo projects which started marketing programs during 2007, only approximately 33 percent of the units were placed under contract by the end of the year,” Lissner said.

She noted that this is far below the 2005 record when 60 percent of new units were put under contract by the end of the year, or even in 2006 when 43 percent of the new units were under contract at the end of the year.

“No longer is it a quick a simple process to meet that typical 50-percent pre-sale requirement to break ground within less than one year,” Lissner said.

Meanwhile, the inventory of new condos being delivered downtown continues to grow each year. Appraisal Research reported that the total number of deliveries in the downtown market has been growing each year since 2004 when 2,500 new units were delivered. In 2007, 4,300 new units were delivered, and 2008 will be a record year for deliveries, with more than 5,800 units expected to deliver. And, nearly 5,000 are also expected to deliver in 2009.

Another headache is condominium lender requirements are becoming more stringent, according to Appraisal Research.

“Projects currently in their pre-construction marketing programs are finding a smaller pool of lenders interested in financing their projects,” Lissner said.“Equity requirements along with pre-sale requirements are reportedly increasing, as the mood in the lending community and their appetite for risk has undergone adjustments this year.”

To make matters worse, buyers currently are encountering more difficulty in securing financing despite low rates.

“However, developers continue to offer a wide range of mortgage programs, frequently through preferred lender programs,” Lissner said. “Some developers are also offering mortgage rate buy-downs to interest buyers.”

If there is some good news for the wide-eyed condo buyers, incentives are rampant in the market, whether advertised or point of purchase incentives or concessions.

“Nearly all developers will offer some sort of perk to get a buyer to sign a contract,” Lissner said. “With the consensus that price discounts are not good for the market, most developers are looking at more creative ways to offer incentives, with the most popular ones being free upgrades, free parking, and free assessments.”