Monday, December 01, 2008

FORECAST: CHICAGO CONDO MARKET WILL REBOUND WITHIN 18 MONTHS

With year’s end approaching, its time to look ahead to 2009 and beyond to search for some clarity about the future of Chicago’s struggling downtown condominium market.

Appraisal Research Counselors Ltd. reports that the downtown market accounted for a meager 161 condominium sales in the third quarter of 2008—the lowest total for any quarter since the end of 2001 when the market stalled because of the 9/11 terrorist attacks.

Sales in the third quarter ran an incredible 88 percent below the average quarterly sales volume, which has ranged between 667 and 2,113 units over the past decade, according to Gail Lissner, vice president of Appraisal Research, co-author of the “Downtown Chicago Residential Benchmark Report.”

The sales breakdown for the third quarter included 74 new-construction condominiums, 62 condo conversion units, 25 adaptive-reuse lofts and one lonely new townhome, the report noted. With numbers like that, more than one shocked developer is wondering: “Is this the end of the condo era in Chicago?”

Fear not. Lissner predicts the condo market will rebound, although it could take another 12 to 18 months.

“When the consumer regains confidence and market activity increases, buyers will be regretting that they had not purchased during the weaker market when the new construction options were numerous and the pricing was attractive,” Lissner said.

“Clearly the housing market is still unsettled,” said David Hanna, president of the Chicago Association of Realtors. “It is only natural at this time for all the participants to be looking to the new [President Obama] Administration to provide some direction for resolving the overriding economic issues we face.”

Existing home and condo in Chicago sales reached 5,958 units in the third quarter of 2008, compared with 7,769 units a year earlier, or a decline of 23.3 percent, reported the Illinois Association of Realtors. The median price slipped 4.5 percent to $289,400 from $302,900 a year earlier.

With the condo market in pause mode and hungry developers offering lucrative incentives, housing analysts say now may be a once-in-a-lifetime opportunity to buy.

“Nearly all developers will offer some sort of perk to entice a buyer to sign a contract, particularly if they have completed, unsold units,” Lissner said.

“With the consensus that price discounts are not good for the market, most developers are looking for more creative ways to offer incentives.” The most popular giveaways are free upgrades and assessments, or a deeded parking space, she said.

Where are the best incentive deals? Lissner said buyers should shop the buildings that now are being completed, where developers are going ahead and selecting unit finishes, often choosing upgraded appliances, cabinets, tile and fine hardwoods which will enhance the marketability of the unsold units.

“In addition, when developers anticipate that their unsold inventory will be competing with resales within the building, they typically decide to upgrade their remaining inventory so that the units are more marketable and desirable than the resale alternatives,” Lissner said.

Developers are also selectively discounting individual units, as buildings are nearing completion, Appraisal Research noted. “Loss leaders are being used, where developers may discount a few particular units,” Lissner said. “Once those units sell, a different group of units is selected, while maintaining price in all of the other units in the building.”

The Appraisal Research survey found that savvy developers who utilize price discounts, combined with aggressive marketing, can result in greater market share. “However, it does take a combination of both, as neither alone will be sufficient to generate market attention and increased sales velocity,” Lissner said.

Appraisal Research noted that more than 18,000 condo units were built or will be completed in the downtown market between 2006 and 2009. That’s an average of 4,500 units per year.

While these numbers are unprecedented in terms of units, Lissner predicted the market will quickly drop off in year 2010 when less than 500 condo units are expected to be completed. So, it is possible Chicago will go from a condo glut to a shortage within the next 18 months.

Because new-construction projects in the pipeline have up to a two-year life span from start to finish before deliveries start, analysts say the initial pick-up in activity may benefit the condominium conversion market, since conversions can occur quickly in response to renewed market interest.