Monday, March 09, 2009

DOWNTOWN CHICAGO CONDO MARKET RECOVERY STILL 12 TO 18 MONTHS AWAY

New and resale condominium inventories are swelling and the market remains in a tailspin, so downtown condo owners and developers will have to bite the bullet for another 12 to 18 months before a recovery starts.

That chilly prediction comes from Appraisal Research Counselor’s latest edition of the “Downtown Chicago Residential Benchmark Report,” which noted that only 542 new-construction condos were sold in central Chicago in all of 2008.

Between 2006 and 2009 more than 18,000 downtown condo units were delivered, or are nearing completion, for an average production of 4,500 units per year, Appraisal Research noted. However, with developers struggling to obtain construction financing only 620 condo units are in the pipeline and scheduled to be completed in 2010.

“The financial markets are in turmoil and buyers are sitting on the sidelines,” said Gail Lissner, vice president of Appraisal Research. “With so much uncertainty in the financial and real estate markets, potential buyers are confused, cautious, and deferring purchase decisions.”

Prospective purchaser traffic is down overall and conversion ratios—the turning of lookers into buyers—remain at low levels, the report said. “Marketing agents report that the bargain-hunters are out doing comparison shopping, and looking for significant discounts,” Lissner said. “However, few transactions are occurring since most developers are not willing or able to greatly discount their units.”

When the market demand eventually recovers in 2010, Appraisal Research predicts there will be no new condominiums being completed and there will be pent-up demand. It is likely that prices will start to rebound as inventory is sold.

“The initial pick-up in activity may benefit the condominium conversion market, since conversions can occur quickly in response to renewed market interest,” Lissner said. “And with the large amount of new apartment development which has been occurring since 2002, this may be a very welcome exit strategy for the owners of these recently constructed rental properties.” Any college student studying supply and demand in Economics 101 knows what this means. Lenders currently are offering home loans at 5 percent or less—the lowest mortgage rates in more than 40 years—to qualified borrowers, so now may be a once-in-a-lifetime chance to purchase at a reduced price and pocket substantial incentives, experts say.

“Incentives continue to be the norm in the market, whether advertised or point of purchase concessions,” Lissner said. “Nearly all developers will offer some sort of perk to entice a buyer to sign a contract, particularly if the unit is already completed.”

And, the “list price” is where the conversation now begins between buyer and seller, much like the resale market, she said.

Appraisal Research said there are a multitude of incentives being offered in the market. As buildings are being completed, developers are going ahead and selecting unit finishes, often choosing upgraded finishes—fancy granite, upscale appliances and fine hardwood floors—which will enhance the marketability of the unsold units.

“These unit selections are critical to the successful sellout of the building. Poor tile and flooring choices have greatly hindered the marketing of the final units,” Lissner said.

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 will be more marketable and desirable than the resale alternatives, she said.

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

Developers are finding that price discounts, combined with aggressive marketing, can result in greater market share. However, it does take a combination of both to increase sales velocity, Appraisal Research advised.

“For developers with unsold inventory, pricing adjustments of 10 percent do not draw the attention of the market,” Lissner said. “Thus, we are seeing more significant discount strategies being employed by a few developers who are under pressure to sellout inventory.”

Developers who are saddled with a few remaining units also are turning to auctions to close out sales.