Monday, June 15, 2009

OUTLOOK 2010: OPTIMISM IN CHICAGO CONDO MARKET DESPITE SLUMP

With the downtown Chicago condominium market standing at virtual ground zero in mid-2009, some real estate analysts believe there are reasons for optimism looking ahead to 2010.

“Overall, there are some outstanding buying opportunities in the marketplace which should spur sales,” predicted Gail Lissner, vice president of Appraisal Research Counselors, Ltd.

“We see a general improvement in the overall economic climate, and the new development market will be poised to regain momentum in 2010, albeit at a more deliberate pace,” Lissner noted in a new forecast of the Downtown Chicago Residential Benchmark Report.

The report cited the following reasons for optimism in the marketplace:

• Unsold inventory levels have peaked and will begin to decrease because new units are not being proposed for development.

• Despite a recent uptick, interest rates are at extremely low levels, increasing the affordability aspect.

• The Obama Administration appears very determined to boost demand for housing with its $8,000 tax credit for first-time buyers.

• Since so many people have had their future moves on hold due to the weakness in the market, there will naturally be some pent-up demand which will be evident when the market recovers.

• Only 600 units are projected for completion in 2010; this will be a welcome relief after the 18,000 units which have been delivered over the four year period extending from 2006 to 2009.

Appraisal Research reported that 2,250 units of unsold condominium inventory currently are under construction.

“Our current estimates for 2009 indicate that approximately 4,700 units are being completed and ready for occupancy during the year, with 58 percent of these units already under contract,” Lissner said.

Very little construction activity is expected to be completed in 2010, with only 620 units currently under construction and slated for delivery, Appraisal Research reported. Only one building is projected for completion in 2011.

“Developers who are determined to move unsold inventory are finding that price reductions in the vicinity of 20 percent tend to garner strong interest,” Lissner said.

Appraisal Research reported that the first-time buyer market currently appears to be the strongest segment of the downtown condo market.

“Several factors come into play including the $8,000 first-time buyer tax credit, the availability of FHA-financing with 3.5 percent down, the freedom from having to sell an existing residence, and the large amount of inventory which is priced for first-time buyers at $250 to $350 per square foot,” Lissner said.

On a resale basis, brokers are also reporting the best velocity for units priced under $300,000, she said. “Thus, for first-time buyers who are still employed and feel confident about their jobs, these are very attractive market conditions,” Lissner said.

Appraisal Research noted that FHA financing is making a comeback and is providing mortgages for buyers who otherwise would not be able to obtain financing in the current market.

“It has become increasingly important for developments to get Federal Housing Administration-insured loan approval, as this provides opportunities to buyers being able to purchase with only 3.5 percent down payments,” Lissner explained.

“We are also seeing more developers offer special financing packages,” she said. For example, American Invsco is offering a 2.5 percent interest-only loan for 10 years for buyers at 200 North Dearborn, a Loop condominium conversion, and another South Loop project is offering a graduated rate buy-down program for three years.

“We expect to see more creative financing programs being offered by developers as they seek ways to help buyers secure financing and bridge the down payment gap,” Lissner predicted.