An Unpopular Opinion?

Many Chicagoans are still reeling with disappointment over Chicago?s loss of the 2016 Olympics. But the impact on the near south and South Loop real estate markets may have been less than positive after the flame was extinguished.

While 2016 is a long way off in real estate time, the recent market crash has taught us all to plan further into the future. I have quietly held an unpopular opinion regarding the long term impact of the Olympics on our city. Olympic-based funding and other investments would certainly have fueled infrastructure, commercial, and residential development leading up to and during the events, but the aftermath was a subject rarely discussed in public forums.

A healthy, sustainable real estate market requires a balance between supply and demand. Supply includes commercial and residential units available for sale and rent, as well as funding required to buy or lease these properties. This supply would have undoubtedly increased markedly with the increase in demand prior to and during the events. Olympic-related jobs would have provided income for purchase and rent of these properties, and commercial enterprises would have set up shop to serve workers and visitors at a record pace. Following the closing ceremony, however, visitors return home, jobs end, and demand would have dropped off drastically.

This imbalance would have had a significant negative impact on existing property in and around the Olympic venues. Empty commercial space does not indicate a healthy neighborhood to potential buyers, and I wholeheartedly believe that prices of residential properties in both near south and South Loop neighborhoods would have taken a serious hit in pricing. As we have recently seen, high levels of inventory take years to absorb. Nothing good comes of an oversupply situation.  Post-Olympic buyers would not have benefited either – there wouldn’t be enough of them to take advantage of the situation.

The lessons learned in the past several years should have influenced how we understand supply and demand within the marketplace.  Healthy markets result from slow, consistent activity, not huge, one-time events. I am in this market for the long haul, and still hold my unpopular opinion.

We would like to thank jrjenks for sharing today?s photo via the Creative Commons License.

15 October 2009 ? Chicago’s much challenged lakefront Spire project is facing yet another hurdle. The owner of NBC tower, where Shelbourne Development Group occupies the entire 18th floor in a $10 million sales center, is threatening eviction. The developer hasn’t paid rent since April 1 and owes more than $300,000. The 2000-foot skyscraper project site sits along the north bank of the Chicago River, just west of Lake Shore Drive. The NBC Tower owner joins a growing group of contractors allegedly owed money by the developer. Santiago Calatrava, the project’s architect, also claims that he is owed $11.34 million. A Shelbourne spokesperson claims the eviction threat is the result of a simple landlord-tenant dispute. But sources speculate that Shelbourne is trying to force a rent reduction, which currently stands at $488,714/yr through 2010.

14 August 2009 ? The likely demise of the Spire along with other new construction buildings now being marketed for rent instead of sale continues to contribute to the reduction of Chicago?s housing inventory. Another nail in the Spire?s coffin is the lawsuit filed Thursday by Bank of America against the Shelbourne Development Group for default on loans on the 1194 unit development. This comes on top of substantial liens placed on the “Lien – ing Tower of Chicago.” Peter Holstein, developer of Parkside of Old Town announced he is going forward on construction of rental units in place of the planned condominiums on the land where Cabrini Green low income housing once stood. Centrum development also is converting the Lofts at Roosevelt Collection from condos to rentals, canceling all contracts for sale. This is the third major project the developer has terminated sales on.

29 July 2009 ? PrivateBank & Trust Co. has filed to foreclose on Pearson on the Park (222 E. Pearson St.) a 219-unit condo conversion that as of late has been struggling to sell its remaining twenty percent of units. According to records found in MLS (Multiple Listing Service), three developer units have sold since the beginning of the year. In order to counter this significant slow-down in sales, the developer, Ganesan Visvabharathy, has reduced prices in the past few months by an average of 13%. According to records in the MLS, it looks like that has resulted in one unit going under contract.

According to today?s Crains Chicago Business: The developer paid $46.6 million for the apartment building in July 2005. He borrowed $52.5 million from Hypo Real Estate Capital Corp. and $7.5 million from American Mortgage Acceptance Corp. to finance the purchase and convert the apartments to condos.

The loans came due in August of 2007, and he refinanced the development with a new $17 million loan from PrivateBank. To secure the loan, the developer, pledged 55 acres of undeveloped land in downstate Mount Vernon and signed a personal guarantee. The loan originally matured last November but was extended to March. The developer asked for another extension, to March 2010, however, the bank just wants its money back.

Less South Loop Construction Means Reduced Supply...Eventually

I think there is light at the end of the tunnel. We can certainly see it in our showing activity and in the market. It’s still not an easy market or necessarily a fair market for all involved, but it is changing for the better. Statistics from Illinois Association of Realtors (IAR) definitely back up the these feelings.

Chicago-area sales in May had the smallest drop so far this year at -18.7%. 5,634 single-family homes and condominiums were sold in May in the nine-county Chicago region, compared with 4,747 in April 2008, the IAR said. The association is reporting the following Year-on-Year Declines:

Monthly Year-on-Year Comparison of Home Sales (Single-Family and Condo) in the Nine-County Chicago Area:

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Month-on Month Home Sales Up In Chicago Area

Month-on-month total home sales (which include both single-family and condominiums) were up 19.3% in May 2009 with 8,945 homes sold compared to 7,501 homes sold in April 2009. This is showing the market picking up some speed and buyers feeling more confident in purchasing. Now take this compared to a year ago, when month-on-month home sales were down 21.0% from May 2008 with a home sales number of 11,326 for 2007. We are not back to 2008 numbers yet, but are working on it. The activity is growing and there is an air of growing confidence as well. This is what the market needs right now. There is still a plethora of inventory available, but I think by fall it will start to thin out and come back to more a stable market. Everyone is looking for a good deal right now. Prices are still dropping to meet consumer demands, but are stabilizing just a bit and not falling so drastically. If you have an aggressively priced listing in this market, odds are it will sell.

“We are seeing more activity in the housing market with increased listings, more activity at showings, a surge in interest from first-time buyers as well as some improvement in time on market,” said REALTOR® Pat Callan, president of the Illinois Association of REALTORS®. “First-time home buyers who want to take advantage of the $8,000 tax credit need to be aware that the purchase has to close no later than November 30, 2009 given the December 1 cut-off under current guidelines by the federal government. That means being under contract by early fall.”

Dr. Geoffery J.D. Hewings, director of the Regional Economics Applications Laboratory (REAL) of the University of Illinois said, “Month-to-month sales have recorded increases for the months of March, April and May and this is expected to continue into June. The modest recovery in housing prices and sales has been constrained by the job losses in the economy as a whole. A sustained housing recovery is still not within sight and much will depend on the degree to which federal stimulus funds and the resolution of the state?s budget generate a much needed boost to employment.”

Chicago Home Sales Up 11.5% in May

In the city of Chicago, month-on-month May total home sales (single-family and condominiums) were up 11.5 percent to 1,537 sales compared to April 2009 sales of 1,378; year-on-year sales were down 27.5 percent from 2,119 homes sold in May 2008.

“We?re encouraged to see the bank-owned inventory moving in the marketplace, indicating buyers are finding good bargains, especially in single family homes and flats,” said David Hanna, president of the Chicago Association of REALTORS®. “The city of Chicago condominium sales numbers continue to reflect a critical need for governmental agencies to review the growing disparity in the ability to finance a condominium purchase in the city. This affordable housing will become unaffordable and unattainable to many qualified first-time home buyers in the city of Chicago unless existing federal guidelines, which do not take into account nuances of the local market, are modified.”

Buyers Will Come Out in the Fall

To David Hanna’s quote I say, I think that the feds are addressing this…not quickly enough, but it is being addressed. The FHA guidelines that make it nearly impossible to get financing on a condo in the city are being removed as of October 2009. Some of these guidelines include right-of-first-refusal, liens against the association, and association controlled by the owners (not the developer). Come fall I think we will begin to see a larger number of FHA condo buyers enter the market and also use the $8,000 first-time home buyer tax credit. Watch out lenders…take your vacations now!

We’d like to thank Payton Chung for sharing today’s photo via the Creative Commons License.

Two reports yesterday seem to cast a shadow over recent good news in closings.

Home Builders Not Predicting Increased Business

Hanging on

The National Association of Home Builders (NAHB) reported yesterday that it’s nation-wide monthly sentiment index dropped by a point to 15. This is down from a score of 18 one year ago and an all-time high posted four years ago of 72. NAHB doesn’t slice its data very thinly, so the only numbers we have for Chicago are the Midwest area, which actually increased from 14 to 15.

It’s important to note exactly what this survey is. According to NAHB’s web site, the survey is,

Derived from a monthly survey that NAHB has been conducting for more than 20 years, the NAHB/Wells Fargo HMI gauges builder perceptions of current single-family home sales and sales expectations for the next six months as ?good,? ?fair? or ?poor.? The survey also asks builders to rate traffic of prospective buyers as ?high to very high,? ?average? or ?low to very low.? Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor.

Chicago’s Vacancy Rates at Historic Highs

The Census Bureau is reporting that vacancies are on the rise in Chicago and are actually the highest ever since they began collecting this data in 1996. In the quarterly analysis released yesterday, the vacancy rate in Chicago is now at 3.8%, which is a 41% increase over a year ago, when the rate was 2.7%. It is also up 3% from 3.7% in the fourth quarter of 2008.

Crain’s is reporting that Neighborhood Housing Services of Chicago (NHS) has data that shows South Side neighborhoods are being hit the hardest. Examples cited are Englewood has the highest vacancy rate in Chicago of 16.1% and North Lawndale is standing at 11.8% vacant.

There are many factors leading to this increase, among them are all the foreclosures due to people using sub-prime loans they could not afford, foreclosures due to more and more people losing their jobs as unemployment continues to rise throughout the country, and the huge numbers of newly developed homes that have come on the market in the past two years not selling.

Hope Pours In When Positive Change Occurs

At a dinner On May 21, the Chicago Association of Realtors presented the 2009 Good Neighbor Award winners. As I saw the recipients walk to the podium to receive their awards, the words of the evening?s emcee kept running through my head.

In his remarks, Brian Bernardoni the Government Affairs Director for the Association said, “There is a yin and yang; there is a balance the concepts of HOPE and CHANGE present ? they need to work together. Without the inspiration of HOPE people will not find resources for CHANGE. And without prospects of CHANGE there is no HOPE. Developers and REALTORS® in the room know these words all too well.”

Hope and Change

They are words we heard through the presidential election as a Chicagoan worked to create hope that change will happen. Locally those words define the work, dedication and partnerships of the developers, banks, Realtors®, and in many cases the City of Chicago through its Department of Community Development. The award winning projects where scattered throughout Chicago, from North to South East to West. They were residential, commercial and mixed use renovations and new construction. Working together their work filled vacant lots, abandoned buildings, and in some cases the starting point for hope there will be change for an entire community.

Affordable Housing Without Displacement

This year?s Bruce Abrams Award winner?the program?s highest honor?was awarded to Benjamin Van Horne of Greenline Development for the Greenline Condos in the Woodlawn Neighborhood. With this 37 unit project, Mr. Van Horne achieved his goal of quality affordable housing without displacement. He was able to do this in cooperation with the City of Chicago?s Department of Community Development.

Saving a Historically Significant Building

Another winner that stuck out in my mind was one of a colleague of mine at Sudler Sotheby?s International Realty, Ron Meadows. In the Lincoln Square neighborhood where even in this current real estate market, developers are still tearing down and building new condos and single family homes, Ron saved a building built in 1893 with historical significance from a developer who was going to tear it down. He took this structure, known as the Alley House of Lincoln Square, did a total renovation and is maintaining it as a rental property in an area where there is very little rental inventory left.

Every award recipient has their own passionate story about their project. They all faced challenges. But they saw through them?all to make a difference. Project by project, partnerships bring about change throughout the entire city and hope in many neighborhoods where it did not exist before.

Mr. Bernardoni went on to say ?When you INSPIRE HOPE and bring about CHANGE ? you build this city. You are all winners and great Chicagoans. Thanks for doing your part.?

We would like to thank Kwerfeldein for kindly sharing his photo entitled Hope and Pain via the Creative Commons License.

Sunrise On New Buildings in Chicago

There’s a lot to love about a new building: the smell of fresh paint, the gleam of new stainless steel appliances, the anticipation of waiting for the cardboard protecting the walls of the elevator to be taken down so you can finally see what’s behind it, the excitement of people wearing hardhats carrying blueprints around the unfinished lobby. It’s exactly like an adult version of waking up on Christmas morning to a mound of presents, but then mom says you have to eat breakfast and wait for Aunt Flo to arrive before you can open them.

But, as many of the people who have bought new construction condos over the years are eager to tell you, there are a lot of pairs of underwear waiting for you under all that wrapping paper. Sure, there will be the occasional Lego Death Star or Cuddle Me Elmo, but red checked flannel shirts and itchy hand-knitted scarves will be in the mix as well.

Here are some of the basics that buyers of new condos, be they in high rises or three flats, need to know:

1. How the Turn Over Works

When looking at a new building, you need to understand exactly how the developer is going to turn the building over to the association. Huh? Fair question?let me explain. As the condo building is being built and the condos are being sold, the developer’s company owns the building. At some point, when a specific percentage or number of the units has been sold, the responsibility for the building is turned over to condo association. At that point, the developer simply owns the remaining units and is no longer the owner of the entire building. Undoubtedly the developer will have more units, and therefore more votes, than anyone else in the association, but he/she is still just a unit owner after the building has been turned over. All of this is spelled out in great detail in the mountain of paperwork that comes with buying a condo. This mountain of paper that used to be a pine tree is usually divided up into two documents: the condominium declarations and the condominium bylaws.

It’s important for you to know how many of the units have been sold and how many more need to be sold before the turnover happens. Why is this important? Read on.

2. The Assessments Will Go Up After The Turn Over

Going Up!

While the developer is trying to build and sell the condos, he/she/it owns the building. They can say the assessments are whatever they want. They are supposed to reflect what the developer believes the operating expenses will be after the turn over, but somehow they often seem to under budget…often by a lot. When the turnover takes place, the condo board then starts getting the bills instead of the developer: electric, gas, insurance, maintenance (yes, it starts right away), staff for large buildings, and on and on and on. The developer is supposed to have built up some money for the association to begin paying these bills, and of course there is money coming in from the assessments. But, is it enough? Not usually.

It’s simple…the developer wants to make the building attractive, so they keep the price of the assessments low. However, when the board has to begin paying the bills, they may find that the money coming in isn’t going to cover the money going out. And that’s when you see your assessments go up.

Take my good friend, Kelly. She bought a gorgeous unit in the south loop with views of the lake, the skyline, and Veteran’s Stadium. She was in heaven. Then the board took over the building and they quickly realized that they needed to nearly triple the assessments to get out of the hole they were in. After four months of triple, they were able to reduce the assessments to double of what they were before the turn over.

This doesn’t happen every time, and the assessments aren’t always going to double, but your agent and your attorney better be digging into the numbers to give you an idea of what to expect after the turn over.

3. There Will Be Problems With the Building

You’re buying new construction. Everything is new, right? Everything should work, right? Agreed, but that’s not the real world. In the real world, there are manufacturing defects in heaters, windows, and tile glue that can’t be seen when they are installed. All of these problems will usually present themselves sooner rather than later. Be prepared that your brand new dishwasher’s water pump may spring a leak after it’s fifth load. That’s why it’s under warranty. Be prepared for these types of things to happen. The developer didn’t do it on purpose, and they’re bound to happen.

Equally importantly, the building is going to settle. Gravity works. And, like rust, it never sleeps. Walls will crack. Windows will need caulk to fix newly appearing gaps. Cupboard doors will need to be adjusted. Unless you can get a reprieve from Sir Isaac and his pesky laws, you have to expect that you will have issues regarding settling for a year or two…maybe more. Complaining to the board will do no good (unless one of them knows Sir Isacc). This is something you have to expect.

4. The Developer May Not Be as Responsive as You’d Like

The cheerful sales agent working for the developer isn’t going to come out and tell you that the developer will have started a second or third building by the time you move in. Many of the crew that are working on your building will be moving on to the other buildings. Normally the developers will get everything fixed, but it may not happen as quickly as you’d expect. Make sure to talk about this with sales agent and the developer. What are their policies? How long will the developer take care of small problems? I have seen developers who have fixed problems long after their legal liability expired (see below). They were fixing problems to make sure their reputation was polished to a high shine. These are the people you want to buy from.

5. Usually a Company Built the Building

A company built the building you’re going to buy into, not a person. And, that company will likely be dissolved as soon as possible. Most developers create companies for every building they make: “123 N Main Development LLC.” As soon as the company is no longer legally responsible for the building (one year after turning it over to the association) they will undoubtedly fold the company. This means if there are problems, the entity that built the building no longer exists and the association is on its own. The developer isn’t 100% off the hook at this point however; there is no statute of limitations on negligence. But for cracks in the walls, broken tile, and under lit hallways…the developer is essentially gone.

You and the association need to make sure you know exactly what day the developer can close up shop. You need to make sure that you have all of your issues on the table by then.

Get a Good Team to Help You

This post is not to try to dissuade you from buying new construction. It’s simply to make sure you, dear buyer, go into your new home with your eyes wide open. And how best to do that? By having a bulldog of a buyers’ agent working for you. You need to have someone who has a lot of experience and knows the ropes. The agent working for you should know all of the information above and be able to dig deep into the building to find out as much of what you face in the future as is possible.

You need to make sure your attorney is earning his/her money and looking over the condo declarations and bylaws very, very carefully and alerting you to potential issues. You should have an experienced inspector look over the unit very carefully. They may be able to hear the bad water pump in the dishwasher, giving you the chance to make sure they’re taken care of before you move in.

Mostly, you need to know that your gorgeous new home will have issues, but that’s life isn’t it? All homes have problems. (Want to see my To Do list??) The important thing is that you know as much about what is coming down the path as is possible. It will make enjoying that view and gorgeous kitchen all the better.

Photos by Alan Levin & Iris Shreve Garrot

Rendering of 155 N. Wacker Drive Being Developed by The John Buck Co.

CoStar is reporting that Ernst & Young have signed a 10-year lease for 203,618 square feet at The John Buck Co.’s new office development at 155 N. Wacker Drive. According to The John Buck Co’s web site, the 46 story, 1.13 million-square-foot office tower is scheduled to be completed in July of 2009. Costar is reporting that asking rent in the building is $33 per square foot.

This creates a bit of a problem for The Sears Tower, where Ernst & Young are currently their largest tenant, leasing almost 387,000 square feet.

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Simple supply and demand are having a strong impact in the South Loop.

A quick search in MRED for condos in the South Loop (I defined it as Congress to 18th, Dan Ryan to Lake Michigan) shows a huge number of condos on the market. If we look under the new, stricter maximum HUD loan of $380,000 we find:

• 391 active with an average price of $289,449, median price of $299,000.
• 144 pending* averaging $305,913 with a median price of $312,900.

For jumbo loans (over $380,ooo), the numbers are:

• 414 active The top price being asked is $3.2 million; the average is skewed by some very high end properties at $695,139; the median is a much more telling number at $539,500.
• 186 pending* The top pending price is $2.5 million with an average of $695,139 and a median of $539,500

Clouds Over South Michigan

I was surprised at the number of pending sales. (Pending is defined as when all contingencies?such as obtaining financing and inspecting the property?to the purchase have been met and there is nothing in the way of the closing). However, as many of us have seen, having a contingency-free deal no longer means the transaction will close. More and more often the deals don’t close due to financing “disappearing” or the buyers just not willing to go through with the deal and willing to lose their earnest money.

Despite all of these numbers, Appraisal Research Counselors is reporting that developers are planning to complete 2,147 more condos in the South Loop, which is 66% MORE than were completed in 2008.

But where is all of this leading us? Well, Crain’s Chicago Business is reporting that Miami developer, Lennar Corp., has sold only 43% of the condos in Library Tower, a 184-unit project at 520 S. State St.. This means that Lennar will likely not be able to pay off their construction loan that is due Jan. 11. The ramifications are huge in this type of situation, especially for those who have closed on a unit in the building and had planned to live in it.

So, where can we see things going in the South Loop? It’s pretty clear that we’re going to see a lot of bankruptcies, longer marketing times, and most importantly, much lower prices.

*Be aware that, amazingly and annoyingly, real estate agents very often do not understand what pending means and label their deals incorrectly as pending when they should be contingent.