New-home sales slowed slightly but still hit record levels in 2006
Despite talk of a housing bubble, the downtown Chicago residential real estate market performed rather well in 2006. You might not guess it from listening to national media reports on the real estate market, but sales at new developments in the center of Chicago approached record levels last year.
Of course, 2006 did not match the unprecedented velocities of 2005, but developers sold about 4,700 new townhouses, and new and adaptive reuse condos downtown last year, a drop of less than 10 percent from the 5,200 units sold in 2005. These figures do not include condo conversion units.
Pricing at new developments continued to inch upward and sales continued to occur at a steady pace, allowing the downtown market to avoid the potential “bust” some had predicted. There was no “bubble” in this market during 2006 – and it’s not likely that one is on the horizon.
In fact, 2006 was a banner year for development. More than 7,100 new-construction and adaptive reuse condos started marketing programs in downtown Chicago in 2006, which exceeded any year in recent memory.
Around half of this new residential development is taking place in the South Loop, which is undergoing a dynamic transformation. Copious construction cranes and a forest of new high-rises attest to the growth of new housing here, but the neighborhood also is experiencing the development of major retail along Roosevelt Road as well as smaller, locally-owned retail and service businesses throughout the neighborhood.
The growth of retail in the South Loop marks an important milestone in the neighborhood, where commercial development has lagged explosive residential growth.
Development in the South Loop and throughout the downtown market is dominated by new construction. Only one downtown rental building, Century Tower, began the conversion to condominium ownership during 2006. With little competition and very affordable pricing, this 293-unit project at 182 W. Lake St. sold 90 percent of its units during its first month.
Rather than beginning new conversions, builders in this niche spent 2006 selling units in the record number of condo conversions they started during 2005. Part of the reason for the lack of new conversions last year was the fact that owners put very few rental buildings up for sale. Given the state of the rental market, that’s understandable. Downtown rents continued to climb in ’06, with overall occupancy rates averaging more than 95 percent.
Speculators also seem to be sitting on the sidelines judging from sales patterns at the newest projects. Some marketing agents and developers still have loyal followings of speculators / investors, but the herd mentality that brought the initial wave of them to the condo market apparently has diminished.
The number of new-construction projects opening sales, however, remains quite high. Consider this level of activity against the backdrop of the more moderate sales pace of 2006, and it’s easy to see why competition between new projects has intensified.
The newest developments are now offering a wider array of amenities and finishes to compete. Resales tend to be inferior to this enhanced product and offer a lower-priced alternative.
A recent New York Times article noted one part of this trend, labeling condo projects with large spa components “spadominiums.” The spa trend has grown popular in Chicago too, with developments such as the new Canyon Ranch putting a long list of spa amenities, services and experts (from nutritionists to exercise physiologists) at the beck and call of residents.
And these days you don’t have to pay $800 a square foot to live in a spa building. Spas are being incorporated into projects at a variety of price levels. Developers at these buildings aren’t just selling condos; they’re selling a “lifestyle” by combining a large spa component with social areas for residents and other creative features.
Development of these and other projects will continue at a brisk pace in 2007.Â The pipeline of new projects being actively proposed by developers totals more than 10,000 potential units, though it is certain that not all of these projects will make it to market in 2007. The projects that do come to market will represent a wide variety of price points to maximize sales in what promises to be a highly competitive year.
Gail Lissner, CRE, SRA, is co-author of Appraisal Research Counselors’ quarterly Downtown Chicago Residential Benchmark Report. This in-depth analysis of the downtown Chicago housing market tracks development activity and helps people investing in residential real estate make informed decisions.