After almost coming to a halt after the housing crisis, new condo construction is picking up in downtown Chicago and is likely to continue, according to an Appraisal Research Counselors report.
During the second quarter of this year, there were 802 new units available for sale, the report said. Yet, while starting to gain traction, condo development remains minimal compared with the continuing surge in rental apartment construction.
During the last couple of years, construction of condos and townhouses has almost doubled since the slow years between 2010 and 2014, with about 287 new units coming onto the market annually since 2015. That's far below the 2005-2009 period when more than 3,200 condos and town homes became available in the market annually, and it's also dwarfed by the rental surge. During the last couple of years, more than 3,700 new rental units a year have been coming onto the market.
Both rentals and condos downtown are tapping into an affluent market, but there is a major difference between them, said Gail Lissner, vice president of Appraisal Research Counselors.
The trend has been to build smaller apartment units so that affluent downtown professionals could afford studios and one-bedrooms with rents of $3.01 a square foot. But the newest condos are much larger than they have been in the past and are designed for an ultraluxury market, Lissner said. Since 2004, the average condo being built has grown from about 1,100 square feet to 2,500, and typically it contains three bedrooms or three bedrooms and a den, Lissner said.
About 86 percent of new downtown condos are priced at over $700 a square foot and 39 percent are over $1,000 a square foot, according to the report.
"There is a great potential for demand at lower price points," said the report. Yet, "developers are building for the well-heeled," Lissner said. "They have struggled to figure out how to deliver this lower-priced product and still generate a reasonable profit."
The expensive condos are "marketable to a rather thin segment of affluent buyers," said the report.
Lower-priced condos are being built in neighborhoods such as Wicker Park and Ukrainian Village, Lissner said. Caden James in River West also began a marketing program recently with units priced at $430 a square foot, yet at an average size of almost 1,850 square feet, they remain pricier than the more affordable units built for first-time homebuyers before the housing crash.
There is a nascent trend of turning rented condos back into units for sale. After the housing crash, when new condos could not be sold, several condo building developers gave up on selling the units and instead turned them into rentals. Now some developers have stopped renewing leases and are initiating sales programs.
The practice started in 2014 with The Guild at 1555 S. Wabash. The 14-story, 176-unit condo structure had the unfortunate timing of being completed in 2009, just as the housing bust was building. Then, there were only 35 buyers. But now, in a stronger market for condos, the developer halted leasing and pursued sales — and the project sold out during the first quarter of this year. Average units are 1,007 square feet and priced in the mid-$300,000s.
In July, the average condo sold in Chicago went for $325,000, about 1.6 percent higher than the previous year, according to Illinois Realtors. The association contends that sales of both condos and single-family houses have been stunted because there is so little supply on the market as existing owners stay put rather than move.
In the Gold Coast, 2 West Delaware was among the new condo buildings that switched to renting after the financial crisis. Now the 198-unit building, which formerly was called Walton on the Park, is being updated and units are being marketed to affluent buyers at prices comparable to new construction, said the Appraisal Research Counselors report.
Appraisal Research Counselors analyzed average prices for 65 of the largest and most prominent condo buildings downtown and found prices in the first half of 2017 about 4.6 percent above the peak price in 2008 and 28 percent above the worst point in the housing decline in early 2012. At that time, condos were selling for an average of $338 a square foot compared with $433 a square foot during the first half of this year.
Sales volume of condos in 2016 was up over 50 percent from the low point in 2011, but declined almost 5 percent in both the first and second quarters of this year.
The report asserts that developers in the near future will be broadening the type and pricing of condos they build, but that tough lending standards, escalating construction costs and the city's affordable housing ordinance — which requires new buildings to include some affordable units — continue to provide hurdles.
Currently, the two largest new condo projects under construction downtown, the 406-condo unit Vista Tower, and the 69-condo unit One Bennett Park, are aiming at the ultraluxury market. For example, some units in the Vista building are priced in the $8 million to $10 million range. The building has sold about a third of the units and is expected to open in 2020.