Downtown Downturn

Loop Condo Market Dips 83% Since 2007

by Pamela Dittmer McKuen

A nervous real estate market has some of Chicago’s ritziest new condominium towers on edge. With the stream of buyers down to a trickle, lenders are increasingly tight-fisted, developers are scrambling for financing and contractors are looking for ways to keep busy.

“The greatest effect is on anyone who is not yet financed,” says Gail Lissner, vice president of Chicago-based Appraisal Research Counselors. “But everyone is having a hard time raising mezzanine debt, the layer between the construction loan and the equity in a project. That’s expensive money.”

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First-quarter 2008 sales of downtown, new construction condominiums dropped 83% from the previous year, according to Appraisal Research figures.

“It’s been really horrible,” Lissner adds. “Pricing has held its own, but the velocity is not there, which is making it much harder for projects to meet their presale requirements.”

Some developers, taking advantage of the weak dollar, have gone to the international marketplace for both capital and customers. Others have slowed their projects or put them on indefinite hold.

Work on the 89-story Waterview Tower and Shangri-La Hotel at 111 W. Wacker Drive slowed to a snail’s pace until the developer and contractor, Chicago-based Teng & Associates, landed funding from overseas, according to media reports.

Sales figures for the Santiago Calatrava-designed Chicago Spire—expected to be the nation’s tallest building at 150 stories—have not been released, leading industry watchers to wonder if there are any. In 2007, the developer said that the building would hold 1,200 condos ranting in size from 600 to 8,000 sq ft.

Mixed Market

The condo boom of recent years in Chicago isn’t exactly a bust.

Data from McGraw-Hill Construction, publisher of Midwest Construction,show that residential starts in the Chicago metropolitan region in 2007 were down 17%, to $9.1 billion, compared with the previous year.

At the April 28 ribbon-cutting ceremony of the 92-story Trump International Hotel & Tower Chicago, Donald Trump Sr. was upbeat. With 16 floors left to go, “we’re doing very well, about $600 million in sales,” he says. That number translates to roughly 75% of the project’s 486 residential condominiums and 339 hotel condominiums. Prices range from $580,000 to $9 million-plus.

Trump partly attributed his satisfying numbers to the building’s location on the Chicago River, 401 N. Wabash Ave. He also expressed doubts as to whether every luxury tower that has been announced will see completion.

“You don’t build until your financials are in order,” he says. “We built on old money.”

Trump is planning another Chicago project, a smaller one, although he declined to give details.

The Mandarin Oriental Chicago seems to be back on track after the owners took a break to shore up its finances. The 62-story building at 210 and 230 N. Stetson Ave. in the East Loop will have 252 hotel rooms, 103 hotel condominiums and 162 residential condominiums, priced from $600,000 to $21 million.

“We had to slow down because of the credit crunch, but we’re moving back into action this summer,” says developer Gerard Kenny, president of Canada’s Palladium Development, the developer of the Mandarin, and head of Wheeling-based Kenny Construction Co.

By early May, 55% of the units had been sold. “The activity we’re seeing is on the larger units,” says Kenny, who has not offered buyer incentives. “It helps to have a hotel, especially a Mandarin, because of the brand.” He projects completion in late 2009 or early 2010.

Though some utilities have been moved for the project, excavation has not started, he says. The contractor is the Chicago office of New York-based Bovis Lend Lease, and the architect is Chicago-based Solomon Cordwell Buenz.

About 90% of the 268-unit, 90-story Aqua in the East Loop has been sold, according to Chicago-based Magellan Development.

“Good projects that are either in great locations or aggressively priced are still happening,” says Michael Meagher, senior vice president of Chicago-based contractor James McHugh Construction Co., the contractor on Aqua. He adds that apartment complexes are “burgeoning.”

One lender also sees a mixed residential market in the Loop.

“We’re selectively continuing to look at new projects, especially if they are well capitalized, if the people have a lot of experience, if they have a structure with presales that appear to be viable,” says Larry Johnson, executive vice president of commercial real estate in Chicago of Dunn, N.C.-based New Century Bank.

(Editor’s Note: A version of this story appeared in Engineering News-Record, sister publication of Midwest Construction.)

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