By Michelle Jarboe

The Plain Dealer

June 10, 2017

CLEVELAND, Ohio – After years of behind-the-scenes planning, Playhouse Square Foundation is getting ready to stage its biggest real estate act: Building a 34-story apartment tower at the edge of downtown Cleveland’s theater district.

The nonprofit organization will own the project, a $135 million investment comprised of a 319-unit rental building and an adjacent, 550-space parking garage at East 17th Street and Euclid Avenue. Hines, a global real estate firm, will serve as the development manager, shepherding the project without holding a stake in it.

Playhouse Square’s decision to push forward on a long-held development dream comes during a rental renaissance for Cleveland, which is seeing proposals for new construction pick up as the supply of potential conversion projects – older buildings primed for residential makeovers – thins.

An apartment tower called One University Circle is being built on the city’s east side, and a high-rise called the Beacon is earmarked to rise above a parking garage at 515 Euclid Ave. A handful of developers are trying to stretch Cleveland’s skyline, while others are tying up neighborhood sites for smaller rental deals.

Yet economists across the country are asking how long the rental boom will last. Some markets are showing signs of slowing. And lenders are tempering their approach to apartments, making financing tougher to find.

Playhouse Square executives aren’t worried. They aim to start construction on their tower by the end of the year and open the building by early 2020.

“We have vetted this pretty well,” said Art Falco, chief executive officer for the performing arts district, which owns more than 1 million square feet of real estate and manages a comparable amount of space for other property owners.

“We have a database of about 800,000 people that come to Playhouse Square,” Falco said. “So we have great comfort that a small percentage of those will want to live here.”

Plans for the building show a slim, glassy tower at the southwest corner of East 17th and Euclid, with a parking garage just to the west, next to the Hanna Building.

The site, slightly over an acre, is a parking lot. Playhouse Square has owned most of the property since 1999 and acquired the last piece in 2015.

The nonprofit is putting that land into the apartment deal as equity, along with a little more than $10 million — a gift from the Richard J. Fasenmyer Foundation to Playhouse Square’s ongoing $100 million capital campaign. The district also received $1 million from the last state capital budget to help with construction of a garage.

The garage, with two floors underground and four levels above, will replace 140 surface parking spaces. An amenity deck, with a pool, heated gathering areas and a dog run for the apartment residents, will span the garage roof.

At 378 feet tall, including mechanical floors, the apartment building will be comparable in height to the Hilton Cleveland Downtown. The average apartment will be 880 square feet, though the units will range from one to three bedrooms.

Falco won’t discuss potential rents, though they’re likely to be among the loftiest in the market. Early this year, the average monthly rent in the downtown area was $1,400, according to Reis, Inc., a research firm that tracks market-rate, multifamily properties of at least 40 units. Vacancy was a mere 3.1 percent.

Due to modest job growth and a fairly stagnant number of people living in the region, rents in Cleveland aren’t high enough to make new construction an easy sell. That’s why Playhouse Square is shouldering its tower project in-house, rather than selling it to a developer.

Two local developers – the NRP Group, first, and then Hemingway Development – seriously considered the deal but ultimately passed when they couldn’t make the numbers work.

Hines, which entered the talks late last year, reached a similar conclusion: The project wouldn’t generate enough cash to satisfy an owner-developer. But it still could make sense for Playhouse Square, which views the buildings as a working endowment and will accept more moderate returns.

“For a developer who has a certain cost of capital, it just wasn’t penciling out,” said Brad Soderwall, a managing director at Hines. “But we felt strongly that the product itself would be very well received in Cleveland and could compete well and capture the highest possible rents that could be achieved in Cleveland.”

Playhouse Square derives a third of its revenues from real estate and the rest from theater operations.

“We have the benefit of having a long-term perspective, a very different perspective than most investors,” said Allen Wiant of Playhouse Square Real Estate Services. “We also have a perspective of having a broader portfolio where we can evaluate this return as raising the bar on the rest of our portfolio.”

The nonprofit’s holdings, other than the theaters, generate property taxes.

But the foundation does plan to seek property-tax breaks on the apartment tower and garage. Other major downtown developments have tapped a city residential tax- abatement program and have used tax-increment financing, which shifts part of the new tax revenues created by development to paying off project debt.

HollyAnn Eageny, a Chicago-area consultant who worked on a market study for Playhouse Square, acknowledged that it’s getting harder to finance and build apartments in some cities. And she noted that there are thousands of new units on the drawing board in Cleveland – though not all of them will get built, and the ones that do won’t all open at once.

Her firm, Tracy Cross & Associates, Inc., estimates that this metropolitan area can accommodate at least 500 new apartments each year for the next five years, without pushing the overall vacancy rate above 5 percent.

And, she added, there’s a diverse group of renters, ranging from Millennials to slightly older professionals to downsizing suburbanites, who want to live in a new, efficiently designed building with lots of amenities and easy access to dining and entertainment on foot, by bicycle or via public transportation.

Those are the people that Playhouse Square plans to court.

“Everything in apartments is cyclical,” Eageny said, “and there will come a period of accelerated construction followed by a lull. That’s just the way it has always been. You have not overbuilt and, in fact, you’re kind of catching up because there’s been so little construction for so many years.”

TCAI Logo-Squished for Insertion in Excel HeaderTracy Cross & Associates, Inc.

1st Quarter 2017

New production home sales in the ten-county Chicago region rose during the 1st Quarter 2017 to a level of 1,247 units distributed between 774 in the single family detached sector and 473 in the form of townhomes, duplexes and condominiums.  On a year-over-year basis, contract activity was up 20.1 percent overall with volumes in the market’s single family component increasing by 30.7 percent, while the attached sector moved up by 6.1 percent.

By area, sales in the suburbs totaled 1,119 units during the January-March timeframe, improving by 22.4 percent from the same period a year ago.  This upturn was largely due to the 100 contracts written by D.R. Horton at its large-scale Cambridge Lakes community in Pingree Grove, along with 68 sales recorded by Pulte Group in Naperville at its Atwater and Ashwood Pointe single family communities.  On a per-product-line basis, single family sales leaders for the quarter included Pulte’s Springs series at Atwater with 24 sales, followed by Pulte’s Timbers Edge development in Woodridge and D.R. Horton’s Horizon series at Cambridge Lakes with 21 and 20 sales, respectively.  Another 14 individual developments registered at least 12 sales during the quarter.

In the suburban townhome/duplex/condominium market, the Seaboard townhome series at Cambridge Lakes was the clear leader with 29 contracts for the three-month period, followed by CalAtlantic’s Tuscany Woods duplex project in Hampshire and CalAtlantic’s Prairie Pointe townhome community in South Elgin, each registering 15 sales for the quarter.

Unlike the suburban marketplace, sales in the city of Chicago were flat with just 128 sales recorded during the January-March 2017 period, representing a modest 3.2 percent increase from the same time period last year.  Among 37 developments actively selling new units, only four recorded 10 or more sales.  These included three high-rise condominium communities, i.e. Illume in the Near West Side neighborhood, Vista-River and Park Residences in the Loop and Ritz-Carleton Residences in the Near North Side area, along with the Enclave townhome development in Logan Square.

On a seasonally adjusted annualized basis, new construction home sales region-wide totaled 4,419 during the January-March 2017 period representing an increase of 11.8 percent from the yearly pace of 3,953 registered during 2016’s final quarter and an increase of 8.3 percent from 2016’s total volume of 4,081.  From a longer term comparative perspective, however, the annual rate noted for the first quarter signals the 34th consecutive quarter that new home sales in the region failed to move past the 5,000-unit mark.  Equally troubling is the fact that the seasonally adjusted, annualized rate of 4,419 units recorded during the 1st Quarter 2017 was 72.2 percent below the region’s average annual sales pace of 15,903 recorded over the entire 1994-1st Quarter 2017 time line.  On a brighter note, since annual production sales volumes first dipped below the 5,000-unit mark in the 4th Quarter 2008, the 4,419 sales registered during the last three months (seasonally adjusted and annualized) represents the second highest volume since that time.

New construction sales activity over the past three months was concentrated in three suburban submarkets including the Southwestern DuPage County/Aurora/Kendall County area, the Northern Fox Valley, and the Southwestern Corridor.  Builders in each of these submarkets combined to sell 295, 236 and 177 sales, respectively.  Noted areas within these submarkets included Naperville, Aurora, Yorkville and Woodridge in the Southern DuPage County/Aurora/Kendall County submarket, Pingree Grove,  Elgin, South Elgin and Hampshire in the Northern Fox Valley, and Joliet, New Lenox and Lemont in the Southwestern Corridor.

D.R. Horton, CalAtlantic Homes, Pulte Group, M/I Homes and K. Hovnanian Homes each recorded 80 or more sales during the most recent January-March quarter.  By builder, D.R. Horton and CalAtlantic each posted 187 contract signings, followed by Pulte, M/I and the K. Hovnanian with respective volumes of 165, 117 and 83.

In suburban Chicago, price continues to drive sales, especially in the single family detached sector.  For instance, almost 60 percent of all single family contracts written during the 1st Quarter 2017 occurred at base price points between $200,000 and $399,999.  In the attached sector, 55 percent of all sales activity was concentrated at prices below $300,000 with another 20 percent occurring between $300,000 and $399,999.

A much different scenario exists in the city as most sales have been generated at the upper end of the market.  For example, among the 120 condominium and townhome sales recorded in Chicago during the January-March 2017 period, 72 percent occurred at price point of $750,000 and above, with more than 50 percent concentrated at $1 million and higher.  It is important to note that very few new construction condominium/townhome developments in the city offer prices in the lower ranges.  In fact, two-thirds of all active developments forward average offering prices above the $1,000,000 mark.

By Dennis Rodkin

Crain’s Chicago Business

May 09, 2017

2017.05.09 crains-pic 1

Photo by Dennis Rodkin Townhouses at Weekley’s Easton Station development in Buffalo Grove.

A couple of years after bringing its Texas-sized ambitions to Chicago’s lackluster suburban real estate market, a national homebuilding firm is scaling back its expectations here.

Since mid-2015, Houston-based David Weekley Homes has sold about 46 homes in Buffalo Grove, Naperville and other suburbs. That’s less than one-third the goal of 150 homes that a Weekley sales executive told Crain’s about in mid-2015.

“Chicago has been a hard-to-predict market,” said Rich Bridges, Chicago division sales manager for the publicly owned builder. “We’ve been disappointed.” At least 30 of the sales, or about three-quarters of them, came in late 2016 and early 2017, he said.

Bridges now says he hopes to sell 75 to 100 homes in the next 18 months.

The retrenchment will take another form too: Bridges said Weekley may try more townhouses, which have done well at its Easton Station project in Buffalo Grove but aren’t usually a big part of the builder’s offerings.

The challenges slowing Weekley down aren’t unique to this firm, they’re built into Chicago’s weak suburban homebuilding market, people outside the firm say.

“They came into this market banking on an upturn that never happened,” said Erik Doersching, executive vice president of Tracy Cross, a Schaumburg-based consultancy for the homebuilding industry. “They’re not the only ones who’ve been disappointed that this market didn’t pick up.” Earlier this month, Cross released a report on the first quarter of 2017 showing that even with several consecutive quarters of improvement, suburban new-home sales remained around one fourth the norm that prevailed between 1994 and 2007, when the housing market crashed.

New-home sales in the suburbs have lagged because of a litany of factors, including lopsided job growth that favors the city’s housing market, two years of population declines, and low prices on existing homes that reduce buyers’ demand for new construction.

Those factors “pose a challenge for everybody” in the industry, said Jerry James, president of Edward R. James, a privately owned builder based in Glenview. While declining to comment directly on Weekley’s situation, he said “it’s gotten tougher here” in the period since the Texas firm arrived in the Chicago suburbs. Along with the other factors, James cited the elephant in the room in any discussion of Chicago’s economy: uncertainty about the financial health of the region and state in the next several years.

Publicly traded national homebuilders generally shoot for about 2.5 sales a month in each of their developments, Doersching said. By his firm’s count, Weekley is getting an average of one to 1.5 sales a month in each of its four developments, in Naperville, Barrington, Glenview and Buffalo Grove. That’s about or slightly below the average for Chicago builders, Doersching said.

“If you’re from Chicago, you think we’re moving at a good pace,” said Bridges, who’s been in the homebuilding industry here since 1988. “But if you’re from Houston, you say, ‘my goodness, that is slower than it is down here in Texas.'”

Weekley has a double-barreled sales strategy in Chicago: it builds subdivisions in infill locations but also builds on single lots or small clusters of lots. It’s unclear how many of the latter Weekley has sold. Bridges suggested the total is between eight and a dozen, though he declined to give specifics, and Cross’ tally does not include small sites.

Chicago’s slow housing recovery may be affecting that side of Weekley, too. On Fort Sheridan Avenue in Highland Park, Weekley cut its asking price by about 23 percent, from almost $1.1 million to below $850,000, before a home went under contract in March, according to listings on Redfin. The sale hasn’t closed yet, and listing agent Jodi Taub of Coldwell Banker did not respond to a request for comment.

Buffalo Grove has been a particular bright spot for Weekley’s subdivision sales, Bridges said. At the firm’s Easton Station development of 15 townhomes that broke ground in April 2016, 12 are sold and the first three owners moved in recently, he said.

Easton Station, where townhomes are priced from $450,000 to $490,000, has done well, Bridges said, because of Buffalo Grove’s strong schools, easy access to a Metra station, expressways and a Mariano’s grocery store, and “a scarcity of new home development.” Also turning Buffalo Grove buyers’ attention to new homes: a lack of existing homes to buy. For about two years, Buffalo Grove has had an especially low inventory of existing homes for sale. For most of the past two years, Buffalo Grove has had enough homes for sale to feed about 2.5 months’ of sales, while a balanced market has four to six months.

Bridges said Easton would be a model for Weekley’s plans in the Chicago area. Townhouses, which Weekley builds mostly in subdivisions targeted to seniors, “is something we’ll do more of here” but in all-ages developments, he said.

By Dennis Rodkin

Crain’s Chicago Business

April 13, 2017

 

Photo by 5a7 LLC A conceptual rendering for houses grouped around common green space at Plum Farms.

Photo by 5a7 LLC A conceptual rendering for houses grouped around common green space at Plum Farms.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

A 186-acre tract of northwest suburban farmland could become a series of walkable neighborhoods with city-style three-flats and other housing options that aren’t the suburban norm. It would also include a “tranquility center” with a stream flowing through it.

“It will look like something between the suburbs and the city,” said Anthony Iatarola, who will present the plan, called Plum Farms, to the Hoffman Estates village board April 17 in an effort to get most of the land annexed to that suburb, where about 40 acres already lies.

“This should be a model for the way we want to live now,” Iatarola said. Walking trails would thread through the neighborhoods and around wetlands to the shops, school, platform tennis courts and other amenities that would be constructed over the course of what he estimates as an eight-year buildout.

Photo by 5a7 LLC A conceptual rendering of the development's 'tranquility center.

Photo by 5a7 LLC A conceptual rendering of the development’s ‘tranquility center.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Iatarola, a partner in the Plum Farms development partnership called 5a7, said his father bought the land in 1959, when he saw suburban development headed northwest. Iatarola, formerly an attorney and head of the Wirtz family’s real estate operation, now runs a small industrial company and said the Plum Farms land is owned by his family members along with a few other people.

His firm’s proposal, which calls for more than 1,000 homes and at least 155,000 square feet of shops and offices surrounding 70 acres of wetlands, would occupy a site at the northwest corner of state routes 72 and 59. The other three corners are developed or underway, and just southwest is Prairie Stone, the corporate park around the Sears headquarters.

That leaves the Plum Farms site as “the hole in the donut, and you’ve got to do something special,” said John McLinden, whose Skokie-based development firm, StreetScape, consulted on the land plan, which includes houses that face common green spaces, a community greenhouse and a shops building with an outdoor ice rink out front. Streetscape developed the new urbanist-style projects School Street in Libertyville and Floral Avenue in Skokie along similar lines, though they were far smaller.

Plum Farms “will be School Street on steroids,” Iatarola said. It includes a commercial first phase of shops, offices and an outdoor ice rink, which his firm would build at the parcel’s southeast corner near the major intersection, and multiple residential phases to be built by other firms.

LARGEST HOFFMAN PROJECT SINCE 1990s

With plans for 1,035 housing units, the residential part of Plum Farms would be the largest project proposed in Hoffman Estates since the late 1990s, said village manager James H. Norris. The 1999 proposal for University Place contained 850 houses and single-family homes as well as commercial and educational facilities on 325 acres, and another 193 residential units were added in a separate annexation in 2005.

In plans that Iatarola showed Crain’s but would not allow to be published, the land has housing around three sides, built in various configurations including three-flats (where, in traditional Chicago settings, the building’s owner lives in one and rents out the other two units), houses grouped around common courtyards and three-story townhouses for rent.

In presentation documents, Iatarola refers to these and others as “the missing middle” types of housing in the Hoffman Estates and Barrington-area market, where houses and mid-rise apartment buildings predominate. Iatarola said an apartment developer is ready to roll with seven buildings containing 253 rental units on the project’s southwest corner “as soon as we have all the approvals from the village,” but he would not identify the firm.

Photo by 5a7 LLC A conceptual rendering of the commercial property to be built at Plum Farms' southeast corner.

Photo by 5a7 LLC A conceptual rendering of the commercial property to be built at Plum Farms’ southeast corner.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The vision of a mix of housing types “is a strategy that can keep you alive out there,” said Tracy Cross, principal of suburban development consulting firm Tracy Cross & Associates. His firm is not connected to the Plum Farms plan.

Sales of high-end homes have been slow in the northwest suburbs for more than a year, and construction of new homes even slower. “With those different types of housing, you’re not sitting waiting to sell one or two houses a month on your 180 acres,” Cross said. “That could take you 500 months, which is infinity.”

Cross said a residential use for the land might be a good plan, considering that the former AT&T campus, also in Hoffman Estates, has 1.6 million square feet of commercial space standing empty. The long, slow death spiral of Sears Holdings also could end with that firm’s behemoth facility next door becoming available.

The types of housing are all only concepts for now, Iatarola said. Because each phase of development will require separate approval from the village, “I presume that what eventually gets built will be dictated by the market and what is selling on that site,” Norris said.

The Iatarola family sold some of its Hoffman Estates land off in the early 2000s, including 42 acres south of Higgins Road, where the 400,000-square-foot Poplar Creek Crossing shopping center was completed in 2006. Of the larger remaining chunk north of Higgins, he said, “I’ve been dreaming of what I could build here since I was a kid.”

For nearly six decades, the family has rented most of the land to farmers and other users, he said. The family long ago sold off his father’s other postwar real estate investment, tracts of land northwest of Tucson.

 

By Dennis Rodkin

Crain’s Chicago Business

January 26, 2017

2017.01.26 crains article-new home sales up in 2016 after two years of declinesNew-home sales rose in the Chicago area for the first time in three years, although the total was “unimpressive,” according to a longtime analyst.

Developers sold 4,124 houses, condos and townhouses in the 10-county Chicago metropolitan area last year, up 10.2 percent from 2015, according to a report from Tracy Cross & Associates, a real estate consulting firm in Schaumburg.

Despite the increase, 2016 sales were almost 7 percent below 2013’s tally, which was followed by two years of dips. In all, for 2008 to 2016, builders have sold an average of 3,942 new homes a year, Cross reported, or about one-sixth the average for the previous dozen years. Between 1995 and 2007, Chicago-area builders sold an average of over 24,300 new homes a year.

“It’s good to see the number go up again, but it’s unimpressive,” said Tracy Cross, the head of the firm.

Nationwide, sales of new homes rose 12.2 percent in 2016 over the year before, the U.S. Census Bureau and the Department of Housing & Urban Development reported this morning. An estimated 563,000 new homes were sold in the U.S. last year, up from 501,000 in 2015.

Cross’ reports cover only developments with 40 homes or more, so they don’t include homes on scattered single lots in city neighborhoods. A year-end total for that category of new construction is not yet available.

For the city homes covered in Cross’ report, the increase in sales was far larger than the suburbs’ uptick. The year-end total in the city, 577, was up 26.3 percent from 2015’s 457.

In the suburbs, the increase was 8 percent, from 3,284 sales in 2015 to 3,547 in 2016.

More suburban homes aren’t being built for several reasons, Cross said. One is the allure of living in the city for younger buyers, who in past years were inclined to head for relatively inexpensive new construction on suburban sites. Another, he said, is people who leave Illinois because of its financial situation.

The houses they leave behind “add to the competition” that new houses would face, he said.

There’s a silver lining in the low sales figure, Cross said. For the first time in several years, four homebuilding firms had more than 350 local sales each last year.

“It’s a far cry from when they were doing over 1,000 sales a year,” Cross said, “but 350 is a strong, sustaining number that means some of the national builders will keep their presence in Chicago and not bail.”

The four firms were CalAtlantic Homes, which sold 658 homes locally during the year, D.R. Horton/Cambridge Homes (595 sales), Pulte Group (434) and MI Homes (387).

By Dennis Rodkin

Crain’s Chicago Business

October 24, 2016

 

rise-in-local-new-home-sales-picturePhoto by D.R. Horton This newly built house on Chesapeake Lane in Naperville sold recently for just under $415,000.

Local new-home sales rose more than 27 percent in the third quarter, putting builders on track for their second-best year of the post-bust era, according to new data.

For the first three quarters of 2016, new-home sales are up 9.2 percent in the Chicago area compared with the same period last year, according to Tracy Cross & Associates.

“There’s a ray of hope in the numbers,” said Tracy Cross, head of the Schaumburg-based consulting firm, which compiled the data.

While the figures are still “so low” compared to the homebuilding heyday of decade ago, Cross said, “at least we’ve got our feet in the starting blocks.”

Homebuilders made 1,033 sales during the third quarter, up from 812 in the same period in 2015, according to data from Cross’ firm. The data reflect construction by “production builders” in developments larger than 20 homes; it overlooks individual homes on scattered sites, such as those being built in many Chicago neighborhoods.

For the first three quarters, the local sales total is 3,299, compared with 3,021 in the same period last year.

At the current pace of sales, builders are on track to sell about 4,136 homes in the region in 2016, which would be the best year-end total since 4,415 in 2013. From 1998 through 2006, sales totals were above 20,000 every year. Since 2010, the year-end total has been above 4,000 only once, in 2013.

This year’s third-quarter increase followed the second quarter’s year-over-year increase of 12 percent. That uptick was almost entirely the result of sales at the 92-story Vista Tower, designed by architect Jeanne Gang.

The third quarter’s strength was suburban sales, Cross said. “You had strong activity in Naperville, New Lenox, Joliet,” he said. “That’s a more traditional concentration for our region.”

Suburban new-home sales totaled 912 during the quarter, up almost 38 percent from 662 in third-quarter 2015. In the city there were 121 sales, down 19.3 percent from 150 in the same period last year.

 

By Dennis Rodkin

Crain’s Chicago Business

October 10, 2016

 

Naperville once seemed a rich opportunity for homebuilders eager to sell a four-bedroom, quarter-acre slice of the American Dream for $700,000 and up. Then, in 2006, the bottom fell out, and Ashwood Park—only one-third built—ground to a near-halt. Ten years after the crash, it’s still a monument to the limits of suburban sprawl.

In the summer of 2006, there were few, if any, clouds hanging over the plan to build Ashwood Park on about 210 acres west of 248th Street in Naperville.

The western suburb was in the midst of a growth spurt that was forecast to bring more than 83,000 new jobs to the town by 2030, generating demand for homes. The Ashwood Park site lay in the southwesterly path of growth in Naperville, which since the middle of the 20th century had been expanding, seemingly inexorably, one subdivision at a time. And Money magazine had recently dubbed Naperville the third-best place to live in America.

“Naperville was bulletproof,” Steve Dano recalls. Dano heads sales at Crestview Builders, which was poised to develop the northern half of Ashwood Park while Macom did the southern half, for a total of 504 homes with prices that were expected to start in the $700,000s and go past $1.5 million. The two companies had decades-long track records building homes and neighborhoods in Naperville through good times and recessions.

Then, starting in September 2006, the housing crash hit.

A decade later, at least 150 of the lots at Ashwood Park are empty, homes built since the crash come in at price points as much as 40 percent below those built in the heady days of 2006, and the handsome $7 million Ashwood Park clubhouse, built to provide recreational facilities to the occupants of several hundred high-end homes, is staffed only eight hours a week.

“Naperville was bulletproof,” recalls Steve Dano of Crestview Builders, developer of the northern half of Ashwood Park.

“I never would have expected this in 2006,” Dano says. He’s not the only one. What first appeared to be a nationwide tap on the brakes after a few years of dizzying growth in home prices turned out to be a steep downslope that took with it the home equity of millions of homeowners, and the sunny futures of many homebuilding companies.

The Chicago area has been one of the slowest regions nationwide to recover from the downturn, and 10 years after prices peaked in September 2006, the S&P Case-Shiller Index reports that across the region, single-family home prices here were about 18 percent below the peak as of July, the latest data available. And since the downturn, the region has struggled with one of the nation’s heftiest foreclosure burdens—at the depth of the crisis, in 2010, nearly 139,000 Chicago-area homes were in some stage of foreclosure.

Around that time, Ashwood Park looked like a modern ghost town, with one-third of its planned 500 homes built and vast stretches of weedy empty lots lining most of its paved streets. “It was sad to see,” says Terri Christian, a Coldwell Banker agent in Naperville. Ashwood Park “was supposed to be a stunning place, but it was deserted.”

The recovery here was impeded by the Chicago area’s high general unemployment rate during the down years and the low rate of job creation since, as well as its slow processing of the wave of foreclosures because Illinois requires a judge’s involvement in resolving them. Rising property taxes and a huge public pension debt have also played roles in holding back demand. The fastest-recovering cities have largely been tech hubs and warm-weather places—or both.

The Chicago area’s recovery has accelerated a bit this year, but the gap between where the market was at its pre-crash high and where it stands now yawns like a chasm. “The fall that came after that peak changed the landscape for housing and what we expect from it,” says Geoff Smith, executive director of DePaul University’s Institute for Housing Studies.

The players whose expectations have gone through perhaps the most painful adjustment are those who bought homes at the peak and have to sell at well below that level.

That’s been a decade-long story all over the region, and Ashwood Park is not exempt. A home on Corktree Road that sold for slightly over $1 million during the peak-price month, September 2006, sold last May at 32 percent off.

The crash changed the prospects for Ashwood Park, and for the firms building it.

The south-half partner, Macom, is gone, collapsed under a series of foreclosures of its projects in Oswego, Naperville and elsewhere. Macom had been in business since 1949 (although under that name only since 1960) and built more than 30 Naperville subdivisions before closing down sometime around 2010, according to Bill Novack, director of transportation, engineering and development for the city.

Much of Macom’s share of Ashwood Park is now in the hands of Ryan Homes, with prices starting at under $510,000—about 30 percent below the starting price Macom announced for the site in late 2005.

At the height of the building boom, Novack estimates, there were 88 homebuilders working in Naperville. “Everyone was building homes then,” he says. “It was the best business to be in.” The bust took that figure down to “maybe a dozen,” Novack says, though in recent years it’s grown back to around 30. Homebuilding has been in a trough throughout the region, not only in Naperville. Builders sold 25,105 new homes in the Chicago area in 2006, according to Schaumburg-based industry tracker Tracy Cross & Associates, and in 2015 sold less than 15 percent of that.

Ashwood Park’s north-half partner, Crestview, in 2006 expected to be done with the project by 2011 or so. It’s now about 90 percent finished, says Dano, Crestview’s sales chief. “We should be out of there in the next two years,” he says. That would mean what was once slated to be a five-year project wraps up in 12 years.

“You would have expected those guys to be sold out in a few years,” Novack says. “That’s how it had been for a long time in Naperville. You’d build something, sell it out easily, and go build something else.”

Crestview dialed back its expectations for Ashwood Park in at least two other ways: It sold off half the 251 lots it owned in the development, Dano says, and is selling what it builds at prices well below the original goals. A decade ago, Crestview’s homes in the neighborhood were mostly selling for more than $800,000 and up past $1.2 million, he says, “but now the norm is between $600,000 and the $800,000s.” Crestview advertises that it can sell homebuyers a lot and the house on it “in the upper $400,000s.”

Several builders bought lots from Crestview and are now building homes there, though the price points are lower than what was envisioned 10 years ago.

Early-years buyers at Ashwood Park took a hit when it came time to sell. Among the biggest: the sellers of an 11,000-square-foot house on Teak Circle. They bought it in 2007 for $2.46 million and sold it five years later for less than half that, $1.05 million. The home sold again this summer for just under $1.2 million. Another Ashwood Park home from 2007, a 4,600-square-footer on Chinaberry Lane that went for $924,000 that year, resold in July for $750,000.

The Chinaberry sellers “were very disappointed,” says Rosemary West, the Re/Max Professionals Select agent who represented them. (They decline to comment.) “We did everything but stand on our heads to sell at a better price, but it’s not happening at Ashwood Park.”

There were 61 homes for sale in Ashwood Park at the start of October, 11 of them existing homes and the rest either under construction or proposed. The existing homes were priced from the $800,000s to over $1 million, while the new and proposed houses were mostly from the low $500,000s to the $800,000s.

West says the latter-years shift toward less expensive homes in the neighborhood “definitely makes it feel like a different place than people were buying in” when Ashwood Park opened in 2006. “The exclusivity isn’t there.”

Of course, buyers benefit from the lower prices. Christian, the Coldwell Banker agent, last year represented buyers who got a newly built five-bedroom, 4,300-square-foot home on Shumard Lane in Ashwood Park for $638,500.

“Ten years ago, that would have been a million-dollar home,” Christian says. “It’s still hard to believe they got all that home for that kind of money.”

By James F. McClister

Chicago Agent Magazine

August 22, 2016

 

Home starts are up; residential construction in the Chicagoland market has seen a massive cash injection this year; and Chicagoland new home construction is at its highest level in seven years, according to Metrostudy. But while starts are on the rise, new construction sales are down. In the 12-month period ending with Q2 2016, sales fell 4.1 percent, and quarterly sales were down 14.1 percent year over year.

Chicagoland has a lot shortage – so to speak. Builders are finding it difficult to find skilled labor, affordable materials and financing. Faced with regulatory and demand problems, replenishing affordable housing stock has become a challenge. So how do builders overcome those obstacles and thrive in a changing economy? Why are some homebuilders able to adapt while others struggle to evolve?

Not a lot of lots

“Lot supply is constraining Chicago’s ability to move upward,” says Tracy Cross, president and chief executive of real estate research firm Tracy Cross and Associates, Inc.

Lot supply in Chicago peaked about five years ago in the third quarter of 2011, when the vacant developed lot inventory was more than 250-months supply. Now it’s closer to 86 months of supply.

In terms of sheer numbers, an 86-month lot inventory is technically an oversupply. The “shortage” comes in preferred lots – otherwise known as “A” lots. It’s a problem Belgravia Group President and CEO Alan Lev says Chicagoland builders have always faced.

“Lot supply is a problem, but that’s not a new thing,” he says. “I like to think it is, but I look back to my younger years in this business: it’s always been hard to find good sites at the right price. You can always find stuff, and you can over pay for it, but the key is finding something at a number that actually works.”

Mark Gianopulos of Metrostudy claimed Chicagoland builders will look to supplement with infill locations. Cross says we need to expand, but that “it won’t happen over the next year.”

Why? Cross points to disorganization among the developer community, namely interests that come more from corporate dictums than collective agreements. “There are companies saying that builders can only go in and develop 100 lots because they don’t want to hold lot inventories,” he says. “That’s a corporate strategy.”

The hurdles Lev sees are more systemic. “I don’t know if it’s any harder to find lots in the city today than it used to be. It’s the same situation Chicago has always had,” he explains. “Every alderman has all the power in the ward, and you have to get his or her blessing to develop a lot, and the alderman won’t generally bless it unless it has the backing of all the right community groups.”

Assuming a builder can overcome corporate interests and satisfy the right community leaders to eventually land an “A” lot at a worthwhile price, there remain considerable restraints.

Labor

For one, Chicagoland is facing a shortage of skilled labor.

“Labor availability is an issue,” says Lev. “Our subs and general contractors are extremely busy, and their prices have gone up quite a bit. That’s a concern and an issue.”

A report from the Cushman & Wakefield outlined the labor loss in Chicagoland: the construction workforce in the Chicago metro area plunged from 29,600 people in 2008 to 18,100 in 2011, and while it has been slowly building back up, fewer than 22,000 people were working in the industry last year, or about 74 percent of the pre-recession level, according to data compiled by.

Materials

Lev also cites materials costs as a concern. “Pretty much the same building that we built three years ago for $140 per square foot is now $170 per square foot,” he says. “That’s partly due to materials costs.”

And it’s partly due to a building code Lev calls “antiquated.” He says: “It’s not at all in step with the model codes that are used in most other places. And that adds to the cost quite a bit.”

In Chicago, builders are held to standards that keep them operating behind norms. For instance, the city’s building code requires copper and other types of piping over CPVC, which is less prone to corrosion and costs considerably less. “The city is adding costs for things that are unique to Chicago – things you won’t find in codes elsewhere,” Lev says.

Regulations

Complaints against the city’s building code are only part of a much wider set of grievances builders have against how the city and its suburbs continue to shape the new construction market.

“In the suburbs, builders face 297 municipalities and political jurisdictions from which to get approval,” Cross says, explaining the difficulty of adhering to or even understanding the hodgepodge of regulations suburban builders have to follow. “I live in Schaumburg – if I go 1,500 yards, I’m going through three different villages. And none of those villages have the same rules.”

Chicagoland builders juggle regulations on what buildings can go on what lots, how those properties must be built, what materials they can use. Those are necessary to ensure a baseline for quality, but many builders argue the current rules and regulations are excessive. It is an opinion that extends to the national market, according to National Association of Home Builders senior economist Michael Neal.

“In a blog, we recently illustrated the regulatory burden federal, state and local governments are putting on builders,” he says, “and it puts significant upward pressure on the prices that buyers ultimately face.”

One particular Chicago regulation that Lev believes harms buyers is the city’s affordable requirements ordinance, or ARO, which our own Peter Thomas Ricci covers here.

The affordability dilemma

Currently, Chicago is a relatively affordable U.S. city. In this year’s second quarter, 60.5 percent of Chicagoland housing stock was considered affordable by the NAHB’s Housing Opportunity Index – a 100-point scale to compare local incomes against housing costs.

“Our HOI has a dividing line. If you’re above 50, you’re considered affordable, and if you’re below 50, you’re less affordable,” says Neal. “Nationwide, we’re around 50.”

The latest S&P/Case-Shiller Home Price Index reported that May home prices in Chicago increased more than any other major city in the country. And during the first quarter of this year, the supply of starter homes dropped 47.3 percent compared to 2012, according to Trulia.

Do builders have an obligation to provide affordable homes?

Lev says yes, but it’s a shared responsibility.

“I think the responsibility should land on everybody. Frankly, if you think about it, affordable housing is important for everyone,” Lev says. “It’s very hard to build affordable housing, because of land prices, because of construction cost, because of the building code, because of union labor, and because of the affordable requirements ordinance. All these things add up and make it very difficult to building anything you would think of as affordable, especially in areas closer to the city.”

But that’s not to say affordable building is not already happening. “Not all builders are building at the high end of the market. Almost 30 percent of all product produced in the new construction sector is priced under $250,000,” Cross says, noting that in the custom home sector, builders have migrated closer to the $1 million-and-up side of the market. He adds: “But that’s only a very small portion of supply chain.”

The current inventory of affordable new construction homes is not enough to satisfy the demand for entry-level homes. But Cross does not believe filling that inventory deficiency is the sole responsibility of builders.

“Is every first-time home buyer entitled to a brand new house?” he asks. “The answer is no.”

Existing in the new market

Prime lot availability is another issue for today’s builders. In 2005, 1,507 building permits were issued for single-family homes in Chicago proper, and in the suburbs the number was more than 32,000. Last year, the number of permits issued dropped to 503 and 5,905, respectively.

“Most of the construction going on in the city is rental,” Lev says. “Builders are still delivering 4,000 units annually – which is down from the high water mark of 6,000-plus units – but most of it is apartments.”

A silver lining Lev sees in the new construction market, which may come to define new construction in Chicagoland over the next decade, is the growing condo market. “What’s selling in the condo market is larger units and high price points – $700,000 and up,” he says. “We’ve been able to tap into that market.”

The reason one-bedroom condos aren’t selling is because there is no demand for them. Millennials are not buying. They’re renting, or living with their parents. As this new generation of homebuyers struggles to find ways to buy new homes, less are being built.

“We’re 75 percent below peak, and we’ve been there since 2008,” Cross says. “Every year we’ve been bouncing along the bottom. So is new construction going to increase in the short term? Yes, it almost has to.”For builders, existing in today’s local and national markets is a matter of waiting for the new generation to reach the means necessary to buy in substantial numbers. And Neal says it’s inevitable.

“The NAHB does a preference survey, and in it, we ask Millennials: do you prefer single-family homes,” he says. “Their preferences are not much different from what previous generations have expressed.”

Sixty-five percent of Millennials prefer a detached single-family home, but because of price, credit availability, student loans, stagnant wages, etc., they haven’t been able to buy. But they will, eventually.

“We’re experiencing a delay, and eventually that pent-up demand is going to be unleashed,” Neal says. “But it will take some time for young buyers to work their way through the rental market and the existing market before they can purchase a new home.”

When that wave of demand finally hits the market (in the mid 2020s), there’s unlikely to be an explosion of new single-family homes in the city proper. Builders are going to have to expand. They are going to have to subvert the lot shortage.

“Builders are going to need to move into the greenfield, so to speak, but not totally into the emerging markets where you can’t see the Chicago skyline anymore,” says Cross, referring to the under-developed areas beyond current suburban limits. “What I mean is that we’re going to see development occurring in areas along the Route 59 corridor in Plainfield, or near the Cape Farm Road Corridor near Joliet.”

Cross expects to see more development in Oswego, Elgin and Gilberts, as well.

That is what builders will have to do to survive.

By Dennis Rodkin

Crain’s Chicago Business

July 21, 2016

 

Local new-home sales rose almost 12 percent in the second quarter from a year earlier, and an industry consultant attributed nearly all the growth to one downtown Chicago condo project.

Builders sold 1,239 new homes in the Chicago area during the quarter, according to data from Schaumburg-based consulting firm Tracy Cross & Associates. That’s up from 1,110 in the same period last year.

The year-over-year difference, 129 sales, “is almost all because of the Vista tower downtown,” said the firm’s principal, Tracy Cross, referring to the 406-unit Vista Residences portion of a 93-story tower that recently broke ground in the Lakeshore East neighborhood.

Without an estimated 98 Vista Residences sales during the quarter, “we’d be flat for the quarter,” Cross said.

For the year to date, including both the first quarter’s 8.2-percent drop and the second quarter’s increase, new home sales totaled 2,271. That’s up 2.8 percent from 2,209 in the first half of 2015, Cross reported.

Of those sales, 352 were in the city, an increase of more than 52 percent from the 231 new homes sold in the city in first-half 2015. There were 1,919 new homes sold in the suburbs in the first six months of the year, a decline of 3 percent from 1,978 sales in the first two quarters of 2015.

Job growth has been stronger in the city than in the suburbs, Cross said, explaining the better results there. His reports do not include single-site and other small builder projects. Sales of city new homes on sites of all sizes have increased sharply in 2016, Crain’s reported in May.

The Chicago-area homebuilding recovery continues to lag behind most other cities, Cross said. Nationally, new-home sales were up between 5 and 23 percent in March, April and May.

“Chicago is probably the least favorable metro area in the country to be a new-home builder,” Cross said.

By Dennis Rodkin

Crain’s Chicago Business

May 19, 2016

city-new-home-sales-jump-picture

Photo by Dennis Rodkin

Each of these newly built homes on Race Street sold for $870,000 this spring, one (right) in February and the other (left) in March.

When she went house-hunting earlier this year in Ukrainian Village and other nearby neighborhoods, Hilary Cerbin looked at a mix of existing and newly built homes before zeroing in on new construction.

With a newly built house, she said, “I could move in to a clean slate,” while among the existing homes, “I didn’t look at a single home where I wouldn’t have to fix something, change something.”

Cerbin, who ultimately bought a new four-bedroom house on Race Street in Ukrainian Village in mid-February, was among many Chicagoans buying newly built homes this year.

In the first four months of 2016, builders sold 449 new houses, townhouses and condominiums in the city, the records of Midwest Real Estate Data show. That’s an increase of more than 34 percent from the 334 sales in the corresponding period in 2015, and10 times the increase in sales of all types of homes—new and old. By the end of April, city home sales totaled 7,707, according to MRED’s data, or about 3.4 percent ahead of last year’s 7,453.

“New construction is the hottest thing right now,” said Nick Gasic, the Fulton Grace Realty agent who represented Cerbin. “Everybody’s looking for a house with all-new appliances and warranties, and a contemporary style.”

That doesn’t necessarily mean angular or minimalistic contemporary architecture—although the look is popular in new city homes—but “the layout, with the open living and dining room upfront and the family room off the kitchen, that you can’t find in an older house,” Cerbin said.

New construction has filled an inventory gap in the city. With a large proportion of households still underwater on their mortgages, owners of existing homes have been reluctant to put them on the market. The city’s inventory of homes for sale began the year epochally tight and, in the case of single-family homes, has grown ever tighter in the months since.

Meanwhile, many builders are in the opposite position: They bought land at depressed prices during and after the recession “and stockpiled it until the market was ready for them to build,” said Steve Jurgens, managing broker at 312 Estates. Jurgens has represented several new-construction homes that sold this spring, including a pair by Mangan Builders on Hoyne Avenue in North Center. The two five-bedroom homes sold for $1.2 million and $1.21 million in April.

The share of city sales that were new construction rose to 5.8 percent this year, from 4.4 percent last year. It’s a small slice of the total, but that’s new construction’s share of all homes sold all over the city. New houses and condos are densely concentrated in booming North Side neighborhoods like Logan Square, Avondale and West Town; their share of sales in those areas is clearly larger, although difficult to calculate using MRED’s data.

Because some builders don’t list their products on the multiple-listing service or don’t list all of them, the actual number of sales may be larger than the total of 449 homes given above.

CONTRAST TO SUBURBS

The increase is counter to what’s going on in the suburbs, the traditional center of new-home-building. Sales of new homes dropped by more than 12 percent in the first quarter of the year, according to Tracy Cross & Associates.

“There’s much stronger employment growth concentrated in the city than we’re seeing in the suburban marketplace,” said Tracy Cross, principal of the firm. On top of that, “you’re seeing a transitional shift of what we could call the older millennials, who are seeking an urban environment.”

Builders and agents both say land and construction prices have been rising as a result of the boom in sales.

Jurgens said that the asking prices of buildable lots in desirable places like Bucktown and the Southport Corridor have risen by about $200,000 in the past few years.

Mike Skoulsky, a partner at KMS Builders, said that three years ago, wood flooring “cost $4.50 a square foot, for the wood and the install. Now we’re paying up to $7 a square foot.”

KMS has built and sold nine condos and three single-family homes in the city in the past year, including a pair of contemporary twins on Honore Street in Bucktown. One, featured in Crain’s in December, sold for $1.6 million in March, and the other sold at the same price last week.