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	In Chicago, Fears of Overbuilding Quieted by Steady Demand Multi-Housing News 04/2002 Chicago Avenue Place, a new multi-story luxury condominium in suburban Chicago, benefited from the use of a Beam & Open Web Joist Structural Steel Framing System. This system provided cost-effectiveness for the design and development team, and flexibility for the owners. It allowed for larger, free-flowing expanses of space and a notable reduction in the transmission of sound between units as well. Such attributes are highly desirable - if not mandatory - among discriminating condominium owners. There is no doubt the Chicago multi-housing market is softer now than it was a year ago. Yet there is also no question things are just now beginning to pick up again. In fact, developers, architects, and brokers alike agree that since this past February the Chicago market has indeed accelerated its pace toward a recovery, leaving behind its fears of overbuilding, plummeting vacancy rates and the need for concessions. "I would say we're definitely quite a bit softer than we were a year ago," says Leslie Andren, a partner with Chicago's Moran & Company. "But...it's not quite as bad right now as it was a few months ago." Andren, who says October and November of 2001 were the hardest months for Chicago (perhaps even the point at which the market hit bottom) further explains occupancy in the area began inching up this February while owners and managers curtailed most rental concessions. Marcus & Millichap's National Apartment Report 1Q/2002 estimates overall multi-housing vacancy in Chicago will likely increase in 2002 to 5.8 percent, up from 5.2 percent in 2001 and 4 percent in 2000. The increase, however is for the most part attributed to the fated Class A properties which are bearing the brunt of the recession and will see vacancy rates rise to 7.5 percent this year, according to the report. As renters opt to pay more modest rental rates in this softer economy, Class B and Class C properties are holding their ground with vacancies set to stabilize around 5 percent. According to Andren, the increase in vacancies has even caused Moran & Company, an investment banking and brokerage firm specializing in multi-housing real estate, to see a lower volume of transactions this year as compared to prior years. "I think there will still be some good transactions this year but there are just not as many owners interested in putting their properties on the market when occupancies aren't that good," she explains. Andren feels the company will see some more activity in the latter half of this year though, as there is still a good amount of money - both institutional and private - to be invested, interest rates are still low and apartments still offer some of the most stable real estate investment returns. "I think it's going to take a little more time for the economics of each individual property to sort of shake out because in the Midwest our traditional peak period of occupancy is in the spring and summer," she says. And though transaction volume will be nowhere near the record level reported in 2000 and 2001, Andren is confident it should increase later this year. Furthermore, Andrenhas seen some depression in sales prices throughout the industry. "I would say that prices have probably been a bit depressed from where they were, say, a year to a year and a half ago," she says. "It's coming because the buyers have to underwrite concessions that they may not have had to before and they have to underwrite higher vacancy and less rent growth." According to the National Apartment Report, sales prices for Class B and Class C properties rose only 5 percent in 2001, breaking two consecutive years of double-digit increases. "I don't think it's so dramatic here [though]." Andren contends, adding that there aren't as many distressed situations in the Midwest as in some other areas, including Atlanta where the housing market is experiencing much softness due to an abundance of new construction. Though talk of overbuilding circulated through Chicago's multi-housing industry late last year, fears were quieted early in 2002 as demand for multi-housing units remained steady. "The concern in the last quarter [of 2001] was "Did Chicago overbuild both rental and condominium products?" says Joel Carlins, president of Chicago-based Magellan Development Group Ltd. He explains, however, that over the last two to three years Chicago saw gains in population as it never had before creating demand for housing. "So even if there was some surplus, it takes short time to absorb it with that kind of growth," Carlins says. What's more, insiders say Chicago has undergone a dramatic facelift. "I think Chicago has been dramatically renovated," says Carlins, "and I think [its] downtown [submarket] is one of vitality." Carlins explains the metro has come a long way and has finally woken up to the rest of the nation - perhaps even the world - as businesses, prospective residents and tourists vie for a taste of the vibrant city. And Thomas Roszak agrees. "I think Chicago has been on a rampage the last five years," says the president of Roszak/ADC, an Evanston, Ill.-based architectural design, development and construction firm, adding that Chicago has indeed proven itself. "People want to live in Chicago; it's a great city, and people are doing the reverse and coming back into the city whereas before there was urban sprawl going out of the city," he says. Roszak has taken a particular interest in the submarket of Evanston located just north of Chicago. "What's interesting about Evanston is it is kind of a quasi-urban, quasi-suburban [market]," he says. "It's got all the benefits of a downtown but it's close to all the suburbs." Currently, there are about 600 condo units in the development stages throughout Evanston, while Roszak/ADC has a 156-unit project, Chicago Avenue Place, in the works. "We have not seen any change in the Evanston market. It's still very brisk in terms of sales," Roszak says. "We maintained our sales velocity through all the Sept. 11 events, had a pretty strong year end and continued that [velocity] through January and February." Roszak also cites the submarket's relatively cheaper prices as a significant factor in its popularity. "[People] see the value of Evanston as compared to Chicago, and I think that's part of the reason we're looking at more projects [there than] in Chicago." Consumers, he explains, are aware of the fact that the same type of product may be bought in Evanston for 10 to even 30 percent less than in Chicago and still have all the benefits of restaurants, shops and transportation present. Roszak/ADC recently completed 1421 Sherman, a 23-unit luxury one-, two- and three-bedroom condominium project and one other development in Evanston as well as another two projects in Chicago's Old Town and West DePaul neighborhoods. And though many have expressed concern over a glut of condominium units in particular, both Roszak and Carlins contend the for-sale market is strong enough to absorb the supply. In fact, the condominium market, they say, is in large part being fueled by the baby boomers now turning into empty nesters. "We have people from the North Shore and some people from Chicago proper [who are] selling their large homes because their kids have moved away and they want to consolidate," says Roszak. "They basically sell half of their furniture, want to simplify their life, want all the same amenities they had in their homes and know where to spend money on upgrades - nice kitchens, nice bathrooms and hardwood floors." Carlins agrees, as he finds condo buyers are now "very serious buyers; [many] of them from the suburbs." "I'd say 50 to 55 percent of the current traffic is from the suburbs and the rest is probably from a two-square-mile radius [from the city]. Back in the middle '90s when the market started to heat up, 90 to 95 percent of the traffic was from a two square-mile range and only five to 10 percent was from the suburbs. So that's substantially shifted," Carlins says. He also explains that the baby boomers are aging and are expressing a need to move back to the city in order to downsize and secure a more convenient lifestyle. However, Roszak expresses one concern for Chicago's condominium market, primarily the position of major investors. "The other thing I think is interesting is there were a lot of speculators, or investors, buying condos and some of them have fallen by the wayside because they were buying units just on 'spec' and - at the same time - were losing a lot of wealth in the stock market," he notes. These investors (who buy condo units early on in the development process at one price and wait until development is completed and units gain value to resell them to other buyers at a higher price) consequently were unable to carry out their goals to close and eventually flip these condominiums. "They just don't have the cash to do it or they are scared they won't be able to sell, so they back out of their contracts," Roszak says. "What's happening then is, say, 20 to 30 percent of a 200-unit building falls through in terms of their deposits and that affects the developer's ability to close and his position with the bank. It's a pretty serious thing and some developers have lost projects [because of it]." Yet, Roszak is hopeful that a stricter policy on pre-sale requirements set by banks and lenders will keep this trend from further impacting Chicago's for-sale market. "People are going to be more conservative about this now," he says. "I know banks are not allowing as many investors to be a part of the pre-sale requirement." Instead, banks are requiring that buyers are bona fide purchasers and though that may be putting more pressure on developers, it is more economically prudent to work that way, Roszak asserts. Roszak/ADC 1415 Sherman Avenue Suite 101 Evanston, IL 60201 Main  847-425-7555 Sales  847-328-8200 Fax  847-425-7540 email inquiries: info@roszakadc.com copyright© 2003 Roszak/ADC. All rights reserved.