Monday, July 30, 2007

City Budget Taking Hit From Slowing Housing Market

The slumping housing market is going to hamper Chicago's economy over the next several months, despite a strong job market and increased spending by area businesses.

The local economy is projected to grow at 2.7% in the second half, according to Moody's Inc., little changed from the first six months of 2007 as the fallout from mortgage defaults and declining home sales stymie consumer spending.

"We have yet to see the full impact of the housing decline penetrating through the economy," says Geoffrey Hewings, director of the Regional Economics Applications Laboratory at the University of Illinois at Urbana-Champaign. "This doesn't mean we are going down — we are just not going to be growing as rapidly as we have in the past."

For the year, the local economy is expected to expand 2.3%, down from 3.2% in 2006. Economists predict modest growth over the next two years.

Chicago-area home sales and construction have fallen over the last year due to an explosion of defaults on loans to customers with tarnished credit, foreclosures and tighter mortgage lending standards. Combined with more than $3-a-gallon gas prices, consumers are expected to hold back on spending in the second half, economists predict.

"I've been in housing for over 30 years. I've never seen it go this long and this steep at any point in my career," says Tracy Cross, president of Schaumburg-based real estate consultancy Tracy Cross & Associates Inc. "Modest signs of recovery may show itself in 2008."


Total home sales in Chicago fell 19.8% in June from the year-earlier period, according to the Illinois Assn. of Realtors. Local homebuilding dropped 37% in the second quarter from a year earlier, the worst showing since 1994, figures from Tracy Cross & Associates show.

The housing troubles aren't hurting manufacturers that cater to commercial and industrial customers, says Don McNeeley, president of Chicago Tube & Iron Co. in Romeoville.

Mr. McNeeley is hiring thanks to strong demand. He says orders are up over last year and he plans to add up to 30 workers in the next 12 months, bringing his staff to about 530.

Chicago Tube & Iron built a $22-million plant in Romeoville in 2005 and plans to open two other facilities in Wisconsin and North Carolina.

In addition to manufacturing, there also will be hiring and overall growth in tourism and financial and professional services, says Sophia Koropeckyj of Pennsylvania-based

For some business owners, the question isn't whether they'll add jobs but whether they can find qualified employees.

"The marketplace right now is challenging," says Todd Black, a Naperville-based regional vice-president for Arkansas-based technology consulting firm Technisource Inc.

The firm is recruiting on college campuses and turning to current employees to help find as many as 12 people in the Chicago area this year.


Overall, Chicago-area companies added 44,100 jobs in May, after creating 41,000 the previous month. The unemployment rate in the Chicago area is 5.3% as of June, which is higher than the national average of 4.5%. Still, some local businesses are having a difficult time finding the talent they need to keep up with orders and expansion plans.

Mark O'Malley, president of Chicago-based packaging company Paket Corp., wants to hire 16 mechanics in the next six months after sales rose 17% in the first half of the year. (He wouldn't disclose sales.) But he's wary of bidding on big contracts.

"I'm concerned that we can't fulfill them in a timely fashion," Mr. O'Malley says.

With rising demand from industrial, food, health and beauty products companies, Mr. O'Malley also is spending to invest in new equipment and technologies.


Business spending, which was tepid during the first part of the year as companies let inventories run down, is propping up the economy in the second half of this year as consumers curtail their purchases.

"Business (investment) is going to be absolutely critical going forward," says the University of Illinois' Mr. Hewings.

Overall consumer spending makes up about two-thirds of economic growth and had been a mainstay for the economy until the end of the first quarter.

But the outlook at retailers like Hoffman Estates' Sears Holdings Corp. isn't good: Sears warned this month that profit will decline in the second half as sales fall.

The outlook has small businesses anxious as well.

Tiffany Bullock, who recently opened her South Loop shoe boutique House of Sole in May, says she's had a slow start and is keeping a close eye on inventory.

"I'm still in a break-even cash-flow situation," Ms. Bullock says. "I'm nervous because I'm the new kid on the block."

July 30, 2007

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Conversion Property Sales Up (but stats are deceiving)

2 major deals drive first-half jump in apartment sales

(Crain’s) — Sales of apartment buildings in the Chicago region soared almost 70% in the first half of the year to $1.45 billion, buoyed by two massive downtown transactions and rent growth that continues to fuel demand from institutional investors.

Sales in the city through June totaled $944.25 million, almost triple the amount from the same period last year, while sales volume in the suburbs fell 4.9% to $502.59 million, according to a new report by CB Richard Ellis Inc.

With another $750 million of deals in the works, sales could climb to $2.5 billion this year, predicts John Jaeger, first vice-president with CB Richard Ellis’ multi-family investment unit in Chicago. That would shatter the all-time high of $1.89 billion reached in 2005.

“I think $2.5 billion is achievable. It’s not a stretch,” Mr. Jaeger says. “You’re seeing mega-deals as well as large and mid-sized transactions.”

Two downtown deals accounted for more than 50% of the volume in the first half of the year: the 2,346-unit Presidential Towers, which was bought for $475 million by Chicago-based Waterton Associates LLC, and the 481-unit Grand Plaza east tower, which a foreign investor bought for $263 million.

Institutional investors such as pension funds and private-equity firms are dominating the landscape, as condominium converters have been almost non-existent.

Through June, not one apartment downtown was bought by a converter, a developer that would convert the building into condos. One such deal was put under contract, though: American Invsco’s agreement to buy a 46-story tower at 200 N. Dearborn St.

The Chicago region has become popular with institutional investors trying to find so-called value-add properties where renovations can lead to big rent increases. That’s because much of the apartment stock here consists of 20- to 30-year-old complexes, says Mr. Jaeger, and because few new apartments have been built in recent years.

“Value-add deals continue to be the buzz as investors are chasing higher yields through a renovation program and resulting rent premiums,” the CB Richard Ellis report says.

One value-add investor concedes that deals have been hard to come by.

“It’s a challenge to successfully win those opportunities in this environment when so much capital is seeking value-add properties,” says Bennett Neuman, a senior vice-president of acquisitions with Chicago-based Laramar Group.

But Mr. Neuman says Laramar, which last bought a property here late last year, is hopeful about some current prospects.

“We’re seeing good increases in market rents, and vacancies are declining,” he says. “In general, we have the wind at our back.”

From Crain's Chicago Business

Related story: Thompson to resign as Winston & Strawn chair

Related story: Over the past 11½ years, condo converters have accounted for 43% of apartment sales in the city, according to CB Richard Ellis.

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Friday, July 27, 2007

Michigan Avenue Development Dead

Citing worries about the slumping downtown condominium market, Miami developer Peebles Corp. has walked away from a prime Michigan Avenue site where it had planned to build a 50-story condo and hotel tower.
Peebles had signed a contract this spring to pay about $32 million for the site at 300 N. Michigan Ave., currently home to a Walgreens, a Subway and a Radio Shack (Crain's, April 14).

But the developer "felt a bit uncomfortable" with the weak high-end condo market and decided to back out a couple of weeks ago, says Barron Channer, Peebles' vice-president of development.

"We're not moving forward with it, but we're still looking aggressively in the market," he says. "We want to do something that's more in scale with where we think the market is."

from Crain's Chicago Business

Average, Not Speculative, Buyers Moving Market

The stories are similar across the country. More homes for sale and fewer people buying. The National Association of Realtors reports sales of existing homes fell for the fourth straight month.

David Hanna is the treasurer for the Chicago Association of Realtors.

"Overall, the market has just gotten back to a pace where it's more about the average person going out and buying a home, and that's what's driving our market today versus the investment activity that we were seeing before," said Hanna.

The American dream of buying a home isn't as easy as in some Chicago communities. Geoff Smith is the research director for the Woodstock Institute where they track financial services in Chicago's minority communities. He says foreclosures have gone up 50 percent since last year and he says that only makes it harder for low income families trying to buy or keep a home.

"It's going to be more difficult for borrowers who are having problems with their mortgage to refinance their loan because credit terms are going to be more restrictive. It's going to be more difficult for them to sell their homes because there is a much larger supply of homes on the market," said Smith.

In addition to sub-prime lenders aggressively marketing their mortgages to those who couldn't afford them, sometimes a job cutback or illness may put homeowners behind in payments. If that happens, housing experts recommend calling the lender immediately to work out some arrangement to change terms or work out a way to get up to date.