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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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.

May home sales in Chicago down almost 21%

Home sales in the Chicago area plummeted 20.7% last month compared with May 2006, according to the Illinois Assn. of Realtors.

A total of 9,750 single-family homes and condominiums were sold in the nine-county Chicago area last month, with the median home price rising 1.2% from the year-earlier period to $252,388. The biggest drop in sales last month occurred in outlying DeKalb, Grundy and McHenry counties. Sales in Cook County fell 20.1%.

Through May, sales in the nine-county area were down 17.4% from last year to 38,423, according to the association.

The home-sales figures were more grim nationwide.

Sales of existing homes fell in May to the lowest level in four years while the median home price dropped for a record 10th consecutive month.

The National Assn. of Realtors reported that sales of existing single-family homes and condominiums dropped by 0.3% to 5.99 million in May, the slowest sales pace since June of 2003.

The median price of a home sold last month dropped to $223,700, down 2.1% from a year ago. It marked the 10th straight price decline compared with a year ago, the longest stretch of weakness on record.

The sales decline reflected weakness in the South, where sales dropped by 3.4%, and the West, where sales were down by 0.8%. Sales actually showed strength in the Northeast, rising by 5.8%, and the Midwest, where they were up 0.7%. In a troubling sign for the future, the inventory of unsold homes rose by 5% to 4.43 million units in May, a level that would take 8.9 months to clear out at the May sales pace. That is the highest inventory level since the last deep slump in housing in 1992.

Analysts said housing is being hurt by high inventories and the recent crisis in subprime mortgages, which has caused lenders to tighten their standards, making it harder for potential buyers to qualify for loans.

They said all of the housing troubles seem to be causing a crisis in confidence, making people delay decisions to buy homes.

"I think psychological factors are currently the biggest drag on the housing market, in addition to a disruption from tighter credit for subprime borrowers," said Lawrence Yun, senior economist with the Realtors.

The current slump in housing is the worst since the 1989-92 downturn. It is occurring after a prolonged boom that saw sales of new and existing homes set new records for five consecutive years.

Analysts believe that the median home price, the midpoint where half the homes sold for more and half for less, will continue falling until builders move further to cut back on production of new homes coming on the market.

The Realtors are predicting that the median home price will decline by 1.3% this year while sales are forecast to drop by 4.6%. It would be the first annual price decline in four decades of record-keeping.

Another potential problem is mortgage rates, which have been trending higher in recent weeks although they still remain below their historical averages.

According to Freddie Mac, the average commitment rate for 30-year mortgages was 6.26% in May, up from 6.18% in April.

(From AP, staff)

Mega South Loop Development

3,000 housing units, hotel on drawing board for vacant riverside site

Two Chicago developers aim to build as many as 3,000 homes, a hotel, stores and a marina along the Chicago River just south of downtown, transforming an 8-acre tract that has sat empty for 36 years into a densely packed urban neighborhood.

Estimated to cost $1.6 billion, the 3.5-million-square-foot project four blocks south of the Sears Tower would mark a big step forward in the South Loop's residential renaissance and bring life to a dead stretch of the Chicago River. Sources say the developers, Rokas International Inc. and Frankel & Giles, have agreed to pay about $55 million for the parcel, which, like Block 37 in the central Loop, has stubbornly resisted development.

"That site is a gaping hole," says architect Dirk Lohan of Chicago-based Lohan Anderson, who did planning work there in the early 1990s.

The question is whether Rokas and Frankel & Giles can succeed where others have failed. It's unclear whether the city will grant them the zoning change they need to build such a dense project, which would jam into the site about a million square feet more than current zoning allows. The developers, who decline to comment, also plan to ask the city for about $25 million in tax-increment financing to help pay for a riverwalk and other infrastructure, a source says.

Another challenge: the slumping condo market, which could make financing the development difficult.

Designed by Adrian Smith & Gordon Gill Architecture, the project would include as many as eight buildings — one exceeding 80 stories — and about 125,000 square feet of retail space. The residential component would be a mix of condos, apartments and senior housing. A hotel, with as many as 500 rooms, and a 40-slip marina would round out the complex.

With its riverside location and proximity to downtown and public transit, "it's a great piece of real estate," says Peter Dumon, president of Harp Group Inc., an Oakbrook Terrace-based development firm that has reviewed the latest proposal for the property.

Yet he declined an offer to develop the hotel in the project, noting that hotel guests are unlikely to venture south of the Congress Expressway. Harp instead is considering buying development rights for an apartment tower on the site.

Known as Franklin Point, the property is the former site of Grand Central Station, a rail terminal demolished in 1971. The developers have signed contracts to buy the tract from Jacksonville, Fla.-based railroad company CSX Corp., which owns 6 acres of the site, and D2 Realty Services Inc., which owns about 2 acres. CSX did not return calls. David Kleiman, a D2 principal, declined to discuss terms.

SEEKING APPROVAL

The developers are negotiating with city officials over rezoning the property and will also need support from neighborhood groups and Alderman Bob Fioretti (2nd).

Then there's the challenge of selling enough condos to land a loan for the project. The condo glut could ease by then, but the supply of unsold units downtown reached 6,507 at the end of the first quarter, up 62% from a year earlier, according to Chicago-based consultancy Appraisal Research Counselors.

Founded in 2000 by Lithuanian immigrant Andrius Augunas, Rokas has developed several smaller condominium projects in the South Loop but nothing on the scale of Franklin Point. Frankel & Giles, which also specializes in the South Loop, has a longer résumé, including a 274-unit condo tower at Prairie Avenue and 18th Street.

If it comes to fruition, the Franklin Point project would anchor and enliven the western edge of the South Loop, where residential development has been slow to take off. D2 Realty proposed a less-dense project there than the current proposal but dropped the plan about two years ago amid an impasse in talks with the city. In the early 1990s, Harris Bancorp Inc. scratched plans to build a back-office building on the site.

"It's kind of like Block 37," says Mr. Kleiman, referring to the central Loop parcel that is finally being developed after a 15-year delay. "Hopefully, this will be the time."

©2007 by Crain Communications Inc.