Selected Press

Betting on run-up in condo prices

After just seven weeks of sales, developer Enrico Plati has had a stunning success selling his planned 16-story River North condo tower, with signed contracts for 90 of the building's 120 units.

But up to a quarter of the buyers are unlikely ever to move in.

In what may be the city's hottest new futures market, speculators are snapping up condos even before construction starts, with plans to resell the units at hefty profits to owner-occupants once the building is complete.

Though such investor-buyers have long been a part of the local real estate scene, their numbers are rising as quickly as downtown condo prices, accounting for more than 45% of buyers in some River North and West Loop developments.

Mr. Plati, an architect and veteran developer, would prefer that all of his buyers move into his $40-million project, with its long, wrought-iron balconies, at the corner of Superior and Orleans streets. But prices are rising so fast that Mr. Plati says the one-bedroom units that sold for $200,000 could be worth $230,000 when the building is completed in nearly two years. Speculative buyers could then resell the unit, more than doubling their cash investment, a $20,000 (10%) down payment, after paying commissions and other expenses.

"For someone who wants to undertake some risk, that's a very good reward," says Mr. Plati, president of Chicago-based B&P Developments LLC. "But I'm not a speculator."

Like futures traders, these investors are betting on the demand for moderately priced homes and continuing favorable interest rates.

Yet there is increasing concern that speculators may be inflating demand. If there's a shock to the economy, a speculator may be more likely to walk away from a deal than a traditional homebuyer, or rent the units out, turning projects into hybrid rental/condo developments.

"It's a good thing because it facilitates sales and reflects people's confidence in the economy and in the future of our city, but it also may be sowing the seeds of future problems," says Joel Zemans, president and CEO of Chicago-based Mid Town Bank & Trust Co.

Speculators are a shadowy group, who seldom identify themselves as such when they sign sales contracts.

"Brokers are leading it, but it's everybody: yuppies with money, contractors and the guy who lives down the street who has seen the value of his own unit appreciate," says Garry Benson, a partner in Garrison Partners, a Chicago-based residential-project marketing firm, who has recommended that his developer clients increase earnest money requirements to discourage speculators.

More than 20% of buyers

Although the exact number of speculators is difficult to ascertain, residential consultant Tracy Cross estimates that in River North and the West Loop east of the Kennedy Expressway, speculators account for more than 20% of all buyers, up from 15% one year ago.

Mr. Cross, president of Schaumburg-based Tracy Cross & Associates Inc., says that in some projects -- which he wouldn't identify -- speculators account for 45% to 50% of buyers.

Although every project is seeing an increase in investor-buyers, the telltale sign of speculators' influence is rapid sales at early stages, as with Mr. Plati's project, a joint venture with Deerfield-based real estate firm Richard Hoffman Corp. In the West Loop, nearly two-thirds of a 97-unit, 16-story project at 700 W. Van Buren St. developed by Chicago-based CMK Development Corp. was sold after two months of marketing. Between 15% and 20% of the buyers are investors, estimates CMK President Colin Kinke.

Investors also are said to have favored several River North condominium developments by Chicago-based Magellan Development Group Ltd., including a 25-story building at Kingsbury and Ontario streets planned by a joint venture of Magellan and Chicago-based Fifield Realty Corp.

All 171 units were sold in three days in December, although the developers don't know how many of the buyers are investors, says Steven Fifield, president of Fifield Realty. Depending on the project, investors account for 10% to 30% of all buyers in the market, he estimates.

Traditional homebuyers are typically reluctant to make down payments on units in a new condominium building until it is topped out, fearful of losing their savings if the project isn't finished. These new real estate middlemen are stepping into the condo market earlier than traditional buyers, making highly leveraged bets that they can eventually resell the units to owner-occupants.

If they can't, many investors will rent out their units, taking advantage of the tight market for apartments near the Loop.

But some developers fret that mixing a high percentage of renters into a condo building will only create tension with owner-occupants.

Prohibition on resale

Prohibition on resale "Renters don't have the same concerns as homebuyers do," says Ronald Shipka Sr., president of Chicago-based Enterprise Development Co., which this month will start marketing a proposed 18-story condo tower in River North.

To curtail speculation, leading commercial real estate lender LaSalle Bank is now requiring that developers prohibit buyers from reselling their units before they close. A LaSalle spokeswoman confirmed the bank's policy, but would not say when it went into effect.

Mr. Fifield and Mr. Plati, who permits investor buying, question the effectiveness of such clauses.

But such steps may help prevent an oversupply of condos, says developer Harry Huzenis, a critic of speculators.

Says the executive vice-president of Chicago-based Jameson Realty Group Inc.: "It's imperative that lenders impose the necessary discipline, because developers aren't going to do it."