New Construction in a New Economy

by Chicago Agent

Despite what people may believe about the market, new construction is springing up and selling – selling well, in fact, for some developers and projects out there. Here are the updates from those who know: Alan Lev of Belgravia Group, which is developing 565 W. Quincy, 433 Briar and 600 Lake Shore Drive; Jeff Benach of Lexington Homes, which is developing Lexington Park in Des Plaines and Lexington Square in Chicago; Debbie Beaver of William Ryan Homes, which has developments in Elgin, Naperville, Shorewood and Volo, among other towns; Scott Hoskins of CMK Realty, which is developing 235 Van Buren; Brian Hoffman of Red Seal Homes, which is developing Coventry Creek in Des Plaines, Deer Park Estates in Deer Park and Enclave at Sheridan Point in Wilmette and Evanston; and John Murphy of MB Real Estate, which is developing Lincoln Park 2520.

Chicago Agent: How’s business? Is traffic up or down?

Alan Lev: We are fortunate to be at the tail-end of sales
on our two remaining new construction developments, 600 Lake Shore Drive and 565 W. Quincy. We accounted for nearly one third of all sales in 2010 as reported by Appraisal Research and sales have been strong thus far in 2011. In addition, we have sold half the homes at a building we bought from a lender recently. So far, traffic is up in 2011 from the second half of 2010. We expect traffic to continue to increase as the weather improves.

Debbie Beaver: Business is challenging. The customer profile – who they are and what they want and need, and what they want to pay for it – changes daily. As for traffic, our preferred Realtor program has helped our traffic and our sales. With the preferred program we offer 4 percent commission, a fast cash program (half commission at the time all contingencies are released in lieu of waiting until closing for all of it), the ability to pre-register their clients, and homes that are in process for a quicker delivery.

John Murphy: We have experienced a noticeable upswing in business over the last two quarters. As it relates to Lincoln Park 2520 specifically, this movement is because both our prospects and buyers recognize that overall, the economy is improving. Furthermore, there is a limited supply of well-located, ultra-luxury, newly constructed homes available for purchase – which is what Lincoln Park 2520 represents. We recognize that there is still strain in the economy, however, and historically, the finest projects tend to demonstrate resiliency to more broad market conditions; they stand alone. We have clearly experienced such positive attributes with this project.

Jeff Benach: Traffic and sales are still down for us since the elimination of the tax credit last year. We’ve lowered some prices with the market. Foreclosures and short sales are still a factor out there. We’re offering incentives at both our communities.

Brian Hoffman: Business is improving from the middle of 2010. We have seen steady sales activity since Thanksgiving with product moving at all of our locations and price points. Traffic and the quality of traffic is definitely up.

Scott Hoskins: Personally, I’m very excited about business. Right now, there still seems to be some hesitation going on in the marketplace, but early in the year, especially starting in February, we saw a significant surge in good quality traffic – a lot of that traffic that led to deals. People have been sitting on the sidelines for some time now, and now have confidence to buy. People are feeling confident in the job market and people recognize that loans aren’t easy to get, but there are some programs out there for financing. We’re seeing lots of first-time and move-up buyers, and we have a good price point – high $100s to mid-$300s. Traffic is up, and it’s similar this time to last year, but the quality of buyers is better. We are seeing a higher percentage of people looking to buy sooner, and people are making quick decisions.

CA: How are you dealing with pricing issues?

JM: In response to the downturn in the economy, we made sizing modifications to the building, which impacted overall unit pricing. We made limited changes as it related specifically to price per foot, but since modifying the project, we have not had to adjust our pricing downward. As our inventory of available units further reduces, pricing, logically, may be adjusted upward. It’s difficult to project exactly when that will occur but likely sooner than later in response to our activity trends.

AL: All our homes are priced to today’s market. In some cases (like with 565 W. Quincy) that means reductions of up to 30 percent, and in others (600 Lake Shore Drive) that means no reductions due to the unique circumstances of the building.

JB: We’ve lowered some prices with the market. Foreclosures and short sales are still a factor out there. We’re offering incentives at both communities.

DB: We’re dealing with pricing one deal at a time. Today’s buyer is looking for as much for their dollar as possible. But every buyer needs or wants something different, so we offer a $10,000 Freedom Fund to use however the buyer needs it, whether for options, upgrades, closing costs, interest rate buy-down, etc. Because one-size does not fit all, we tailor every deal.

SH: I can say with a great deal of confidence that when we introduced our project and all it offered – great location, best finishes, great price point – we didn’t have to change prices. A lot of our competitors have same type of product, but we haven’t had as many issues with pricing. Therefore, we feel there’s been a bit of stabilization, and that our property is an exceptional value for the market. Over the course of the past year, we have seen continual improvement in buyer activity. Traffic continues to increase, and more recently we have realized a significant bump in traffic. There is a renewed level of confidence being demonstrated by buyers in the marketplace, and this has been the primary catalyst to increased sales absorption over the past few months.

BH: Pricing remains quite weak, but appropriately priced homes are moving at a decent clip for the first time in three years.

CA: Give us an update on what your company is working on.

DB: We are increasing the quality of our construction. During the downturn, most builders have “value-engineered” their product, taking features out of their homes to reduce costs, while we have been making our product better and putting more features into our homes. Our homes are more energy efficient with increased air quality.

JB: We have a community in Prospect Heights that we’ll open this year, and possibly one in Morton Grove. Both are townhome communities.

AL: Belgravia Group and its affiliated company, Nextstep, are concentrating on buying more distressed multi-family properties. We will buy anything from a partially completed building to a completed building with a bulk of units unsold. We also manage property and perform brokerage services.

BH: We continue to focus on a combination of our developments and the management of several bank owned projects and foreclosures.

CA: Are you opening or taking over anything new?

DB: Yes! Lots actually. We’re in growth mode. We’ve taken over five communities after other builders failed in Joliet, Lindenhurst, Lakemoor, Libertyville and Elgin. We’ve also taken our floor plans, efficient building and national purchasing power to infill locations. There are hundreds of scattered lots throughout the suburbs. We’ll build one of our 13 floor plans on them, bringing quality homes and a great price to some of the most sought-out locations, such as Naperville, Libertyville, Wheaton, Mount Prospect, Palatine, and more. But our largest undertaking is creating Ryan Remodeling, where we leverage our national purchasing power and provide customers with phenomenal pricing on remodeling customer’s homes if they choose to stay put.

AL: We bought two bank owned properties and are actively negotiating on the purchase of others. Some we will rent and hold, and others we will complete the sales at today’s market prices.

JB: We have a couple of small communities in the suburbs planned for 2011. Dates are still uncertain.

JM: Projects are presented to us with each month that passes, but, as with any project, we are highly selective. That said, and for the time being, I think new business activity will most likely be isolated to the purchase of an existing asset versus a new construction pursuit. As with any real estate pursuit today, the key is to attract adequate capital to develop or redevelop properties as attractive investments.

BH: We are working on opening two new projects for this summer.

CA: What challenges are you dealing with now and might you be dealing with during the next few years?

SH: Our biggest challenge is educating buyers. The market has changed a lot and, in some cases, we’re seeing rebounds. Some prospects might not realize what’s going on out there, so to be able to properly educate buyers is important.

JB: Job growth has stagnated in Chicago. That’s one important factor that needs to improve in order to see improvement in both the foreclosure/short sale situation as well as traffic and sales for builders.

DB: Our challenges are lending rules, interest rates, competition of resale and foreclosure, village requirements, getting the word out with reduced marketing budgets…

AL: It appears that homebuyer mortgages will become more difficult to obtain as the year progresses. Down payments and credit scores may increase and many buildings do not qualify for FNMA or FHA loans under current guidelines.

CA: Are there any special indicators you watch?

JB: As I said, unemployment is the biggest indicator. Clearly, the stock market has virtually no effect.

DB: Being “customer-driven by design,” what I watch is our customers and prospects. We survey both to keep our finger on the pulse.

JM: We look at the employment picture closely and monitor the movement of financial markets. We look for consistent stability of the economic climate for an extended period of time, which is usually a leading indicator of employment growth, which thereby drives demand. We’re seeing evidence of that in the economy now, but it’s moderate. We need to first see longer-term consistent growth in the employment sector, which will impact or allow the housing market to rebound but, as stated, we are starting to see improvement. Our trending at Lincoln Park 2520 is improving and we expect activity to continue at the same velocity, if not accelerate. We’ve seen an increase in traffic each week and have not seen any kind of break in that activity since the beginning of the year. As long as we continue to sign contracts, we’re very optimistic about Lincoln Park 2520.

AL: We watch traffic, conversion ratios on traffic, rental rates and cap valuation rates, among other data.

CA: What are your expectations for 2011?

BH: It doesn’t appear to be a robust year, but it looks like we won’t lose any more ground this year. The one worry point is the recent increase in oil prices — every discretionary dollar that the consumer loses makes the prospect of greater homebuying more remote.

DB: We’re looking to sell 100 homes this year, more homes than any other privately held builder, but I do expect it to be a challenge. Competition of re-sales and foreclosures is fierce.

AL: I expect some new apartment buildings to be started, but no new construction of for-sale multi-family buildings. The existing inventory of new construction will continue to be sold and the rental market will continue to improve through higher rents and high occupancy. The banks are beginning to dispose of distressed assets and we’ll see more cleaned up in 2011 than previously.

JM: Our buyers are looking for a unique residential opportunity. As we complete the 22nd floor of the project and prepare for delivery in the first quarter 2012, those prospects are seeing the reality of the project and are responding favorably to our progress. It’s been almost 40 years since Lincoln Park has seen residential development on this scale. Consistent comments have been, “This is what we’ve been waiting for.” We expect 2011 to be a very good year. As there are very few units available in terms of new construction in the ultra-luxury market, we are confident that Lincoln Park 2520 will become the elegant new home that we and our buyers envision.

SH: I foresee steady levels of buyer activity to continue into 2011. Interest rates continue to be historically low, unemployment levels have stabilized and buyers seem to have a higher level of confidence in making a decision to purchase. Much of the activity that we are seeing stems from buyers who have been considering a real estate purchase for some time, but have been waiting on the cautiously on the sidelines. Many now feel more comfortable with the current employment situation and sense that the Chicago real estate market has reached its bottom and is slowly rebounding. C.A.

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