New Construction

While the existing-home market is coming back to normal levels, the new construction market is still at half the normal level. A high vacancy rate and low household formations are to blame, but that doesn’t mean that there’s absolutely no activity going on with new construction. Demand for new construction is trending slightly up, and with competition from existing inventory, the new construction market for next year looks like it will be more level. Where will demand trend next year?

Will there still be financial incentives for new construction buyers? And are families really looking for new construction homes in the suburbs, or are they looking to stay in the city? 

For example, in the city, both Heather Gustafson of CMK Realty and Eric Richards with Optima Real Estate, Inc. are seeing an influx of families staying in Chicago rather than moving out to the suburbs. This is true for both condos and rentals, they say. Even though new construction’s competition is existing inventory, Gustafson says there is demand for new construction, and that this market will fill a need inventory isn’t satisfying.

• “The market ticked up, producing nearly twice as many new home starts in 2013 than 2012. As buyers struggle with affordability from rising costs and rates, we see them going back to buying the larger plans and less options, with the mentality that they have the large house, they can always add the granite later.” –Debbie Beaver, William Ryan Homes

• “The big indicator of this is traffic is high at our sales centers. And these are real buyers – we’ve already seen a high volume of contracts for our projects, and I think it will carry through to next year. There’s a need and interest, and there’s also some urgency to buy now, because interest rates are low and pricing is favorable.” –Heather Gustafson, CMK Realty

• While several new construction rentals have hit the market this year and will continue to do so next year – Optima 1 recently completed construction, and Optima 2, a second rental, will start construction next year – there are rumblings that conversions to condos may happen in some buildings next year, especially in rental buildings that already have condo finishes. “That’s a big thing we’ve seen a lot of buyers want. Even in an apartment, they want hardwood floors, granite countertops and stainless steel appliances. Condo finishes in rentals are becoming more popular.” –Eric Richards, Optima Real Estate, Inc.

• “Demand for new construction is two-fold. First, buyers are seeing home prices rise, which gives them more confidence about future appreciation and the market as a whole. Second, Chicago still has low housing inventory due to the lack of new development since the downturn. This has created a strong appetite for new construction, particularly in sought-after downtown neighborhoods. Until more new construction becomes available, the demand will continue to outpace supply.” –Curt Bailey, Related Midwest

• “Demand is still strong, and it wouldn’t surprise me if next year’s new construction market exceeded 2013. More apartment buildings are going up, not a lot of condos or townhome product, and those for-sale projects are not large ones. The things we’re building are for smaller projects. We’re not ready yet to start building big condo buildings – there is too much risk involved and not enough pre-sale buyers.” –Alan Lev, Belgravia Group

• Although the trend still exists of new and growing families moving to the suburbs, there is also a growing trend of young families staying in the city. This trend of buyers are looking for open concept living, which many new construction developments have – spaces for entertaining and extra space to make it possible to raise a family. “We are mindful of this new trend, and have started creating large spaces in our developments, such as four-bedroom floor plans and open floor plans that accommodate families, not just a family until the children are preschool age.” –Heather Gustafson, CMK Realty

• “Financial incentives will lessen, if not disappear. With rising costs of new construction and the demand for new on the rise, we’ve already seen a swing back toward a sellers’ market.” –Debbie Beaver, William Ryan Homes

• “Developers will always look for ways to make it easier for buyers to make their purchase, but what those incentives look like change with market conditions. The lending environment has changed a lot since the downturn, with lenders and buyers alike much more cautious and the approval process much more rigorous.” –Curt Bailey, Related Midwest