Tracy Cross
President
Tracy Cross & Associates, Inc. 

Chicago Agent (CA): What is your current sentiment towards new construction in Chicagoland’s suburbs? 

Tracy Cross (TC): It’s flat all over. We’re only selling at an annual pace of just over 4,000 units, compared with more than 33,000 in the heyday of 2003 through 2005. I would not say the market remains “distressed,” because there are very positive developments in the area, but for the most part, it has remained flat for the last 30 quarters.  Sales have remained flat for two key factors. The first is supply. Chicagoland’s new home market has not produced a significant number of new home sites for development in what one would consider Class-A locations, and most of those “A,” and some “B,” locations that were hit hard by the downturn have been absorbed by the builder community over the last four years, so there’s nothing new coming on the market. For example, in 2005, there were 1,400 active developments throughout the Chicagoland region; currently, there are only 290, and that includes the city.

The second factor is competition from the existing-home market, which benefits agents but dampens sales on the new construction side. The historical new home sales share here in Chicagoland is 16 percent of total sales. Currently, it’s 3.5 percent. There are several reasons for the deterioration. One is the distressed side of inventory, which is greater here in Chicagoland than nationwide. Another is a significant rate of domestic out migration, meaning homeowners are listing their homes in strong locations and moving to another state. That re-sale unit now competes with new construction that is likely 20 miles farther out and more removed from major concentrations of employment. 

CA: Why do you think listing prices for new construction have risen so dramatically in recent years? 

TC: From 2008 to 2012, you had a price adjustment in the market. As builders picked up distressed, vacant properties, they came back on the market with a price reduction of almost 15 percent. That reduction has now been fully eroded, and prices are beginning to move up in the single-family sector on an 8 percent yearly basis, while prices are flat in the multifamily sector. Our single-family new homes in the suburban market carry a median price of $295,000.  Price has to go up. You cannot stay on a flat-line basis forever. We expect it to move up as new properties are brought on to the market. There was quite a bit of investor help with vacant developed lots that are starting to resurface, so the supply side will begin to increase. We expect a 20 percent upturn next year on inventory, and in the fourth quarter of 2015 we may see a 20 percent increase over last year.  

CA: What are some of the challenges builders face as the new construction market recovers?

TC: There are three big challenges. First is the availability of dirt, meaning land they can use for development. Second is the limited accessibility of financing for the privately-held homebuilder, and third is the approval process. Referencing the third point, we have 297 municipalities and political jurisdictions in this area. In Raleigh, North Carolina, a builder may deal with three villages as they move around in the growth areas in that region, while in Charlotte, they may deal with five to six separate communities.

But here in Chicagoland, when builders vary their geographic position in the market, they’re going to deal with 30 or 40, and each will have different rules. The streamlining of development from a political process is very arduous and complicated.  The problem of the number of municipalities also plays a role in the low availability of vacant land for development, through restrictive zoning not allowing an efficient level of supply to come onto the market. Also, we do not have smaller-lot zoning in many of those suburbs, which makes building to what the market really can afford through density difficult. 

CA: Do you think we’ll ever return to widespread spec building, or are those days forever gone in Chicagoland? 

TC: “Speculative building” is a term that gets thrown around with no definition. Spec building is when you start construction on a home before a contract is signed, and honestly, that’s never been a factor in Chicagoland’s market. The reason is you either had privately held builders who were cautious in their construction, or prudent lending practices. The only time you saw speculative building was foundation placement before the winter, but otherwise, 95 percent of construction in Chicago has been done on a contract basis, even during the boom. The only developments that have experienced problems are high-rises in the city, some of which are still trying to sell out.

That said, today’s developments are smaller than in the past because there has been a concerted effort on the part of the builder community to seek in-fill locations, which are by nature smaller. So if you pick up 40 lots in Lisle, there is likely to be very limited land obtainable for a replacement community. As the builder community has moved toward in-fill as an important way to compete with the existing market, the developments have naturally become smaller. That does not mean, though, that in the developing areas of Chicagoland – Pingree Grove, Volo, Plainfield, Joliet – you’re not seeing larger scale development. To some degree, those are the same growth areas as during the boom years.  

CA: With lots and materials growing more expensive every year, entry-level new construction is essentially finished. Is that observation consistent with Chicagoland’s suburbs? 

TC: Yes and no. You can still find affordable new construction in Chicagoland, and entry-level buyers are still an important part of the market. The trouble we have is that employment growth is not occurring in manufacturing, blue collar or the service sector, but in the tech and health sectors. And the employees in those sectors, who are members of the Millennial/Gen Y group, are today looking for apartments in the city, as well as suburban locales that are transit-oriented or proximate to shopping and jobs. 

Will Millennials/Gen Y become a dominant part of the for-sale market? The answer is “yes,” but not until they get older. Then, they will become a significant part of Chicago’s market. Consider this future scenario: a 60-year-old couple sells their house in Elmhurst and moves to Florida, Arizona or the Carolinas. That supply-side house will be purchased by an older Millennial that is now forming a family. I guarantee it. So this notion that Millennials will have no impact on the for-sale market is simply not true.  

CA: Do you think new construction will return to Chicagoland’s “exurb” communities, or is there no longer demand for that kind of sprawl?

TC: Absolutely not. The markets that emerged – DeKalb, for example – may have had the label of an “emerging market” during the boom years, but they’re clearly exurban, and in my opinion will remain exurban for the foreseeable future, unless a large employer relocates there. The only exception to that is Kenosha County, where “just-over-the-line” companies like Amazon, Uline and Snap-on Tools have a strong and expanding presence. And while Kenosha lost its status as a growth area in the mid-2000s, that label may resurface very quickly with the employment growth that is occurring there. Where jobs are, the rooftops follow. 

CA: No one has a crystal ball, but based on your observations, where is new construction heading in the next year? 

TC: It will be 20 to 30 percent higher, but that number, 4,500 units, still puts us about 70 percent below long-term trends, and far below the 23,000 units a year we averaged from 1995 to 2006. So rather than a rapid push upward, we’re due for a slow, gradual growth, or what we call “the return of the rational consumer.” That is the guiding line, because there was irrational exuberance during the boom. That does not necessarily mean that Illinois or Chicago will regroup to its historical place in the new home market.

Previously, you could take all the economists in the U.S. and have them forecast for-sale volume. Then, after taking the general consensus of that, you would take 2 percent of it – the resulting number was always Chicago’s new home sales volume. So if you have 1.2 million units, 2 percent of that would be Chicago’s volume. It was a very, very predictable market. Now, though, Chicago is producing about 1 percent of the general consensus, meaning its market share has dropped by 50 percent. We do not see that number moving much above the 1 percent mark moving forward, meaning Chicago will remain at that level over the long term at a new normal. Is it returning to where it was? No. Will it ever? No.