Home starts are up; residential construction in the Chicagoland market has seen a massive cash injection this year; and Chicagoland new home construction is at its highest level in seven years, according to Metrostudy. But while starts are on the rise, new construction sales are down. In the 12-month period ending with Q2 2016, sales fell 4.1 percent, and quarterly sales were down 14.1 percent year over year.
Chicagoland has a lot shortage – so to speak. Builders are finding it difficult to find skilled labor, affordable materials and financing. Faced with regulatory and demand problems, replenishing affordable housing stock has become a challenge. So how do builders overcome those obstacles and thrive in a changing economy? Why are some homebuilders able to adapt while others struggle to evolve?
Not a lot of lots
“Lot supply is constraining Chicago’s ability to move upward,” says Tracy Cross, president and chief executive of real estate research firm Tracy Cross and Associates, Inc.
Lot supply in Chicago peaked about five years ago in the third quarter of 2011, when the vacant developed lot inventory was more than 250-months supply. Now it’s closer to 86 months of supply.
In terms of sheer numbers, an 86-month lot inventory is technically an oversupply. The “shortage” comes in preferred lots – otherwise known as “A” lots. It’s a problem Belgravia Group President and CEO Alan Lev says Chicagoland builders have always faced.
“Lot supply is a problem, but that’s not a new thing,” he says. “I like to think it is, but I look back to my younger years in this business: it’s always been hard to find good sites at the right price. You can always find stuff, and you can over pay for it, but the key is finding something at a number that actually works.”
Mark Gianopulos of Metrostudy claimed Chicagoland builders will look to supplement with infill locations. Cross says we need to expand, but that “it won’t happen over the next year.”
Why? Cross points to disorganization among the developer community, namely interests that come more from corporate dictums than collective agreements. “There are companies saying that builders can only go in and develop 100 lots because they don’t want to hold lot inventories,” he says. “That’s a corporate strategy.”
The hurdles Lev sees are more systemic. “I don’t know if it’s any harder to find lots in the city today than it used to be. It’s the same situation Chicago has always had,” he explains. “Every alderman has all the power in the ward, and you have to get his or her blessing to develop a lot, and the alderman won’t generally bless it unless it has the backing of all the right community groups.”
Assuming a builder can overcome corporate interests and satisfy the right community leaders to eventually land an “A” lot at a worthwhile price, there remain considerable restraints.