In a housing market beset by low inventory plus rising interest rates and inflation, there is reason for optimism among homebuilders and the real estate agents who represent them: Home values remain strong, and demand continues to soar.

It’s that mix of challenges and opportunities that cause Danny Glick, real estate broker with @properties Christie’s International Real Estate in Chicago, to describe the local new-construction market as complicated.

“On a positive note, material costs have stabilized,” Glick said, “and it’s easier to predict construction costs compared to a year or two ago. That said, interest rates right now are high, so the cost of capital is a much bigger factor when evaluating any development deal, and banks are requiring more equity. In March 2022, the interest rate was 4% to 4.5%. Today it is 9% to 9.5%. That’s a massive additional expense that plays an important part in determining the viability of a project.”

The U.S. Census Bureau reported that housing starts in July were up 5.9% from last year nationally, exceeding builder expectations and boosting confidence for the coming year. That same outlook has made its way to some pockets of Chicagoland, prompting cautious optimism among some industry experts about the next six to 12 months.

What history tells us

More than 75% of all new-home sales in the last several years were generated by five large builders — DR Horton, Pulte Homes, Lennar, M/I Homes and Ryan Homes — said Erik Doersching, president and CEO of Tracy Cross & Associates, a real estate development consultant based in Schaumburg. It’s a departure from 1995 through 2003, when medium- to large-scale private builders like Neumann Homes, Town & Country, Pasquinelli Homes and Kimball Hill were dominating the market.

“Those private builders either sold their companies right before the Great Recession, or it put them out of business, and no medium- or larger-scale private companies ever came back,” Doersching said.

However, there are a number of smaller builders hovering around areas that other builders are not taking advantage of for “infill” developments of town homes.

“We never fully recovered from the recession, though demand has increased,” he said. “New construction peaked in 2007 — there were 1,300 new-construction developments throughout the Chicago area. There are less than 300 today.”

Demand and pricing

About 5,000 new-construction homes in the Chicagoland market sell each year, not including high-end custom sales. Doersching believes the region could almost double that volume if supply were made available. During the second quarter of 2023, almost 20 new housing developments opened in Chicagoland, making it the best second quarter since 2008, he said.

“It proved if the supply can be made available, our sales in this region are going to improve. We can never get back to the 20,000+ sales a year we were generating in 2003, 2004, 2005 and 2006, but we can be doing much better.”

Builders are also up against inclement weather, meeting the unique ordinances of each municipality and rising costs. As a result, it can take up to two years to get through the approval process, Doersching said.

While costs have leveled off since the pandemic, they remain much higher than they were pre-pandemic. Over the last five years, costs have risen at a greater rate than incomes, and it influences how builders price their product.

Depending on location, new town homes and row homes are generally selling from $250,000 to $400,000 in the suburbs, he said. Single-family, detached homes are concentrated in the $350,000 to $550,000 range.

Hot spots for new construction

A majority of new construction in the region is in “emerging markets” or “growth areas,” locations outside of mature residential areas that are ripe with employment, Doersching said.

Right now, the northwestern, western and southern suburbs are the strongest for new construction. Lake County, however, is “under supply” because of the approval process, Doersching said. He sees development in areas with land availability that allow a builder to create larger-scale development. Those areas include Aurora, Hampshire, Huntley, Joliet, Lemont and Plainfield. But builders still hover around infill development because demand is there, too.

“If additional communities can continue to open up this year, it could be one of our best years in over 10 years,” Doersching said. “It really is dependent on supply. We’ve always told builders, ‘If you’re headed out to growth areas, also look for opportunities in the rearview mirror — inside the region and emerging market opportunities.’”

In the city, there are opportunities in Albany Park, Avondale, Humboldt Park, Irving Park, Lincoln Square, Logan Square, North Center, the West Loop and West Town. Those neighborhoods on the North and West sides are growing in terms of new construction, Glick said.

“Many buyers have certain borders that they want to stay within. But venturing even a block or two beyond those borders, you can unleash a whole new pool of properties and get more for your money,” he said.

For builders, there are also opportunities in the small-to-midsize rental space, Glick said. “With the increase of rental prices over the past couple of years, builders can now build new-construction buildings ranging in size from three to 40 units. Rather than sell them as condos, [they can] hold them as investment property or fill them, stabilize them and sell the entire building as an investment.”

Shrewd builders will look for parcels carrying unique zoning like transit-oriented districts that offer advantages in terms of unit count and parking requirements, Glick said. There’s also great opportunity in the suburban single-family home market because inventory is still exceedingly low.

What agents should know

The best strategy for agents to generate business with builders is to drive around and look for new construction in progress, Glick said.

“Each site will have a building permit posted with the contact information of the developer or general contractor,” he said. “You may even meet them face-to-face on the site” If you do, get to know them and their work by asking questions, such as: How do you typically find your projects? Who represents the sale of your homes? What neighborhoods do you like to build in? What types of properties do you like to build?

New-construction contracts differ from resale in that contracts are specific to each property and individual developer, Glick said. Even though a buyer will work with an attorney, the agent should read the contract thoroughly. Make sure the list of specifications detailing everything going into the house is exhaustive and leaves no room for misinterpretation, which is typically the cause of a poor buyer experience and even litigation, Glick explained.

Research the builder and find out who will be in charge of construction, Glick recommended. Builders should have a long history of constructing quality homes, and, in an ideal world, they will also have a list of clients that prospective buyers can contact.

“If the developer hired a general contractor, then that person is overseeing the subcontractors and the developer is once-removed, which can sometimes impact quality control,” Glick cautioned. “You’ll want to know who is going to be on-site overseeing the construction and, most importantly, who is going to warranty the work.”

Although credits are typically part of new construction, don’t assume closet systems, light dimmers and towel bars are a given, because they may or may not be included, explained brokers Samantha Porter and Lauren Goldberg of Porter Goldberg Residential, Jameson Sotheby’s International Realty, in Chicago. Negotiate fair credits for clients, such as AV speakers, security, wiring, etc. To avoid disappointment, set expectations with buyers upfront about what is and isn’t included in the home.
Porter and Goldberg say it takes four ingredients to make a smooth transaction: cooperation, trust, expectations and communication.

If you’re representing the builder, it’s important to market properties based on the stage of construction, Porter said. “You cannot put a new-construction listing on the MLS and forget about it,” she said. “Projects are constantly progressing, and information should be updated regularly.”

Raw-construction projects command more detailed descriptions of what the finished project will look like, including renderings and schematic elevations, both during showings and online. “One hurdle when you’re selling pre-construction or early-on construction is dealing with rough conditions — no heat and electricity, workers to move around, safety,” Goldberg said. “We prepare people for the state of construction that it’s in.”

Mortgage rates are also handled differently in new construction, and it’s important to explain the difference to buyer clients. Mortgage rates may fluctuate depending on how many units are sold. If you’re the first unit in, you may pay a higher rate. More and more, builders are buying down mortgage interest rates for buyers as an incentive.

“In the past, you might get credits toward options and upgrades,” Doersching said. “Now they’ll buy down your mortgage rate to a rate more akin to a few years ago.”

Getting in early may allow buyers to customize certain aspects of the home, such as replacing single doors with French doors or choosing paint colors, Glick said.

It may be important for agents to coach buyers on maintaining flexibility with the closing date. New construction involves many moving parts, and delays outside of a builder’s control can happen, Goldberg said. Buyers should line up a place to stay in case closing is delayed.

When it does come time to close, make a walk-through punch-list. At the final walk-through, Porter and Goldberg note flaws such as paint that needs touching up, as well as agreed-upon inspection requests that may not be standard items. They also hand buyers a welcome packet with warranty information and appliance manuals.

EXPERT SOURCES

Erik Doersching, Tracy Cross & Associates

Danny Glick, @properties Christie’s International Real Estate

Lauren Goldberg, Porter Goldberg Residential, Jameson Sotheby’s International Realty

Samantha Porter, Porter Goldberg Residential, Jameson Sotheby’s International Realty