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CHICAGO—The Chicago region's incredibly active apartment market has received a great deal ofattention in the past few years. Much of the discussion hascentered around when the number of new rental units hitting themarket will finally outrun the currently healthy demand. There has been far lesschatter about the market for condos. Many developers and lenderswere spooked by the sector's collapse during the Great Recession,and decided to concentrate their efforts in the rental market. Butconditions may be changing.

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“There has been a limited supply of new condos built,”David Wolf, president of ONCollaborative, tells GlobeSt.com. Most of the recentconstruction projects were small in-fill projects, or handfuls ofultraluxury downtown projects, along with some luxury projects inthe West Loop and other neighborhoods on the downtown's periphery.But a restrictive lending environment and high construction costshave kept the brakes on.

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“Everyone we meet with is talking condos,” he adds. “All of thedevelopers want to build them, and there is a lot of pent-up demandfor new for-sale product,” but it's a question of making thenumbers work. Lenders, however, typically ask that to secureconstruction financing, developers pre-sell at least 35% of a givenproject's units, and in most cases prefer a number closer to50%.

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That's a problem, because few investors want to buy condosnowadays, and “most buyers prefer to wait until the productdelivers.” Before the recession, “there was a much bigger appetiteamong buyers to speculate and buy in the pre-sale phase of aproject,” and the subsequent confidence throughout the developmentcommunity that most units would sell meant builders could sometimesget underway with no pre-sales at all.

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Furthermore, he says, the construction boom for apartments hashelped drive up the costs of both materials and labor,putting an additional burden on developers. And with demand forapartments expected to remain strong, and labor markets tight,“construction costs are not going down any time soon.”

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Wolf estimates that in many cases, developers would need to sellunits for more than $650 per square foot on average to make a dealwork. That means many middle-market and even luxury communitiescan't get started, even though he sees a lot of demand for bothcategories, especially in downtown neighborhoods like the West Loopand River North, and in affluent suburbs with great downtowns andtransit options, such as Naperville, Winnetka and LaGrange.

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“We're in a bit of a stalemate,” he says. Still, he also feelsoptimistic that change is coming. Illume, a newcondo project in the West Loop by LG Developmentand architect Pappageorge Haymes Partners, forexample, will soon open, and its 79 units are almost sold out. Inaddition, 400 West Huron in River North, a boutique luxury buildingwith 26 units, has also been successful.

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Although these are modestly-sized projects, each illustrates tolenders that condo production in Chicagoland is workable underpresent conditions. And, slowly but surely, that is how the condomarket will revive.

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“I think this will work itself out deal by deal,” Wolf says. Infact, he sees deals working out today that last year would not havehad a chance. One client will soon unveil a new condo community inthe Wicker Park neighborhood that will offer units for less than$500 per square foot. “We're now seeing a lot of projects breakthrough that barrier.”

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Brian J. Rogal

Brian J. Rogal is a Chicago-based freelance writer with years of experience as an investigative reporter and editor, most notably at The Chicago Reporter, where he concentrated on housing issues. He also has written extensively on alternative energy and the payments card industry for national trade publications.