A Rarity Looms in Chicago:
A Home-Buyer's Market

Chicago may soon become that true rarity in real estate: a buyer's market. Builders are racing to add new office and condominium towers to the Windy City's glittering skyline, despite the region's comparatively weak economy.

Some 3.6 million square feet of new office space was completed in the year ended in June. While New York's larger market gained slightly more over the period, Chicago's new supply is coming into a market where nearly a fifth of the office space was vacant, according to Property & Portfolio Research Inc., a Boston-based real-estate research firm. The vacancy rate in the Big Apple was a mere 12.7%.

One IBM Plaza, designed by Mies van der Rohe, is set for a $130 million renovation in an effort to compete with new construction.

Chicago's average office rental rates fell to $23.10 per square foot in the second quarter from a high of $31.08 in the fourth quarter of 2000, according to PPR. The Windy City's second-quarter office rental rates were slightly higher than the national average of $22.79 a square foot but well below average rents of $38.81 that New York buildings fetched during the period.

The building binge comes as the region's office real-estate market struggles, due to deep job losses in its manufacturing, transportation and technology sectors. The city's job base suffered the dissolution of the Chicago-based accounting firm Arthur Andersen LLP and the acquisition of Chicago's Bank One by J.P. Morgan Chase & Co. of New York. The unemployment rate was 6.4% in July, well above the national rate of 5.2%, according to the Bureau of Labor Statistics.

Among Chicago's most active office developers is Hines of Houston. The company will complete a 40-story tower in the Loop this year and is expected to complete a 60-story tower at 300 North LaSalle in 2008. Inexpensive land and low interest rates will enable several large law firms to take the space at attractive prices, said Greg Van Schaack, a senior vice president in Hines's Chicago office.

The construction is even putting the pressure on architectural icons such as the IBM tower, the last American building designed by the modernist architect Ludwig Mies van der Rohe. The building was recently bought by Lightstone Group LLC, of Lakewood, N.J., which is planning a $130 million renovation to keep its tenants. David Lichtenstein, Lightstone's chief executive, believes the structure is a "Rembrandt" that can do well even if the market doesn't improve substantially.

There's also stiff competition among the city's downtown condo builders, particularly for the most expensive units. Some 3,115 new condos are expected to be added this year and 90% are already sold or under contract, according to Chicago-based Appraisal Research Counselors. Yet while median prices of existing condos and townhouses sold in the second quarter jumped 24.5% to $185,700 from the year-earlier quarter, the days on market before they were sold rose to 79.5 days in the period from 62 days a year earlier, according to the Chicago Association of Realtors.

Two condo towers are vying for the title of most dramatic project. Fordham Co. is building a 115-story lakeside condo and hotel tower designed by Spanish architect Santiago Calatrava.

And Donald Trump is planning the 92-story Trump International Hotel & Tower Chicago on the riverfront site of the former Chicago Sun-Times building. Mr. Trump said he has presold about 71% of the units, though he adds that some other developers could suffer. "The Chicago market has been very good for our building but I don't know if it's necessarily good for all builders," Mr. Trump said.

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