Chicago's Condo Market
Shows Signs of Cooling

The air appears to be seeping out of Chicago's bubbly condo market.

In recent months, several luxury condominium projects have suffered slower-than-expected sales. A handful of high-profile projects narrowly averted foreclosure as banks came to the rescue with new loans.

While condo developer defaults and cash crunches are by no means widespread in the Windy City, some developers are either selling units for less than planned or not at all. Meanwhile, construction of condos and conversions of rental apartments into condos have gone on unabated, giving buyers a lot more options, including the option of saying no.

"We're seeing in the last couple of months the sound of the bubble breaking in the Chicago central business district," says Hans Nordby, who monitors real-estate markets and trends for Boston research firm Property & Portfolio Research Inc. "Projects are starting not to sell, they're starting to go to the bank. The bubble is starting to break."

Unlike some other markets, Chicago isn't experiencing a pricing bubble but a supply bubble. Chicago ranks third in the nation in terms of condos that are expected to be completed this year, including new buildings and conversions of rental apartments. According to Property & Portfolio Research Inc. and Reed Construction Data, 18,586 condo units will be added to Miami's condo inventory this year. San Diego is expecting 10,875. Chicago could see 8,533 more units.

But Chicago so far ranks first in terms of troubled condo projects as high prices and healthy supply have made some buyers more cautious. The median price for a downtown condo is up 34% in the past five years to $349,000, according to Appraisal Research Counselors.

This month, luxury-condo developer Christopher Carley was extended a nearly $53 million loan by Corus Bank of Chicago to refinance a 50-story condo tower that opened this year and whose units were selling slowly. Some real-estate observers said Mr. Carley wanted to refinance in order to buy more time with Corus and another lender that provided the construction loan. In an interview yesterday, Mr. Carley said he wanted to refinance to get a lower interest rate and thus decrease his financing costs. He said condo sales at the tower have accelerated.

In December, a development group behind Skybridge, a condominium project in the West Loop designed by Chicago architect Ralph Johnson of Perkins & Will, avoided foreclosure by securing new financing after the development's original construction loans came due. The two-year-old condo project is more than 20% unsold.

The signs are literally out there. "If you drive around Chicago, you see big signs on the tops of buildings -- 'Condos for Sale' -- which I've never seen before," says Paul Barile, an investment specialist with real-estate services firm Grubb & Ellis Co., whose Chicago office is down the street from a condo building that was taken over by Lehman Brothers Holdings Inc., which had been the mezzanine lender on the project. "If they have to put a big sign out, they're not getting the traffic they have to get."

Lenders step in when sales don't go as well as planned or promised. "If they're not able to qualify for [additional long-term financing] when the project is completed, the bank could call the [construction] loan and demand payment," says Patrick Dzuris, vice president with Citibank Commercial Banking Group.

Mr. Nordby warns that Chicago may be a harbinger of things to come in other markets. In Miami, "we haven't seen too many bad deals," Mr. Nordby says, but the amount of speculators, or investors buying units to flip or sell quickly, concerns him. "The story is Chicago this week, but Miami is not far behind," he says.

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