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An Ill Wind
Chicago’s property market will take a long time to recover
| Text : Ajay Shamdasani | Photo : www.thinkstockphotos.com ||
Chicago, the Windy City, has seen better days. With 2.8 million residents in the city proper, it is the third largest US city and the third most densely populated city in the US, and the hub of the 26th largest metropolitan area in the world – 9.6 million people across three states.
It also boasts some of the best universities in the world, such as the University of Chicago and Northwestern University, and is for that reason popular with many Asians for higher education, and often for post-graduation and settlement. However, the City of Broad Shoulders has been impacted by the recession.
Figures from the Illinois Association of Realtors say Chicago won’t see the prices of its 2006/2007 heyday again until 2018-2020. Lawyer Damon Park, who regularly sees the local courthouse full of home foreclosures, is not as optimistic: “I personally don’t see the returns coming for the next 10 years. The last bubble burst in the early to mid-80s did not recover until 2001.”
Park thinks foreigners should be cautious about investing in Chicago and are better served waiting it out. Nevertheless, savings-oriented and bargain-craving Asians may yet realises investment and/or second home opportunities unimaginable a few short years ago.
The most popular areas for home-seekers and investors remain downtown in the West Loop – the financial district and home of the Chicago Mercantile Exchange, the world’s largest futures exchange; Streeterville – the area associated with Navy Pier; North Michigan Avenue – known as the Magnificent Mile, home to some of the most expensive apartments and shopping on earth; and further north, Lakeshore Drive, nickname the ‘Gold Coast’, overlooking the seemingly endless and ocean-like Lake Michigan, one of the continent’s Great Lakes.
While Chicago is known for high rises, John Alston, a sales executive with Callero & Catino Realty, thinks recently built “low-rise townhouses” along the Chicago River are the most interesting. “The city has made great steps toward cleaning up the river and it is becoming Chicago’s other waterfront property. These properties offer an almost suburban feel while being right in the heart of the city,” he says.
However, it is noteworthy that Chicago has one of the highest vacancy rates in the US with numerous dormant houses and apartments visible citywide. Its demographics are at best stagnant - at worst the city is losing population, “but we have an overhang of unoccupied condos [two to three years]” worth of supply, says Park.
“Real estate is not an investment because of the ‘negative cash flow,” he says, adding “The wild cards such as property taxes, assessment increases, neighbour defaults and insurance all weigh against considering [property] as an investment. If you calculate the fall of the dollar, one can argue that homes have not appreciated but the dollar has weakened since the mid- 1980s.”
Park does not recommend buying in Chicago because of the “fiscal policies” of the city and Cook County, its administrative district. “There is no limit to the amount of taxes … [that’s] very bad for attracting businesses,” laments Park.
However, Alston, while acknowledging that Chicago is facing the same problems as the rest of the US, thinks property “has always been a good investment here” because, despite price declines, it doesn’t “have the huge price swings … like Florida and Southern California”.
He contends that downtown properties are a sound investment for either a primary or secondary home, “as long as you keep in mind we will not see the 2005 peak of market prices until sometime around 2018”.
Most realtors contacted said that, given the current economic state, it’s difficult to say what returns will be in five years, and properties are currently selling at about 2000-2003 prices, depending on the building. Alston says that “builders are also offering great incentives like free parking spaces and upgraded finishes,” which was not the case a few years ago. “Given the amount of colleges and universities downtown, it is relatively easy to find tenants as long as you price your rental competitively. That being said, it is a great time for cash buyers,” says Alston.
Chicago property prices have not gone up since the crash of 2008, but they have somewhat stabilised. “I believe the large amount of distressed properties on the market is hurting prices overall, and we need to get the foreclosed and short sale properties sold before we will see a turnaround,” says Alston.
The market peaked in 2005 and overall in the Chicago area average sales prices are down about 25 percent from their peak. However the conventional wisdom now is that those were largely artificially inflated prices driven by the investors’ irrational exuberance – about 30 percent of downtown property bought between 2004-2006 was purchased by investors, and a large percentage of those are among the distressed properties on the market today.
However, there is a silver lining: according to Alston, a distressed studio apartment can be purchased “for as little as US$100,000” with multimillion dollar homes and penthouses now going for in some cases half of historic highs. “A normal one bedroom can be purchased for anywhere from US$200,000 to US$250,000.”
Given its surplus real estate, a failed Olympic bid, a shrinking population and a global downturn that has hit its financial sector badly, there are ample bargains and those with ready cash are poised to name their terms. “There are definitely deals to be had,” says Alston. “Cash buyers are in much better shape given the difficulty of condo financing right now. There are people holding out for the peak prices, but there are plenty of competitively priced properties available.
Despite conventional wisdom that the real estate in global financial hubs like Chicago is fundamentally recession proof, Alston begs to differ. “I don’t think anywhere is recession proof, but [at] the higher end [US$600,000 and up], properties are difficult to sell right now.”
Based on Park’s experience, starter families are purchasing, but only if the price is right, “meaning short sales and foreclosures”, and even then, in the suburbs because of the schools. “They are moving out of Chicago – I don’t see foreigners buying in Chicago,” says Park.
Alston has noticed all sorts of customers – foreign and local – interested in downtown property and recalls that during the past decade, some Asian parents purchased apartments for their children to live in during their studies in Chicago and later sold them for large profits. “The gains they made paid for the tuition!”
However, Alston acknowledges the whopping gains of the 1990s and the past decade are gone for the foreseeable future. Currently, purchasers range from “investors first-time buyers to empty nesters selling a home in the suburbs to move downtown,” he says.
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