As if finding new buyers in today’s lousy condominium market wasn’t hard enough, a growing number of downtown developers face an even tougher task: holding onto the ones they already have.
Downtown condo developers lost a net 253 sales in the fourth quarter, mainly because buyers canceling sales contracts for new units outnumbered those signing them, according to a new report by Appraisal Research Counselors. It was the worst quarter for downtown developers since the Chicago-based consulting firm began tracking the local market in the early 1990s.
Amid the turmoil in the financial markets, “people were just frozen in their tracks” in the fourth quarter, says Appraisal Research Vice-president Gail Lissner.
Making matters worse, a growing number of buyers who signed contracts for new condos during the boom a few years ago are backing out at closing time, either because they can’t get a mortgage or are skittish about buying in such a depressed market. Investors who expected to flip their units for a quick profit are especially likely to walk away, often giving up deposits in the tens of thousand of dollars.
Factoring in canceled contracts, downtown developers sold just 592 condos last year, down 84% from 3,724 in 2007, according to Appraisal Research. It was the third straight year that sales have fallen since peaking at 8,162 units in 2005.
Amid a brutal recession and much tougher lending standards, demand for condos isn’t expected to bounce back anytime soon, but some developers have been able to goose sales in recent months by cutting prices 20% or more.
Compounding the problem, the supply of new condos continues to grow as developers finish projects started during the boom. Downtown developers will complete 4,734 condos this year, 42% of which remain unsold, according to Appraisal Research. The supply of unsold condos is especially high in South Loop and West Loop developments.
“There’s going to be much more intense pressure in those developments due to the lower number of units under contract,” Ms. Lissner said at a Tuesday luncheon presentation.
Unable to pay back construction loans, many developers have already asked for and received loan extensions from their lenders. That number is likely to grow, but lenders eventually will be forced to foreclose if sales don’t pick up.
The list of troubled developers includes Donald Trump, who is battling with lenders in court over an overdue construction loan on his 92-stort downtown skyscraper.
The good news is that many developers, unable to get financing, have scrapped plans for new projects. That means supply will taper off next year, a key step toward bringing the market back into balance. Downtown developers will complete just 620 units in 2010 and 86 in 2011.
“Thus, it is likely that there will be better absorption of unsold inventory in 2010, helping to sell out this overhang of unsold units,” the Appraisal Research report says.
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