Memo to Shrewd Condo Investors: Buy in Chicago

Any report on the condo development market routinely lists cities such as Miami and Las Vegas as the touchstones of a market gone mad. It's just as easy to point to Chicago, where conversion of disused and historic office buildings has fueled a resurgent and, some say, overbuilt urban center.

But unlike those other places, Chicago's developers can't rely on tourists, snowbirds or fun-seekers to fill their new residential buildings.

That relatively steady market has its benefits, says Gail Lissner, a vice president at Appraisal Research Corp., a local real estate marketing and research firm. "We don't have peaks and valleys, the craziness that you see in Vegas and on the coasts," she says.

That said, prices for Chicago condominiums have been holding firm, although sales volume dropped off at least 10% in 2006 from a record year in 2005. With more projects still in the pipeline, construction costs rising and lenders beginning to tighten the reins, high-quality Chicago developments offer some good values relative to other markets. And steady appreciation in prices, plus renewed growth in the area's economy, mean that for those who want big-city living at an attractive multiple, Chicago represents good value.

Downtown Chicago has been undergoing a growth spurt that started in 1990, when there were just 50,000 condo units, says Lissner. By 2004, the number had reached 77,000; today, it stands at 91,000 -- and counting.

With that kind of volume being added and a cooling off of the national condo craze, the roughly 10% slowdown in sales volume in 2006 seems relatively benign. Nonetheless, the Chicago market presents growth challenges to developers.

One group that seems to have outsmarted the general trend -- at least for now -- is locally based Mesa Development. Mesa, the father-son team of Richard and Jim Hanson, is building its second high-rise fronting Chicago's newest big-shouldered cultural landmark, Millennium Park.

The park is the famously beautiful and over-budget cultural phenomenon that features a band shell designed by Frank Gehry and a giant silver bean by artist Anish Kapoor.

Built atop parking and railyards that once formed a large gash in the central Loop, the 24.5-acre park immediately spawned development around it.

	Sky High
	Courtesy Solomon Cordwell Buenz

Mesa, however, didn't wait for the $475 million park to be completed. As planning got under way in the late 1990s, Richard Hanson began work on what he called the Heritage at Millennium Park, a 356-unit, 36-story condo that quickly sold out at an average of $450 a square foot before the park opened to the public.

That's pretty close to affordable housing for Manhattan, but in Chicago, early in the decade, it was a tall hurdle. Donald Trump, in his high-rise on the north side of the Chicago River -- the park, and its new high-end neighborhood, are south of the river -- was seeking sales of $550 to $600 a square foot early on, although his marketing team eventually surpassed those numbers and is now generating sales of about $700 or more a square foot. "We call that level the 'ultra-luxury' market," says Lissner.