If you were shopping for a Chicago condo over the last few months, the deals were coming fast and furious. At 30 West Erie in River North, developers were offering buyers a free parking space—a year earlier, that handy asset would have cost $50,000. At the Rotunda, at 2741 North Sheffield Avenue in Lincoln Park, you’d get a $15,000 “furniture allowance” if you bought by March 31st. At VB1224 Lofts, in the West Loop at 1224 West Van Buren Street, the developers at one point promised a $35,000 allowance that could be used towards a free parking space, appliances, or other upgrades; at another point, they offered to pick up a year of condo fees.

The escalating incentives tell an obvious story: Chicago’s condo boom has stalled—caught in a perfect storm, with a flood of new units landing in a sinking real-estate market. And though the tough economy affects sales of single-family homes, too, the condo market draws some of the most fretful attention. After all, if a subdivision stops selling new homes, the builder doesn’t build the next phase. If a family can’t sell their home, there may be the choice to stay put. But a developer putting up a condominium high-rise has a mechanism in motion that doesn’t stop so easily.

“Trump can’t say, ‘I’ve only got the first 60 stories sold, so I’m not going to build the next 30 stories,'” says Chris Huecksteadt, Chicago market director for Metrostudy, which tracks the statistics of the housing market. “Once they start building them, they’re stuck with those units.”

And, boy, did they start building. Between 2000 and 2006, some 22,650 new condos and townhouses came on line in the downtown neighborhoods alone, according to Appraisal Research Counselors, the independent analysts of the condo market. In most of those years, buyers seemed insatiably hungry, snapping up most of the units built. In 2005, the downtown market’s best year, about 9,000 came on line and 8,000 of them sold. Hints of trouble appeared in 2006 when a surge in new deliveries left about 2,500 condos unsold at the end of the year. That contributed to the logjam that was 2007. The year ended with about 7,700 new and rehabbed condos and townhouses standing unsold (not all were finished or under construction, but all were actively for sale), according to Appraisal Research—and that was in a year when only about 4,300 new units were completed.

The proliferation will continue: Appraisal Research estimates that at least 5,900 units will be completed this year, with another 4,200 due in 2009—more, if all the proposed units get built (which is doubtful, in light of the excessive overhang).

Given that the bottom of the housing market has not been marked, the question is, how long will builders be stuck with what they’ve built? Or worse, will there be thousands of condos left empty, banks left unpaid, high-rise developers belly-up, neighborhoods black-eyed?

In late winter, signs of a big shakeout started to appear. In the first few days of March alone, two stories in Crain’s Chicago Business reported that the developer of a proposed 80-story condo tower in the South Loop faced foreclosure on a preconstruction loan, and two top condo developers, Related Midwest and Magellan, were in talks to merge as a result of slow sales on Related’s properties. The Sun-Times reported that another condo developer may have fled the country after seriously overextending his business credit. And in mid-March, Crain’s reported that foreclosures had hit 25 percent of the condos in the Sterling, the 50-story tower at 345 North LaSalle Street. Those foreclosures were on individual owners, not developers, but even so, they were another sign of trauma in the condo market.

Is there a condo apocalypse looming? Most likely, no. Huecksteadt and other analysts think the new condos will be bought up—but slowly. “This will work itself out,” says Huecksteadt (who is not in the business of selling real estate, so he can’t be accused of wishful thinking). “It’s going to take a long time to work through the inventory. There’s five to six years’ worth of condos to get through” in the larger Chicago region. “But it will correct itself.”

The fundamentals are still in place, Huecksteadt and others say. The categories of buyers who fueled the boom a few years ago—empty nesters, urban-minded singles, affluent Midwesterners who want a Chicago roost—are still interested in buying. Chicago and its suburbs remain strong job markets and cultural centers. For the most part, the new condos are good properties appealingly priced. Condo living may even be growing more attractive. Steven Hovany of Strategy Planning Associates, a consultant to developers, points out that the latest generation of adults are “more downtown-prone than other generations; they’re not going to run to the suburbs to buy their first home.” And the number of nonwhite buyers, many of whom come from cultures where multifamily housing is more typical, is growing fast. Then there are the baby boomers, who are just entering retirement age. “They’ve just started buying the second homes,” says Alan Lev, the president of the development firm Belgravia Group and president of the Home Builders Association of Greater Chicago.

“There’s nothing that has changed about the buyers,” says Gail Lissner, a vice president of Appraisal Research. “All these target market groups are all still out there, but they’re all more hesitant. They don’t have any sense of urgency right now. They’ll take longer to decide to purchase.”

Ron Shipka Jr. has witnessed the hesitancy at his sales centers. As the chief of The Enterprise Cos., Shipka has built a few thousand townhouses and condos in Chicago since the 1990s, including about 1,500 so far in Central Station, the area immediately south of Grant Park (he’s got another 1,100 under construction or planned there). “The process of buying has become certainly less emotional and more diligent, and it takes an awful long time,” Shipka says. “At our sales centers, we’re getting the same amount of traffic that we have ever gotten, but people come back and come back and come back.”

Not only are there numerous choices out there, but no one knows when the price slippage will end. “They want to buy when they’re convinced the market is at the rock bottom,” Lissner says.

Meanwhile, it looks as if the speculators have pulled back. They’re the people and firms who buy early in bulk and plan to sell off their units at later, higher prices. (They differ from investors, who may buy in hopes of reaping a profit but who plan to use the condo along the way.) While no solid figures exist on how much of Chicago’s condo crop has been bought up by speculators, Lissner suggests that the peak year for those deals was 2005, when an enormous share of just-announced condos were purchased. Speculators can afford to buy a few years before the building is ready, because they are not looking for housing, just an investment. The proportion of early sales and pre-sales—condos bought when a new project is announced or when the first stages of construction have begun—dropped by almost half between 2005 and 2007, which tells Lissner that many speculators have moved on to some other investment class.

The developers left holding unsold inventory have to decide if they can wait it out. Those with deep pockets probably can. But many have turned to incentives, such as free parking spaces or kitchen upgrades, to sweeten the deal. Of course, there’s danger that way, because buyers can smell the desperation. If the developer is offering a free parking space this month, what more will he offer next month? Some developers will turn unsold units into rentals, but that’s a tough proposition, too: When the market improves later and they want to sell the apartments, they will be selling used, not new—and they probably won’t get the price they targeted while building.

How bad will it get? None of the people I talked to predicted a significant number of bankruptcies. Shipka, for one, says the immediate condo future looks painful but not fatal. “Developers will leave some profit on the table,” he says. “They’re not going to have what they hoped for, but they’ll have enough [money] to pay the bank.” Those who can change course, will. In February, the developers of a planned condo tower at 535 North St. Clair Street in Streeterville announced they wanted to make the building a hotel instead, because of slow sales at a sister condo tower, across the street at 550 North St. Clair.           

Some metaluxury buildings, including the Spire and Trump, are aggressively marketing their apartments to a new crowd of potential owners—the sexy “international buyer,” the sophisticate from Russia or another European or Asian country who already has several homes and now wants one in Chicago. (For more on the Spire, see Towering Ambition, page 106.) Lissner has heard the logic: “The dollar is cheap; they’ve seen huge appreciation in their own countries; they want to bring their money here.” In particular, the Irish are thought to be likely buyers because of the long-running boom in Ireland and, perhaps, because many of their countrymen have landed in Chicago over the past century and a half.

But don’t bank on the globetrotters for a wholesale rescue from our condo glut. After all, this is Chicago, not South Beach or Park Avenue. If you were jetting in from Dubai, would you come here or go to Miami?

Lissner thinks the internationals are looking primarily for a payoff and likely don’t feel a particular loyalty to Chicago. “If things change, they can walk away from this market in no time,” she says. “They’re a volatile market segment.” And it will probably take more than a free parking space to pull them in.

For the more typical condo shoppers, though, that incentive might do the trick—unless they hold out to see if later on they might get two parking spaces. 

Illustration: Michelle Thompson/Agoodson.com