White-hot luxury: Why Chicago’s high-end condo market is booming

Chicago’s luxury condo market is approaching its all-time annual sales record, outpacing office, retail and middle-income residential as buyers opt for downtown views while vaccines offer hope that the city will open up again. 

A total of 27 condo and townhome sales above $4 million each had closed by mid-October, compared with the record 36 units sold in 2018, according to Integra Realty Resources, an appraisal and consulting firm. That’s good news for the city’s budget, and its efforts to spur development across Chicago and provide more affordable housing, said Alderman Walter Burnett, who represents the 27th Ward that includes the rapidly developing Fulton Market where developers are planning residential buildings.

“The more high-end sales that we have, the more taxes come in, the better it is for everyone,’’ Burnett told The Real Deal in an interview. “What’s even better for folks is if we leverage development to build up those communities where we don’t have development, where we normally have vacant lots and we’re not getting any tax dollars from.”  

The booming luxury sales are being driven by buyers with a range of motivations: older folks who want to be closer to their children in the city; workers seeking a shorter commute when they eventually return to their offices; wealthy buyers in search of opulence. Constrained supply, meanwhile, is keeping prices high.

Giancarlo Chavez, an agent for Keller Williams ONE Chicago, said his client signed a contract for a 75th-floor, 5,700-square-foot penthouse at the Residences at St. Regis in 2016 — even though it came with a hefty price tag of $8.7 million and was at least four years from completion. 

“The views, to be able to have a 360-degree panoramic view of the city, a private elevator,’’ said Chavez of the property, built by Magellan Development Group. “He [the buyer] has ties to New York, so the affordability compared to New York City drew his attention.” 

A 14,260-square-foot penthouse on the 89th floor of the Trump International Hotel & Tower is the most expensive listing in Chicago this year, at an asking price of $30 million. The second priciest listing is a 71st-floor penthouse in the St. Regis, now under contract after asking $18.5 million. All five of the priciest listings in the city are asking $15 million and over. 

Older people who have the means to purchase a second home come to Chicago because their children are there, said Linda Shaughnessy, a broker in Chicago with Sotheby’s International Realty. “It’s a Chicago-specific culture.”

Only about 13 percent of the 30,000 rental apartment units built over the past 10 years in downtown Chicago were condo units, according to Integra. “With the limited amount of new condo inventory being developed in the downtown market, the new condo buildings are targeting a narrow segment of the overall housing market,” said Gail Lissner, managing director at Integra’s Chicago office. She expects 95 percent of the units that are in development or in marketing will be condos ranging from $1.4 million to $2 million. 

For buyers, the downtown area offers restaurants, museums, scenic views and convenient transportation, all at a relatively affordable cost, at least compared with similar-sized cities on the east or west coasts.

The challenge for Chicago, a city with high crime rates and persistent income inequality, will be translating the purchases of the wealthy few into benefits for the less-well-off majority. Politicians like Burnett say that starts with encouraging developers to build residential properties on vacant lots, with at least 20 percent of the units meeting affordable housing criteria.

High property taxes and slow home value appreciation are the downsides for people looking to buy the higher-end luxury condo units. For the broader benefit of the city, they better hope the high-end buyers keep coming, said Daniel McMillen, a finance professor at the University of Illinois at Chicago. 

Illinois ranked second for the nation’s highest property tax rates at 2.16 percent, behind only New Jersey at 2.42 percent, according to the U.S. Census Bureau. Local governments in Illinois also rely on the property tax for 40 percent of local revenue, compared with 30 percent of local governments in other states, according to the Lincoln Institute of Land Policy. 

“Driving out the high-priced market would be just a recipe for financial disaster,” said McMillen. Without the property tax, the city would be in bad shape as it won’t be able to fund schools and invest in less developed areas. So with buyers picking up more luxury condos, the city’s budget would increase, but the question is where that money gets spent, he added. 

Chicago’s Home Price Index of high-tier residential properties grew by 12.8 percent in July year over year, according to St. Louis Fred and S&P Dow Jones Indices. The index for the rest of the Chicago market increased 13 percent during the same period. The figure for Miami, one of the popular cities remote workers are moving to, jumped by about 25 percent. 

“At the end of the day, the price is still going up. That’s still going to incentivize developers.” said Luis Lopez, a professor at UIC’s business school. But, he said there may be greater incentives to build in states like Miami where there is no income tax. 

Chavez, the buyer’s agent at the St. Regis, said he has seen more demand for luxury condos this year than any other year closing 12 contracts for condos that were $4 million and over. 

“Some of those condos sold in less than 30 days,” he said.

“A few years ago, we were talking about there being more million-plus sales in the West loop than there ever had been,” said George Schultz, who oversees brokerage services at @properties. “That’s not going to stop.”