This week’s Crain’s ran a story on the continuing demise of the downtown condo market. According to data from Appraisal Research Counselors sales of new downtown homes (i.e. condos) sank “73% to a record-low 685 units during the first six months of this year” compared with the first half of 2007. Here is the data:

And of these 685 units more than half were from the Chicago Spire. Given that construction cranes continue to fill the skyline and existing units continue to be foreclosed it’s a mystery how they are going to ever sell all these new units.

One would think that a) this is good news for affordability and b) this will eventually depress prices in the areas of the city that have thus far been immune from the price declines - e.g. Lakeview and Lincoln Park.

Anyone who has looked around Chicago during the last year has probably remarked to themselves that there sure are a lot of cranes in the air building ever more expensive condominiums. The Chicago Spire alone is adding 1194 units to the supply and constructing a building that tall can not be cheap. I for one don’t know where the developers plan on getting the buyers, and especially at the prices I’m seeing. In the South Loop area alone the MLS currently has 1,116 condominiums on the market, 390 of which are over $500,000 with $400+/month assessments plus taxes.

Well, this last week Crain’s Chicago Business ran on article on the Downtown Dead Zone, highlighting the woes of condominium developers. Here are some of the highlights (or lowlights) of the article:

• In the first quarter of 2008 downtown developer condo sales were down 83% from the previous year to only 201 units. This gives new meaning to the word downtown.
• 2007 developer sales were down 54% from the peak in 2005.
• The glut of condos on the market is causing some development projects to be put on hold and other projects are converting to apartment buildings.

Crain’s also supplied this graphic that succinctly summarizes the situation. Judging from the dramatic growth of unsold condos under construction it would appear as though the developers hit the gas just as the market was running out of steam. Interestingly, based upon the fact that the unsold, completed condos have not historically grown from one year to the next, I would conclude that, in the past, most condos have been sold prior to completion. However, the question is whether or not this pattern will continue over the next year or two as these huge projects near completion. I would say there’s a good chance the developers won’t be so lucky since never before has the market needed to absorb so many units still under construction.

As buyer’s consider purchasing into these developments they have to be nervous. What would happen if the developer is left holding a large portion of the building? What if the developer starts to heavily discount the selling prices after the majority of the units have been sold at “list price”? And does the developer have the financial wherewithal to keep the association afloat with only a portion of the units contributing to the funds?

We may soon find out the answer to these questions.