Booming Chicago housing market buoys privately held homebuilders

In the third quarter last year, homebuyers were clearly turning to new construction, with sales of homes coming to the metro market for the first time up more than 41 percent to 1,448 contracts. Final statistics, due to be released this week, are expected to show new-home sales at or above 5,000 units for all of 2020,  the highest total since 2008. 

“The Chicago market finds itself substantially undersupplied with new homes,” says Erik Doersching, managing partner of Tracy Cross & Associates in Schaumburg, which compiles home construction data. “We’re concerned about the supply issue. We might see sales of 7,000 to 9,000 new homes this year if the supply becomes available. In some suburbs we could see new-home sales double if homebuilders could keep up with demand.”

That’s a sweet turn of events for private builders, who dominated the local market almost up until the housing crash of 2008-09, when banks stopped lending and demand for new homes fell by nearly 90 percent overnight. Within months, mainstay names such as Lakewood, Neumann and Kimball Hill began to crash and burn. In 2000, when some 25,000 new homes a year were being delivered in Chicago, private builders accounted for roughly 75 percent of all sales. In fact, earlier in the 1990s nine out of every 10 houses built here were erected by a private firm.  In the past decade, with overall sales limping along at a pace of 4,000 home sales a year and even less, it’s been the public companies that have squeezed private firms into a minority position.    

With the market now stirring, surviving private builders are all laying plans to boost their activity. One of the largest, Lexington Homes, which sold 90 homes last year from its headquarters in Lincoln Park, is laying plans to “get to a yearly volume of 200,” says Jeff Benach, Lexington’s principal. “We think we can get to that level in the next couple of years. If we do, it would be our best year since 2005.” 

In Geneva, the Shodeen Group sold 103 homes last year, up nearly 25 percent from 80 the year before. David Patzelt, Shodeen’s president, is projecting a further 20 percent rise this year to 125 units, a far cry from the 20 or so homes the firm sold at its low point around 2010. 

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Some years ago, the better-capitalized public companies could often be counted on to take down large tracts of land, frequently hundreds of acres and more, and sit on them waiting for the right time to start building. More recently, Wall Street investor patience has waned, and public companies have retreated from some of their positions on raw land.

Instead, private companies have emerged to acquire choice parcels. Shodeen, for instance, has 900 acres west of Elgin slated for 2,700 homes eventually, plus another 700 acres in exurban Elburn with 100 homes already sold. “We’ve been sitting on that land west of Elgin for over 20 years. We can afford to be patient,” says Patzelt, noting that his company is just finishing up work on its Mill Creek subdivision west of Geneva, featuring 2,000 homes on 2,000 acres as part of a 25-year project. 

While production builders typically aim for budget-priced construction, often at prices below $300,000, private firms are increasingly offering shoppers custom and semi-custom choices.  Lexington has a six-acre development in Glenview with each of the planned 29 units expected to be priced at $850,000 and up. “We’ve got to offer more trendy options than the national builders do,” says Benach. 

Still, the private builders face plenty of obstacles. Big national firms negotiate for cheaper prices on everything from appliances to windows, then work on thinner margins, in many cases, than the 20 percent gross mark-ups that private firms count on. Meantime, the cost of lumber has been soaring, from $450 per thousand board feet in June 2020 to $929 a week ago, with much of that jump blamed on Trump tariffs. Also, there are spot shortages of labor that have prevented some builders from proceeding even when they have sales in hand. Chicago is now a predominantly non-union market, in contrast with 20 and 30 years ago when entrenched unions maintained robust apprentice programs to train fresh generations of carpenters and plumbers. Those are gone now. 

The other challenge is that the Chicago area continues to hemorrhage population overall while employment centers like Schaumburg and Naperville that popped up in the 1980s and 1990s have in most cases been losing jobs. “Satellite employment centers spawn nearby homebuilding,” observes Tracy Cross’s Doersching. “But employment and office development in the suburbs haven’t been growing.”

Jody Kahn, senior vice-president of research at John Burns Real Estate Consulting in Irvine, Calif., says that other metros such as Indianapolis have seen homebuilding flourishing as population streams away from Illinois for lower-tax alternatives. “The great recession of 2008 was particularly difficult for Chicago,” Kahn says. “The city hasn’t been able to spring back from the bottom like other cities have. There has been such a protracted period of minimal new-home construction that the private and local family builders have found they couldn’t make a go of it any longer.” 

Kahn is cautious in predicting a comeback for the local market. Exurban development trends that once pushed building into farming towns like Huntley and Oswego have cooled in recent years. Restrictive zoning laws delay entitlements. “At the moment demand is very intense and supply is super-constrained,” Kahn says. “It remains to be seen how long that remains the case around Chicago.” 

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