Chicago - February 27, 2007

TAPPING MILLENNIUM PARK'S LEGACY
by Peter Slatin



Solomon Cordwell Buenz
Mesa Development's Legacy 356-unit, $345 million Legacy project is its second condo on Millennium Park.

Any report on the condo development market routinely lists cities such as Miami and Las Vegas as the touchstones of a market gone made. 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, snow birds 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 product 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 more turgid markets. The quick buck may not be there for speculator types, but the quick bang is also far less likely. 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.

Still, downtown Chicago has been undergoing a growth spurt that started in 1990, when there were just 50,000 condo units there, says Lissner. And though by 2004, there that 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 in the midst of 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 rail yards that once formed a large gash in the central Loop, the 24.5-acre park immediately spawned development around it.
 
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 in 2004.

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.

Mesa's success with the Heritage project led to its second building facing the park, this one called ? do we detect a theme? ? the Legacy. Just two blocks away from its predecessor, this one is twice as tall, at 72 stories, yet it has virtually the same number of units. At the $345 million Legacy, 's sales are moving more slowly than did those at the Heritage, but they are moving, says James Hanson.

Construction began last summer, and the units are 75% sold; he anticipates an average sale price of $600 a square foot. The premium above the Heritage units comes, he says, comes from learning to offer as many units as possible with park views, which he says are good for a $100 to $200-per-foot bump in price. And Mesa recently secured a $275 million construction loan for the project from a consortium of banks led by LaSalle Bank, which is owned by Dutch bank ABN-AMRO (NYSE: ABN). Other banks leading the deal include Bank of America (NYSE: BAC) and EuroHypo.

"They have outperformed, both in terms of sales velocity and on price point, too," says Lissner.
While Hanson says the highest-priced units in Chicago sell for between $1,000 and $1,200 a square foot, his projects aim at providing "affordable luxury." (The "ultra-luxury" market, says Lissner, is "very thin." ? i.e., there's not much out there to sell at that level.)

Mesa has also worked a twist on the condo-hotel packages that have become increasingly prevalent. Although the Legacy is not such a project, residents can opt to join the adjacent, 100-year-old University Club, of course at a hefty membership fee.
Although the Legacy's sales prices may be higher, it's an open question whether Mesa's profits are seeing a similar boost. Construction costs have soared at least 50% in the past two years. Asked how Mesa has fared, Jim Hanson is circumspect: ?
"We're fairly conservative," he says. "Although costs have risen, our margins are what we'd originally underwritten. We got the legacy job bid out early enough in 2006 before a lot of rampant escalation" in steel and concrete costs.

Even by Hanson's own admission, Chicago isn't attracting the kinds of condo buyers who fly in from Europe or Asia for the weekend. So where do his clients come from? "Our draw is local and regional," he says. "Fifty percent of our customers come from the suburbs." They are attracted by the park ? and city ? views, and by the cultural district that surround the area.

Oddly enough, Mesa is betting on another market that has seen its share of see-through buildings: San Jose. Mesa is developing what it says is the first downtown high-rise in Silicon Valley, a 22-story condo tower that Hanson claims will allow Mesa to "define the luxury market." "The play out there is looking at the recovery of Silicon Valley and the tech sector." In an area with a higher median income than San Francisco and a population of roughly 1 million, he says, "we need 213 [people] who want to be in a high-rise."