The concept of total potential inventory and its role in real estate pricing isn’t something that’s very well understood. And if it is understood, then it’s not fully appreciated. The concept is quite simple. It states that any property in any particular market is a potential piece of inventory. The market size is determined by the total number of properties that could potentially be available, while the actual market inventory is the measurement of properties on market at any given time. It’s because of this simple market concept that I find the removal or alteration of existing potential inventory to be so important to the overall shape of the market. Dare I say the adjustment of these properties is nearly as important to the market as the existence of actual inventory? Yes, I dare.
At Lake Geneva, our lakefront market is a narrowly defined segment consisting solely of private lakefront homes. We conflate this market at times to include homes in the South Shore Club, homes on the lakefront in Glenwood Springs and Buena Vista, homes in Trinke’s on the Harbor, and homes with some variety of shared frontage. The lakefront market is small and well defined, which is why I find it to be so captivating. I don’t really understand markets in towns that can continue to grow outward. It’s like how Fiddler’s Creek has a Naples address but we know it’s not Naples. Or how a home in Vail could very well be on the north side of 70. Sure, it’s in those markets, but is it really? At Lake Geneva, there is no such potential for confusion. Lakefront is lakefront is lakefront.
Within this market, there has been remarkable gentrification over the last several decades, but this improvement cycle has accelerated of late. I actually credit the two spec homes that sold in Cedar Point Park during 2020/21 for this most recent rush. These spec homes were just under $5M, for 60+ foot lots. Historically, a 60 foot lot could never host a $5M house, but with these two sales the market accepted the adjustment upward in potential small lot valuation. If we were looking for lakefront homes in 2018 we would have had to approach a tear down lakefront home on a 60′ lot as being something that would have to be worth some variable of $1.5M, solely because a new build could never* be worth more than $3M. Today, a 60′ lot can be worth $3M, because a new build for $2.5M will indeed be worth $5.5M. This transformation in segment value is astounding, even to me.
With this all understood, it’s key that we keep an eye on the lakefront and the new construction or significant renovations underway. The reason has everything to do with our potential inventory theory. When a small home sells for $2.5M, that’s a fine little sale for the market. But once that home is torn down and rebuilt, and this happens again and again each year, the market is transformed. These tear downs represent a finite piece of our potential inventory. The removal of entry level homes is occurring in real time, and it’s shaping the market more than you might think. Because of this, here’s an update on nearly all of the construction underway on the lakefront as of this morning.
There’s a new build on Main Street in Lake Geneva with a foundation poured. This was the site of the old Starboard Cottage, which proves my point about history in Lake Geneva. Our market loves to talk about history. We think it’s neat. But when it comes to market we usually just tear it down. There’s a nice renovation underway further to the southeast near downtown Lake Geneva, and another major renovation a bit further south, just north of Stone Manor. On Knoll, in the city of Lake Geneva, there was a small cottage sold earlier this year with a shared pier. That house has recently been scraped, and I believe there’s a spec home being contemplated there.
Further to the south, there was a classic home on Swinghurst demolished earlier this year, but no new construction has commenced on that site. Nearby, there’s a new home on Hollybush nearing completion. Heading west, there’s likely a wrecking ball soon headed to the Birches to remove a home I sold there earlier this year. A small home in Wooddale that sold last summer is still standing, but it’ll be curious to see if it lasts the winter. A new build is underway on Black Point on that beautiful lot I sold just to the east of the Black Point Museum. Expect that home to be amazing and representative of the finer quality and style that we’re fortunate to see sprouting up on our larger lots.
In what feels like the first time ever, the South Shore Club doesn’t have a single active build underway. This is an incredible positive for the club, not just for the market itself but for the sanity of the owners. Construction dust can get very old, especially when it’s lasted nearly twenty years. Further West, Basswood has one beautiful new home inching closer to completion, and one large home (that I sold in 2019) has just wrapped a sizable and impressive renovation.
The Fontana lakefront is quiet right now, with one terrific renovation in Indian Hills (house I sold) finishing up, and one large new build on the North Shore nearly framed. Heading towards Williams Bay, there are two spec homes on Constance in full swing (I sold both of these), with one almost complete and another in the rough mechanical stage. Cedar Point Park has two lakefront builds under construction on Circle Parkway, neither of which had been on the market recently (existing ownership tear downs). Back in Lake Geneva, there’s a large lakefront renovation/addition in Geneva Manor. Lastly, there are two cottages (that I sold this year) with ownership in the design stages of new construction, so I’d expect those two projects to commence sometime in the spring/summer of 2022.
If you want to judge the health of any particular market, you should measure the active construction in the market. At Lake Geneva, construction is in full swing, even at these elevated construction prices. This process removes existing inventory from the market and reintroduces the improved product at much higher valuations. The trend at Lake Geneva is obvious, and there is a day coming when we’re going to run out of older lakefront cottages.