WITH the windows on its towering blocks half-fitted and steel girders exposed, downtown Istanbul’s Zorlu Center appears to be just another construction site. But step inside the sales office and the illusion begins. An elegant hostess walks you down carpeted corridors to a lounge where water trickles soothingly across a fake granite wall. Giant screens play 3-D trailers of the good life on offer at Istanbul’s latest hot property, from indoor pools to artfully placed orchids.

Construction on the $2.5 billion Zorlu Center, which will include 200 luxury boutiques and a Raffles Hotel, is due to end next spring. The terraced apartments, with views stretching out to the Bosporus, begin at $1.5 million, and almost half the 550 units have sold. The buyers are Americans, Europeans and wealthy Emiratis, Azeris and Kazakhs, all flooding into Istanbul in search of Ottoman villas and upmarket shopping malls on the Bosporus. “Istanbul is now desirable,” says Mehmet Even, deputy manager of Zorlu Real Estate. “It is a city on a par with London, Paris and Moscow.”

That heady self-confidence is energizing Istanbul. Zorlu is just one of at least 10 similar mammoth projects going up within a 10-km radius of the city’s center. As economies in the rest of the world contract, Istanbul hums to the drone of diggers and drills—a reflection of the soaring 8% growth in the past two years. Istanbul was ranked as the best European real estate investment destination for 2012, according to a PriceWaterhouseCooper survey, and the city’s real estate is fueling Thrkey’s wider boom. In the decade since Prime Minister Recep Tayyip Erdogan took power, per capita income in Turkey has grown from $4,000 to $10,000. Istanbul, which had 4 million residents in 1980, is now pushing 14 million. As investors in recession-hit economies seek higher returns, Istanbul has been a chief beneficiary. But exports to Europe have dwindled, slowing Turkey’s growth. Might this boom turn out to be another illusion?

Erdogan, a former mayor of Istanbul, has made little secret of his ambition for the city. It completes his larger scheme to return Turkey to its glory days as center of the Ottoman Empire. He sees himself as a pious alternative to Kemal Ataturk, the secular founder of modern Turkey, and he has a different vision for its prosperity. “Erdogan’s dream is of a society based on conservative principles that is nonetheless wealthy and a global leader,” says journalist Osman Ulagay, author of the recent best-selling book Who Will Inherit Thrkey?

Construction has been key to Erdoganomics. The sector grew at an annual rate of 17% in 2010 and 11% last year, making it one of Turkey’s largest industries. Along the E5 highway heading north from the Zorlu Center, both sides of the road are dotted with garish new housing blocks. Most were built by TOKI, a public real estate developer that Erdogan revived in 2003. Since then, it has built half a million homes, 616 schools, 74 hospitals and a 52,000-seat soccer stadium. TOKI takes government land at little or no cost and auctions development rights to private construction firms, which then share the revenue from sales and rent.

The company answers only to Erdogan and his Justice and Development Party (AKP). Fortunes are said to be built on its back. “Every Turkish government has a mechanism by which it shores up its own supporters, and for the AKP, this has been construction,” says Mustafa Sonmez, an economist and commentator for the newspaper Cumhuriyet. “Construction has a ripple-out effect ... It has helped new building companies emerge.”

A generation of entrepreneurs has come of age under Erdogan, and they are helping to diversify the economy. “We are the sons of small-town shopkeepers who wore skullcaps, but we wear ties and have taken their businesses overseas,” jolces Rizanur Meral, who heads TUSKON, an organization for small and medium-size businesses that is close to Erdogan. Meral and his energetic breed of clean-cut entrepreneurs-purveyors of everything from food and textiles to furniture and machinery parts-are behind the rise in trade with Africa and the Middle East. Trade with Africa went from $10 billion in 2005 to $21 billion in 2010, while trade with neighboring Iraq went from $940 million in 2003 to $12 billion last year, making it Turkey’s second largest trading partner after Germany.

While those new markets have lowered Turkey’s dependence on Europe—exports to the EU dropped from 60% to 34% in the past decade-it is still the country’s largest trading partner, and the slowdown there is having an effect. As the EU contracts, the Turkish economy is starting to sink. “The government does not have a long term economic strategy,” says Sonmez.

That has raised questions over whether Turkey’s government can weather the rough waters ahead. Officials recently cut their economic-growth forecast down to 3.2% for 2012. Banks have put the brakes on consumer-loan-driven spending by tightening eligibility requirements. As a result, construction, which grew by more than 11% last year, was up only 0.4% in the second quarter of this year.

There are political risks too. On the eastern border, the Syrian conflict threatens to spill over. The two countries have been trading cross-border fire after Syrian shelling killed several Turkish villagers early this month. In the southeast, where Kurdish separatists have stepped up fighting, more than half the people live in poverty. The urban building boom has yet to touch them, but in Istanbul, gloss prevails. One editor complained that even a small item about the rising price of tomatoes merited an angry call from a government official.

Filmmaker Imre Azem tracked Istanbul’s dizzying transformation for his acclaimed documentary Ekumenopolis. He worries that reckless growth will eventually end with a crash. City planners in the 1980s once imagined Istanbul “as a kind of Amsterdam green, historically preserved, aesthetic,” Azem explains. “Instead, what’s happening here is savage. The model is based on pumping more people in the city, constantly developing more land. That’s how the bubble grows.”       –Time