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Old Posted Oct 13, 2007, 1:30 AM
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From: http://sanjose.bizjournals.com/sanjo...420800^1533632

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Friday, October 12, 2007
Axis sales a glimpse of future

Silicon Valley / San Jose Business Journal - by Sharon Simonson

Next month, sales begin at downtown San Jose's Axis, the 329-unit, luxury condo tower rising behind the historic Hotel De Anza.

The development's backers, Oregon's Spring Capital Group and Cupertino's KT Properties, won't be the only ones watching with deep interest. A lot of other people will, too.

For developers with product in the market, Axis represents new competition. For would-be developers, its fate will provide insight into the depth and strength of downtown buyer demand. For lenders, another set of data points can be charted.

For 33-year-old Tony Sum, co-founder of Silicon Valley Lofts & Condos, buyer response to Axis could mean the difference between a good idea and a great one: It will either bolster or bombard his 18-month-old real estate brokerage, which is dedicated to trading downtown San Jose's urban homes.

"We were looking to get in early on an expanding market, and we are hoping that downtown becomes the vibrant living place that everyone is anticipating it to be," Sum says.

But Axis' success and the success of the three other downtown condo tower projects is even bigger than all that. For decades, downtown has been the fortunate recipient of hundreds of millions of taxpayer dollars. The mission has been ambitious: to re-make the center city from a decrepit legacy of post-war suburbanization to an urban hub; to give San Jose a regional and national identity; and to prove the wisdom of "smart-growth" policies so favored by urban planners and politically robust environmentalists.

The investment has not gone without cost. San Jose neighborhoods -- arguably as much in need as downtown -- have gone without as a result, forsaking community centers, libraries, fire and police stations, parks, playground equipment, pools -- literally hundreds of public amenities -- as city leaders across multiple administrations have adopted the same approach.

Now the wisdom of that policy is on the cusp of possibly its most significant test. Because if Axis and the other towers don't find enthusiastic buyers and developers and lenders don't make money, no more high-rise condos will be built in downtown, maybe for a very long time. And if no more such housing gets built, the entire city vision could become blurred.

No one is watching with greater focus than Alex Erickson, principal and co-founder of Northpoint Development. The newly formed San Jose company is pursuing high-rise living on four downtown San Jose sites. So far, it has secured $8 million in financing to gain entitlements for all four. It hopes to start construction on Phase One next summer on the most modest, a $70 million, two-tower, 164-unit complex at Delmas and Auzerais avenues just across the Guadalupe Expressway from Discovery Meadow and the Children's Discovery Museum.

The project will be "kid friendly," unlike all others proposed for downtown now, with slightly larger units and a "tot lot," he says. It is aimed at families who have grown tired of a commute and with at least one employee downtown.

"We are definitely hinging on their success," says Erickson of Axis and The 88, the project being developed by San Francisco's Wilson Meany Sullivan at San Fernando and Third streets in downtown. The first phase of The 88, with 197 units, begins sales in February. The first move-ins are expected June 1, about the same time as at Axis.

Already, Erickson says, he has had to resign himself to signing a recourse loan to get Delmas built, and he acknowledges that, even then, getting it financed is "going to be a challenge."

Still, he says, once units at The 88 and the Axis begin to close escrow, "that is what is going to give me comps to show (lenders), 'This is what will sell for $850 a square foot. I can sell this comparable unit for the same amount. Give me a building loan.'"

There is no question that the bloom is off the condo rose elsewhere in the nation. The troubles in San Diego, Las Vegas and Florida have been well-publicized. So have condo buyers' attempts to abandon commitments made during construction once their homes become available for occupancy months later. In some cases, buyers have been willing to walk away from thousands of dollars in deposits based on the belief that the value of their purchase has fallen so precipitously in the time from agreeing to the deal and the ultimate close. In those cases, developers -- and their lenders -- are left holding the bag.

That kind of scenario -- though it seems unlikely in San Jose right now -- is something that gives lender Raymond Au pause. The loan officer for Pacific National Bank says he is extremely pleased with the market response and home sales at San Jose's 360 Residences, the 213-unit high-rise being developed by Chicago's Mesa Development LLC and financed by Au's bank. He declines to give specific sales performance numbers for the development, which is rising near East San Carlos and South First Street. Mesa itself did not respond to a request made through its publicist.

"We all know that the velocity of absorption has slowed down," Au says. "So far, it has not really affected median home prices (in Silicon Valley). But who knows six months down the line? We are only at the front end of a down cycle."

He, too, is watching events at Axis and The 88. Were either to adopt fire-sale practices, for instance, it could suck buyers away from Mesa and depress prices, starting the kind of downward spiral that has proved disastrous elsewhere.

Mesa could be especially susceptible to that series of events. The company began selling its units some nine months ago, at roughly the same time construction began on its tower. Buyers today won't get delivery for another 18 months. That means buyers will be subject to whatever vicissitudes the market delivers -- good and bad -- between now and then.

Both Axis and The 88 chose to begin their sales much farther into construction. Seth Bland, Wilson Meany's project manager for The 88, says the factors behind their decision were multiple, but at least one was their desire to avoid "selling... units multiple times."

Right now, market conditions in Silicon Valley are among the healthiest in the state, says Leslie Appleton-Young, the plainspoken economist for the California Association of Realtors. Jobs are being created, a key to housing demand, and the overbuilding that has led to problems elsewhere does not plague the South Bay. Beyond that, the stock market is doing well, something that is more of an issue for Silicon Valley buyers than anywhere else in the state.

People are extremely interested in and curious about the new high-rise condo units coming out of the ground, says downtown real estate agent Sum. Empty-nesters in particular are ready to give up the headaches of owning in the suburbs and hunger for a lifestyle that allows them to walk to dinner and a movie and leave on vacations with no more worries than locking a front door.

Still, he says, downtown retains a "stigma" of being a "rough neighborhood," an issue of particular interest to the older set.

"We still have clients ask all of the time, 'Is it safe downtown?'" he says. Consequently, "City officials are going to have to look at the types of businesses that we have downtown" to make sure they are not fostering activities that undermine downtown's attraction to that key customer base.

In the same vein, he notes, the young professionals with no kids that developers and city planners seem convinced will make up another core downtown buying pool can't afford the prices on high-rise units on offer today. They often have little or no equity and their credit prospects are dimmer than those of their more stable and richer elders.

How all of this will play out on the ground is of course the ultimate question, Sum notes. "It will be interesting" to watch, he adds. "I hope it will all be OK."
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