Condo pipeline dries up
Lack of sales this year could translate to a shortage in two to three years
The John Ross condominiums have sweeping views, an elegant shape that inspires architectural envy, and a whole lot of unsold units.
To date, just 177 of its 303 units have attracted buyers.
According to Multnomah County property records, a database that includes sale dates along with information about the property, buyers and prices, just two units have sold in 2008.
Public records portray the John Ross as a building that opened in a market flush with buyers, but which faltered in mid-2007 as newer buildings opened and the market slowed amidst housing concerns triggered by the subprime mortgage crisis.
It offers a telling example of why condominium developers are waiting for the market to improve before launching new projects, a situation that, ironically, could turn into a condo shortage in two to three years.
According to the Regional Multiple Listing Service, which tallies most though not all residential sales, there have been just 138 new units sold in the downtown area so far this year, far off the pace that led to a record 809 new condo sales in 2007. RMLS says 1,951 condos of all ages sold in 2007. In 2008, the figure is just 405.
At the John Ross, sales peaked at 40 in April 2007 and fell quickly to zero by November, according to county records.
Today, Portland has about 2,500 unsold condominiums, a figure that includes developers' inventories and another 1,000 "phantom units," which refers to condominiums bought by investors who intended to turn a quick profit and who apparently are holding out for the market to return.
Assuming Portland buyers have an appetite for 700 to 1,000 units a year, it will take nearly three years to clear out the current inventory.
The city of Miami, the poster city for condo development, has more than 25,000 unsold units, a six-year supply, according to its own Multiple Listing Service figures.
In Portland, developers haven't been quite so prodigal; since 2003, the city has added approximately 5,700 new condominiums in the area that includes the Pearl District, South Waterfront, RiverPlace and downtown Portland. Developers were attracted by the city's seemingly bottomless appetite for condos and buyers who didn't disappear as the average price rose from $203 per square foot to $378.
Even now, some Pearl District buildings have prices well above $500 a square foot.
Today, the pipeline is still turning out new projects, but all broke ground in better times. They include the Cyan, a 330-unit Gerding Edlen project near Portland State University; Eliot Tower, a 232-unit project in downtown; the 937, a Pearl District project with 114 units; and Waterfront Pearl, a riverfront project with 196 units, to name some of the larger buildings in construction.
Hundreds more are off the market in buildings that have been converted to apartments.
Since it takes about two years to construct a new project, brave souls might even consider launching a new one today. But don't count on it. With unsold inventories and hundreds of millions of dollars of outstanding construction loans to repay, condo developers aren't advancing any known new projects.
"It's almost the perfect time to start a condo project," jokes Mark Edlen, principal of Gerding Edlen, which has sold nearly 500 condominiums at the South Waterfront but, on slow sales, opted to open its newest building, the "3720," as apartments instead.
It is selling an equity stake in 3720 for $145 million to institutional investors advised by Kennedy Associates Real Estate Counsel LP. Gerding Edlen previously borrowed $113 million from Corus Bank to construct the project, a note that wasn't due for more than a year.
With apartment vacancy rates below 4 percent, Edlen said it's a great time to be in the apartment business.
In contrast, the snail's pace level of condo sales has sent developers back to their banks to renegotiate construction loans, including Gerding Edlen.
To construct the John Ross and Atwater Place, the well-regarded Portland developer took construction loans from JP Morgan Chase Bank: $93.6 million for John Ross and $91.17 million for Atwater Place. The John Ross loan was initially due on Aug. 22, 2008. That's been extended, Edlen said. The Atwater Place loan is due next spring.
Not everyone has the ability to renegotiate loans. Gene Grant, a real estate attorney with Davis Wright Tremaine LLP, said foreclosures are inevitable. Given that, he's not expecting new construction soon.
"It's grim," he said.
Not surprisingly, one local lender said it isn't writing any new condo loans.
"My very best customers wouldn't ask me. That's why they're our very best customers. They don't sell ice to Eskimos," said Nelda Scott Newton, vice president for Wells Fargo Real Estate Group, which provides construction loans for commercial projects, including condominiums.
Wells Fargo money financed construction of the Encore, a 177-unit building in the Pearl District that began selling units in January 2007, and Hoyt Street Realty's Metropolitan, a 133-unit tower that began recording sales last September. Wells Fargo, which said it has not foreclosed on any projects, loaned $88.8 million for the Encore and $84.78 million for the Metropolitan, according to loan documents filed with the Multnomah County Assessor.
Newton discounts one speculative estimate that Portland has more than 7,500 units in inventory and will take a decade to clear out.
"We probably have about a two-year supply in the downtown area," said Newton, who said barring an economic collapse, Portland continues to attract newcomers and will need to keep adding new housing in the future.
Edlen said it will take more than the promise of good timing to lure developers and their bankers back. Still, he's encouraged that units are selling, though at a slower pace than hoped for.
The Civic, a West Burnside building, has fewer than 10 units left for sale and Gerding Edlen's new Cyan project at Portland State University has attracted more than 1,500 visitors to its sales center, exceeding expectations, he said.
Wells Fargo's Newton said when the market comes back, some of the buildings that opened as apartments may convert back to condominiums.
Like the 3720, Ladd Tower and the Wyatt launched as condominium projects but converted to apartments.
Ladd Tower, a 220-unit tower the heart of downtown Portland, is being developed by Opus Northwest, which responded to the softening market by scrapping its original plans. It drew up a new project with high-end features packed into smaller, apartment-scale units.
The 245 units in the Pearl District's Wyatt, from developer Bob Ball, were actively marketed to buyers. In the end, Ball and his partners sold the building to an apartment operator.
"That's three towers that if the market were just screaming for condos, somebody could find a way to convert them back," Newton said.
Brian Owendoff, newly appointed vice president and general manager of Opus Northwest's Portland office, believes it will take until 2011 to clear out inventories and usher in a new builder's market.
"That's when people will probably start dusting off their plans," he said.
wculverwell@bizjournals.com | 503-219-3415
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