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Posted Feb 27, 2009, 5:45 PM
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Join Date: Jun 2006
Location: San Francisco & Tucson
Posts: 24,088
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Quote:
Friday, February 27, 2009
Lenders forcing price cuts at Blu, other S.F. condo developments
Projects need to boost sales to get loans approved
San Francisco Business Times - by J.K. Dineen San Francisco Business Times
Developers Lennar and Malcolm Properties are aiming for an April opening of their San Francisco condo tower Blu, a 114-unit boutique mid-rise that is getting rave reviews for its quality architecture and finishes.
But besides a lousy housing market, the developers face another hurdle before opening: new lending requirements that dictate 25 percent of the building be pre-sold before the bank will finalize any of the loans. Blu is about 12 percent sold; it must sell another 15 to 17 units to open on time.
Already, the deadline prompted Lennar and Malcolm to slash prices by up to 26 percent two weeks ago to draw new buyers to the 631 Folsom St. property. Prices were cut from $809,000 to $631,000 for some units, while a penthouse priced at $2.5 million was slashed to $1.8 million.
Blu is the first of several Bay Area projects that will be affected by the new lending requirements, which are likely to spur deep price cuts or conversions to rentals. In some cases, they already have.
“We are at a price model right now that is below anything else in the marketplace to get absorption to 25 percent,” said Chris Foley, a principal with Polaris Group, which is handling marketing and sales for the building. “We are telling buyers this is a massive discount. Prices are not going to stay this way.”
Lennar Director of Sales Lynn Bell said the reductions put the project “below market.”
“These were hard prices for us to swallow,” said Bell. “We are in a situation where we have to position ourselves to start closing. So we need to put the pricing at a level where buyers will say ‘I can’t pass this up. It doesn’t make sense for me to pass this up.’ And I think we hit that level based on the amount of interest and the amount of traffic coming through.”
Even higher requirements
Even the 25 percent pre-sale requirement is well below the latest standards banks are quoting, according to industry sources. Paul Zeger of Pacific Marketing Associates said “the rules are changing weekly right now — that is how bad it is.” Fannie Mae and Freddie Mac have always required at least a 50 percent pre-sale requirement, but banks essentially had a waiver giving them flexibility to start closing units before the 50 percent was met. Now banks are no longer willing to take that risk.
“The world has shifted, the pendulum goes the other way, and the banks get cautious,” said Zeger. “In the last couple of weeks we have heard 50, 70, 75 percent. Everybody is messing with their own internal policies.”
The new lending realities may have the effect of forcing developers to rent buildings rather than struggle to reach an unrealistic pre-sales goal. At least two building that are complete — the 52 unit Artani at 818 Van Ness Ave. and the 179-unit Argenta at 1 Jones St. — have been repositioned as rentals. Another building, Walid Mondo’s 69-unit 829 Folsom St., is nearing completion, but has yet to open a sales office. All three would face a pre-sales requirement of at least 50 percent.
Other current projects with 25 percent requirements include Homes on Esprit Park and Cubix. Loring Sagan, a principal with Esprit Park owner Build Inc., said they were able to sell enough units to meet their requirement.
“We’re lucky — I think 50 percent has become the norm,” said Sagan.
William Mollard, sales manager at Cubix, said the project has sold 35 percent and just introduced a new lease-to-own program to try to boost sales.
“If we were coming out today, the best we could do is 50 percent, and there is a possibility it would be 51 to 71 percent depending on who was doing the underwriting,” he said.
The trouble with the pre-sale standards is that it’s not easy to reach 50 percent — or even 25 percent — in a topsy-turvy economy where buyers in contract are losing their jobs and watching their investments portfolios get wiped out. At Homes on Esprit Park, out of 25 buyers who have fallen out of contract, half could no longer get financing, while the rest were either laid off or had suffered significant investment losses, Sagan said.
“The reality is trying to keep homebuyers together long enough to get to 25 percent is like herding cats,” said Zeger. “You have constant movement that is hard to bundle and get across the finish line.”
John Malcolm, CEO of Malcolm Properties, said he understands why the banks need to be more conservative.
“If I were a lender, I would try to have requirements to secure my position in a building, and I think that’s fair. I think if they go beyond that (25 percent), they are going to hamper or hurt the market,” he said.
Poor timing
Blu was designed by Glenn Rescalvo of Handel Architects, the same architect who did the Four Seasons on Market Street and the new Millennium Tower on Mission Street. Planned during the peak times, the project was conceived of as a scaled down, more affordable alternative to the Millennium. It has similar finishes, but doesn’t have the deluxe amenities or astounding views.
The Blu sales office opened in April of 2008, a time when the San Francisco condo market was starting to weaken but condo developers were still logging pre-sales. The willingness of buyers to put a non-refundable deposit on an incomplete condo unit fizzled out in September when Lehman Brothers went belly up and an already poor economy further deteriorated. Since then, buyers have become extremely hesitant to invest in unfinished homes.
“Buyers want to see it, feel it, touch it, and maybe even sleep in it a couple of nights before they sign their purchase and sale agreement,” said Lennar’s Bell.
Since prices were slashed, traffic through the sales office has increased tenfold. Last week, more than 100 people toured the building, which is between Second and Third streets. The majority of prospective buyers are currently renters.
“The prices on this first tranche of homes are mind-boggling,” said Foley. “It’s cheaper than renting. It’s amazing design. Why would I not do it?”
Email J.K. Dineen at jkdineen@bizjournals.com / (415) 288-4971
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Source: http://sanfrancisco.bizjournals.com/...ml?t=printable
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