Portland condo developers hit best of times, worst of timing
Buildings that opened as the condo boom melted down sit vacant in a shifting market
Sunday, April 06, 2008
RYAN FRANK and JEFF MANNING
The Oregonian
Condo king Homer Williams gambled that Portland's condo mania had reached such a fevered pitch that he could sell Pearl District luxury on a humdrum stretch of Southeast Portland.
He and his partners launched a $40 million building, a sprawling, 123-condo complex, along eclectic Belmont Street in 2006.
Their timing couldn't have been worse.
Just as 2121 Belmont's sales office opened last year, the national mortgage market melted down and the economy sputtered.
Since sales opened last year, 2121 Belmont had no sales, Williams said Tuesday. To cope, Williams said, the complex will switch to apartments, the fourth such conversion of the slowdown.
About 15 major buildings, including 2121, were planned during the city's five-year condo wave, and their construction started near the crest. Now that these buildings are finishing, buyers have backed off. Brokers and developers say they're still seeing lots of interest and some sales. But the pace of those sales has slowed far faster than Williams expected.
The shifting market is good news for buyers in search of a deal and for apartment owners who can cash in on strong demand from reluctant buyers. It's bad news for developers who accelerated construction at the end of the boom. Some made bets as big as $175 million on a single project that they wouldn't get pushed off by the bust.
Portland has outperformed almost every other major housing market. Job growth has slowed but is relatively stable and people continue to move here, two key drivers of housing demand. Still, recession fears fester in potential buyers who can't get a home loan or sell their house. Others worry that values would drop after they buy, costing them thousands.
Williams acknowledges that the slowdown is real but says much of it is tied to psychology. "It's between the ears," he said. "People are afraid right now."
Portland has roughly 1,300 new and existing condos on the market in the 28 biggest downtown projects. Over the past five years, an average of 800 condos sold annually. If the past five years is an indictor -- and some say it's not -- the city has enough supply to serve demand for 18 months to two years, said Patrick Clark, one of the city's top condo salesmen at Realty Trust City. That compares with about a 10-month inventory of homes for sale in the overall housing market.
"That would be optimistic to say that," Clark said of the current supply. Not surprisingly, the city's major developers have shelved plans for more towers until the supply is whittled down.
The next year could be bleak for developers with large, slow-selling condo buildings.
In some ways, they have a self-fulfilling problem. Brokers steer buyers away from struggling buildings over worries that the developer may reduce prices or, worse, that the bank will take the building back.
"I discriminate against unsold property," said John Cooper, a Portland real estate broker whose company is Portland Condos LLC. "If I'm representing a buyer, I don't want to put him in that situation.
"It was just the wrong time to come on the market."
Riding the boom
Portland developers rode one of the longest and largest downtown condo construction booms in U.S. history.
The downtown condo market, tiny in Portland until the 1990s, cashed in on twin forces: Baby boomers leaving their empty nests and young professionals with no desire to round out a Beaverton cul-de-sac.
With ready demand, developers built more than 4,000 downtown condos since 2001. That's more than twice the amount built in the past 30 years, according to real estate firm CB Richard Ellis.
At the peak in 2005, brokers needed just a week to get more than 200 people to reserve a spot in South Waterfront's John Ross tower. But no boom lasts forever. Like the 1990s dot-com expansion, all business cycles are, after all, cycles.
Portland's condo sales started to slow about 18 months ago. The first wisp of change attracted little notice.
Quick-turn investors, more tuned in to business cycles than typical buyers are, bailed first. Their purchases had induced artificial demand in the run-up, representing as much as 20 percent of the sales in a building, Clark said. Investors who tried to turn a quick sale, combined with all the new construction, produced more supply than the market could support.
Portland has less of a condo hangover than other cities. But for its size, Portland's slowing sales are comparable. "Portland looks the same as the nation. No better. No worse," said Dwight Frankfather, senior vice president at Chicago's Corus Bank, one of the country's leading lenders to condo developers.
How do developers overcome the mortgage market and buyers' worries? There are few shortcuts.
"You work through this stuff. It's just painful," Williams said.
In South Waterfront, Williams and his partner on the John Ross, Gerding Edlen Development, are trying to recruit buyers with a lease-to-own program. With no marketing, the program attracted 12 people.
The John Ross needs the help.
After a bustling opening week in 2005, the 31-story tower has seen more than 70 of those presumed buyers back out. Developers closed 181 sales, leaving 122 to go.
Clark, who's selling units in the building, said about 300 people visited the neighborhood sales office in February. But they aren't closing the deal.
"There's a number of potential buyers out there waiting to see if we've hit bottom," Clark said.
Dream team backing
The 2121 Belmont condo project was backed by a dream team.
Homer Williams and another experienced local condo developer, Scott Stehman of Reliance Development, initially envisioned the project. Cityview Investors, a California firm that gets most of its money from that state's public employees retirement fund, invested more than $4 million. They hired Hoffman Construction to build it.
Even before the real estate downturn, 2121 Belmont was pushing the real estate envelope.
It's five stories tall and spreads across several blocks in a neighborhood of wood-framed single family homes and small apartment complexes.
It was expensive at $400 per square foot, more than any other eastside condo building. The most expensive units bore price tags north of a half-million.
And the location was a challenge, 10 blocks from Belmont's commercial hub.
Yet, in the heady days, it didn't seem a stretch to think consumers would jump at the chance to buy an eastside condo of Pearl District size and cost.
The developers borrowed more than $29 million from LaSalle National Bank to finance the rest of the deal.
The high hopes quickly gave way to ugly reality last summer.
Just as developers mounted initial sales efforts, the mortgage industry went into freefall, further slowing an already declining housing market.
Days after opening their sales office, Stehman said, they effectively ended sales efforts, considering them largely a waste of time and money. By this spring, without a single sale, Williams said they decided to convert 2121 Belmont to apartments.
At some point, when the bad news ends and buyers again open their wallets, they will probably reconvert the building to condominiums, he said.
It's not a given that developers will be fill their condo-turned-apartment buildings at the sky-high rents they want.
But Williams predicts the renters they do get will someday turn into buyers. Rents are so high, it will make financial sense for them to buy, he said. But he acknowledges that buyers will stay renters until the economy and housing prices settle.
The trouble for developers stuck paying construction loans: No one has a clue when that will happen.
Ryan Frank: 503-221-8519;
ryanfrank@news.oregonian.com. Jeff Manning: 503-294-7606;
jmanning@news.oregonian.com
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...nobody here cares if your post is lame...damn, if I worried about BS posts I'd never had made it to almost 5,000 posts. Stupid shit is said all the time...it is posting when drinking that I worry about. Going back the next morning like, 'oh hell Mark, what did you blog last night'.
Lets all drink & blog like Mark!
Portland's condo market feeling housing recession
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