Developers nix or delay condo projects as sales slow, costs rise

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Deborah Yao

 

PHILADELPHIA - More and more developers are canceling or delaying condominium projects as home sales slow, construction costs soar and lenders balk at financing units that might not sell.

What's making the situation worse is a glut of high-priced condos and too few people who can afford them.

SOME COULD BECOME RENTALS: It's called "reconversion"

In Philadelphia, a city cluttered with condominium construction, Old City 205 aspired to shine as an ultramodern residence for the well-heeled with its zinc and glass facade, loft-style homes and windows that span floor to ceiling.

But the $40 million project in Philadelphia's Old City neighborhood won't break ground after the housing market softened and increasingly picky buyers balked at its price tags from $400,000 for a studio to over $2 million for a three-bedroom penthouse.

Brown Hill Development, the company behind the project, saw the slowdown in home buying and decided it didn't want to be left with unsold units, said partner Greg Hill.

"We've gone through the biggest real estate boom in the last eight or nine years and some of these projects haven't started yet. Do you think they're going to start building now?" said real estate executive Allan Domb, dubbed Philadelphia's "condo king."

In Las Vegas, projects nixed include high-profile developments such as Aqua Blue, a $600 million, 825-unit luxury condominium-hotel resort that counted former basketball superstar Michael Jordan as an investor; the $3 billion, 4,400-unit Las Ramblas resort, backed by actor George Clooney; and Ivana Las Vegas, a $700 million, 945-unit tower named after Donald Trump's ex-wife.

Related Las Vegas, one of the two developers for Las Ramblas, cited rising construction costs and slowing sales for the cancellation.

In South Florida, canceled condo developments include 1390 Brickell Bay and ICE in Miami, Fort Lauderdale's The Waves Las Olas, and Promenade in Palm Beach County. WCI Communities, a luxury home builder based in Bonita Springs, Fla., said in June that new orders for its high-rise condominiums fell 84% in the second quarter. The company will now go forward with only three to five condo projects in 2006, down from as many as 15 to 17, mostly in Florida.

With housing sales looking increasingly anemic, it's not surprising that developers are bailing out.

Domb in Philadelphia said he's gotten half a dozen phone calls the past four weeks from developers asking if he would like to buy their properties.

In May, the volume of apartment-to-condo conversions plunged to $334 million from $1.65 billion a year ago, said Gleb Nechayev, senior economist at Torto Wheaton Research, a real estate research firm in Boston owned by CB Richard Ellis. The all-time high was $4 billion last September.

Builder confidence, measured by the National Association of Home Builders/Wells Fargo Housing Market Index, fell in June to its lowest level since April 1995. Confidence took a hit due to rising mortgage rates, high home prices and investors and speculators fleeing the market.

The index surveyed builders of single-family homes, where the sales decline hasn't been as severe as for condos.

Jack McCabe, chief executive of McCabe Research and Consulting in Deerfield Beach, Fla., said desperate developers with finished condos are offering incentives in South Florida.

Freebies range from one year's free mortgage to the use of a yacht or upgraded kitchen packages. McCabe thinks some developers might even sell condo units at cost if sales continue to weaken.

McCabe believes the condo market, especially the luxury end, is at risk of a crash. Over the next few years, he sees prices falling by double-digit percentages.

The luxury condo surplus is to blame. McCabe said about 25,000 condos are under construction in Miami-Dade County, with two-thirds costing $700,000 or higher; another 25,000 units have gotten building permits and 50,000 have been announced for future construction.

McCabe said the median household income in the county qualifies local buyers for a $225,000 home, so the luxury units are targeted mainly toward affluent, out-of-state buyers.

Meanwhile, speculators have driven up prices by flipping units, he said. But they're now leaving the market - driving down demand - and putting up for sale properties they own, adding to the glut.

Aside from Miami, he said areas at risk include Boston, San Diego, Las Vegas, Seattle, Chicago, Orlando, Washington, D.C., and Manhattan.

A big part of the problem is that many condo projects are priced high, in part because developers have to recoup the high prices they paid for land. But most buyers can't afford it.

"The sweet spot of the market is probably $250,000 to $700,000," Domb said. "That's what the majority of the population can afford. Many condos are priced higher. That's part of the problem."

Tell that to The Donald. Real estate mogul Donald Trump told the Associated Press that he's going ahead with his 45-story waterfront luxury high rise called Trump Tower Philadelphia.

"It's doing fine," Trump said. "It's been intense. So many people want to move there."

He said that doesn't surprise him, because his name sells.