Condo Sales in Massachusetts Decline More Than 10 Percent

From Banker and Tradesman Online
January 22, 2007
By Aglaia Pikounis

After two years of substantial growth, the condo market took a breather last year, with unit sales dropping more than 10 percent statewide and prices slipping slightly.

A total of 30,203 condominiums were sold in Massachusetts in 2006, a 12.89 percent decline from 2005, according to statistics released today by The Warren Group, parent company of Banker & Tradesman. The statewide median selling price for condos last year fell 1.2 percent to $275,000

The drop in activity is a sharp contrast to the last two years, when the condo market saw double-digit percentage gains in sales and robust price gains. Condo sales jumped about 12 percent in 2005 from the prior year and sales were nearly 19 percent higher in 2004 compared to the year before.

“We had a normalization of the market. The market had been heated up over the last couple of years,” said Larry Rideout, owner and general manager of Gibson Sotheby’s International Realty in Boston. “Prices didn’t go down as much as everyone – the media – anticipated.”

Condo sales in recent years have been fueled by demand from aging baby boomers seeking a more carefree lifestyle and first-time buyers who couldn’t afford surging single-family home prices, according to longtime Realtors.

A significant portion of boomers searching for condos have a home they need to sell and as the single-family home market softened and homes took longer to sell, some of them put off their purchases, industry watchers say. Meanwhile, first-time buyers, who may have thought that buying a single-family home was impossible, paused as they saw a growing number of for-sale homes to choose from and prices begin to ease.

With the availability of undeveloped land shrinking, parts of the Bay State have seen a jump in new condo development as builders try to maximize the number of units they can build, explained David S. Drinkwater, president of Grand Gables Realty Group in Scituate.

In Boston – which saw a flurry of new luxury condo sales later in the year with the opening of the Residences at the Intercontinental along the Fort Point Channel – some neighborhoods
experienced gains while others saw sales plummet by 20 percent or more. Overall, sales in Boston fell 9.6 percent with a total of 6,588 units trading this year compared to 7,286 in 2005, The Warren Group reported.
In central Boston – which includes the South End, Back Bay, Beacon Hill, the waterfront, Fenway and other downtown neighborhoods – sales were off by only 1.4 percent and the median selling price fell 4 percent to $489,000.
‘Percolating’ Market Jason Weissman, a principal of Boston Realty Advisors, said sales activity remained strong in tony Boston neighborhoods like Back Bay and Beacon Hill because there wasn’t a significant spike in the number of condos available for sale.

“Volume and prices may have been off statewide, but in areas like Back Bay and Beacon Hill, prices really held and there were slight gains in volume,” he said. Some 544 condos in the Back Bay and Beacon Hill were sold last year with an average price of $822,276, compared to 541 condos that were sold in 2005 with an average selling price of $809,275, according to Weissman, who cited information from MLS Property Information Network.

Still, sales volume declined by 22 percent to 33 percent in neighborhoods like Allston, Brighton, East Boston, Jamaica Plain and Roxbury. In Brighton, 476 condos were sold, a 22 percent drop from the prior year, while the median selling price dropped a modest 1 percent to $271,750.

In Roxbury, the median selling price dropped 6 percent to $354,500, and sales were off by 24 percent.
Matt Bless, broker-owner of Vanguard Realty in Brighton, said properties took twice as long to sell. The average market time increased from 30-45 days to 60-90 days, he said.

In Brookline, a community that Bless’ office serves, properties that normally went under agreement within two weeks were taking about two months to sell. Constant news reports about the real estate market affected buyers and sellers, according to Bless.

“Because there was so much publicity about the state of the market and the death of the seller’s market, there were buyers who started to have unrealistic expectations about how much of a discount they could get,” he said.
“I find the market is percolating and coming back to life. We’ve gotten a lot of inquiries. A lot of people who were renting last year and decided not to buy, it seems like we’re getting calls from them again saying ‘now I think I want to buy,’” he said.

While condo sales cooled in Brighton and other sections of Boston, sales jumped 34 percent in Dorchester last year. A total of 862 condos were sold in Dorchester and the median selling price climbed 5 percent to $288,900.
Rideout, of Gibson Sotheby’s International Realty, said Dorchester may be benefiting from home seekers priced out of the South End and Back Bay.

In other parts of the city, some in the industry were stunned when an auction took place in the fall for Folio Boston, a new development in the city’s Financial District. “The Folio was kind of [in] a fringe market. That was a unique property location that was definitely an untested product. The numbers that they were reaching for, I think, were difficult to achieve for a new residential neighborhood,” said Weissman.

Outside of Boston, steep drops in sales occurred in Essex County, where the 3,564 unit sales were 21.86 percent lower than a year earlier, and in Norfolk County, where 3,055 condos were sold – a 19 percent drop from 2005, according to The Warren Group.

Commercial and Retail Condos Growing in Popularity

Minding the Store in a Condo

New York Times
April 11, 2007
By J. ALEX TARQUINIO

Patrick Cooney stops in frequently at the Museum of Modern Art store on the corner of Spring and Crosby Streets in Manhattan. Before Christmas, he loaded up on T-shirts and toys for the family. “MoMA is a part of New York,” he said.

But unlike other loyal customers at the museum’s outpost in SoHo, Mr. Cooney is also the store’s landlord. Five years ago, he bought the 15,000-square-foot retail condominium at 81 Spring Street, covering the ground floor, lower level and a storage area in the basement, and the Modern rents all the space.

Retail condominiums work much like residential condos. Developers carve out retail space on the ground floor of a building and sell it to investors. The developers often lease the space out first, and the more compelling the tenant, the steeper the price they can ask of the buyer.

Over the last few years, the market for these properties has skyrocketed in Manhattan. More than 560,000 square feet of retail condo space sold last year for almost $650 million. That was a sharp increase from the 28,000 square feet that sold in 2003 for around $26 million, according to Real Capital Analytics, a New York real estate company that tracks deals worth at least $5 million.

Over the last two years, Manhattan represented 38 percent of the total square footage of retail condo space sold nationwide, and 65 percent of the dollar value, according to the company’s statistics.

While New York has the largest market for retail condos, they are also popular with investors in other densely built-up American cities like Chicago, San Francisco, Boston and Washington, said Dan Fasulo, the director of market analysis at Real Capital Analytics. “They’re the glamour cities, with global appeal,” he said.

Brokers say that in New York’s intense real estate market, developers are eager to assemble construction sites, even in neighborhoods not previously regarded as prime commercial areas. In the process, they are offering such high prices for smaller buildings that the owners cannot resist selling. And once they do sell, there are powerful tax incentives to plow the money back into real estate.

Mr. Cooney, for example, purchased the SoHo store with money he made selling four adjacent residential brownstones on the Upper East Side of Manhattan that had been divided into rental units.

Mr. Cooney, a restaurateur who immigrated from Ireland in 1968 and owns O’Casey’s at 22 East 41st Street, had purchased all four buildings for a total of $350,000 in the late 1970s. So when he sold them for $12 million in 2001, almost all of the proceeds would have been subject to capital gains taxes.

But he opted to do a 1031 exchange, which is named for a section of the federal tax code that allows real estate investors to avoid paying capital gains taxes if they quickly reinvest in real estate. The law gives them 45 days to identify the properties they would like to buy and 180 days in all from when they sold their original properties to close on the new ones.

Mr. Cooney used most of his windfall to buy two retail condos.

First, as part of his original agreement to sell the brownstones to the developer Sherwood Properties, he gained the right to pay $3.5 million to acquire a retail condo in the Metropolitan, the 30-story residential tower at 181 East 90th Street that was built on the brownstone site. A Chase bank branch has a 20-year lease in his condo.

He also paid $6.3 million to the Horizon Realty and Development Corporation for the store in SoHo, where the Museum of Modern Art already had a 10-year lease.

The museum created this store to maintain a foothold in Manhattan while the museum on 53rd Street was closed for renovation, said Kathy Thornton-Bias, the museum’s general manager of retailing.

But the SoHo store first opened its doors just a few days after the terrorist attacks in September 2001. It was difficult then even to enter the neighborhood in Lower Manhattan, much less do any shopping there.

At the time, Mr. Cooney had only a verbal agreement to buy the retail condo, so he might have backed out. But his interest in the distinctiveness of the location and the tenant — combined with his need to close the deal quickly because of the 1031 rules — persuaded him to proceed.

Eric Anton, an executive director at Eastern Consolidated who sold the Spring Street store to Mr. Cooney, estimates that half of the retail condo sales in his office are to buyers with money that they are eager to apply to 1031 exchanges. He said many of these buyers are gearing up for retirement — like Mr. Cooney, who is 62 now — and without the tax incentives, they might instead roll some of their gains into bonds.

David LaPierre, a senior vice president at CB Richard Ellis, said that retail condos might also have a psychological appeal for some local investors.

“Walking around a neighborhood, you can see new stores opening, and you can go in and out of stores,” he said. “That makes retail feel more tangible than an office market, where you can’t tell the quality of the buildings from the outside.”

Of course, soaring sales prices have taken a slice out of capitalization rates, a ratio of the net income produced by a property relative to its cost. When Mr. Cooney bought the Spring Street store in early 2002, it had a capitalization rate of 7 percent.

Now, however, some retail condos in prime locations like Fifth Avenue are selling with yields as low as 4.5 percent, brokers say. “That is very close to a bond,” Mr. LaPierre said. Buyers who accept yields that low are betting that the values of condominiums will continue to climb, he said.

Mr. Cooney estimates that the SoHo store might sell with a capitalization rate of 5 percent now.

“And I would buy it today for 5 percent,” he said. “You can’t beat the location, or the tenant.”

Why Icahn Is Betting On WCI's Florida Condos

From: Wall Street Journal
By MICHAEL CORKERY in Miami Beach
April 5, 2007; Page C1

Amid softening home prices, rising foreclosures and turmoil in the mortgage industry, billionaire financier Carl Icahn is making a contrarian bet on a troubled pocket of the U.S. housing market: high-end Florida condominiums.

How Mr. Icahn fares with his wager could help answer whether this state's housing downturn is a cloud that will soon blow over or a storm that will linger for years. The board of WCI Communities Inc., a home builder that has erected hundreds of high-rise condos along the Florida coast, could decide today whether to accept Mr. Icahn's tender offer of $22 a share for the builder that many consider a good barometer for the state's priciest real estate. That offer, which totals about $920 million, is slightly higher than WCI's $21.45 price yesterday in 4 p.m. New York Stock Exchange composite trading.

Mr. Icahn's pursuit of WCI has puzzled many on Wall Street who believe the Bonita Springs, Fla., company is highly exposed to the swelling glut of condos dotting Florida beaches and golf courses. In the fourth quarter, WCI, which has a market value of about $909 million, had more defaults on condos and cancellations of typical single-family homes, which it also builds, than it received orders for new homes.

Mr. Icahn appears to be counting on Florida real estate to make a comeback. "My investment philosophy, generally, with exceptions, is to buy something when no one wants it," he said yesterday. "We made a fairly large investment and took control of several energy companies seven or eight years ago when they were way down. Housing is somewhat analogous."

Mr. Icahn, who has put up a slate of nominees for the WCI board, declines to comment on what, if any, plans he has for the company. In a Jan. 16 Securities and Exchange Commission filing, Mr. Icahn said he beneficially held 14.5%, or 6.1 million shares, in WCI and that he intended to contact the company to discuss how to "unlock the inherent value" of its shares. His tender offer is conditioned on the WCI board pulling its recently enacted poison-pill provision intended to ward off hostile takeovers. WCI declined to comment, citing a "quiet period" after the tender offer.

In an interview before he made his March 23 tender offer, he said, "On a medium- to long-term basis, there are a lot of factors that will help Florida." Among them: Baby boomers reaching retirement age are moving south.

With prices as high as $11 million for some prime units, WCI condos seem suited to wealthy buyers. WCI also boasts a large amount of undeveloped land across Florida, with many parcels located near its current developments. Some investors believe that land will prove valuable when the Florida market recovers.
Mr. Icahn's offer comes at a crucial time for WCI and for the Florida condo market, generally. The company is expected to open about 10 condo developments across Florida this year. Many of the units within these developments were sold to investors several years ago, as the speculative market roared along. Now those buyers are choosing whether to close on their units and move in, or walk away from hefty deposits, or try to resell their condos in a softening market. WCI buyers put down average deposits of 18% on units with an average sales price of $1.2 million.

While the speculative overhang of newly constructed single-family homes may have peaked in some markets across the country, the full force of Florida's condo glut is still unfolding because, in many cases, it has taken two to three years to complete the high-rise buildings.

In Miami-Dade County alone, 8,000 condo units are expected to open this year, while an additional 12,000 units will open in 2008, followed by 5,500 units in 2009, says Jack McCabe, a housing consultant based in Deerfield Beach, Fla. Fewer than 11,000 condos were built in Miami-Dade between 1995 and 2004.
"It's not a pretty picture," Mr. McCabe says. "This stuff was built five years too soon. The first real wave of baby boomers will retire in 2010 and Florida is going to be one of the most vibrant markets. But before that, we are going to see a lot of people lose money."

Many investors agree. As of March 15, WCI was among the most heavily shorted stocks, with short interest comprising 55% of its float.

Short sellers bet that a stock price will fall. Many short investors are betting WCI will be hit by a wave of defaults, as buyers walk away from their deposits or buyers try to rescind their contracts through lawsuits.

"You have a dire situation," says Credit Suisse analyst Ivy Zelman, who has a "sell" rating on WCI. "There is too much inventory, not enough sales and price deflation. It's the perfect storm."

Charles May put down a $315,000 deposit on a WCI condo in Bal Harbour, near Miami, in December 2003. Before he decided to buy the approximately $1.55 million condo he says WCI sent a limousine to his house, delivering champagne and fancy bathrobes.

Three years later, the condo tower isn't finished and Mr. May expects he will have to resell for a loss. Mr. May is suing the company to get his deposit back, claiming the project is behind schedule.

WCI says its default rate, or rate of condo buyers who don't close on their unit and walk away from a deposit, this year may rise above its historical average of about 2%, but it doesn't expect that rate to exceed 10%. While on the rise, that measurement is much lower than what many other builders are experiencing.
Other builders have higher cancellations, in part because they require smaller deposits for single-family homes. Buyers of WCI units have been more reluctant to walk away from their bigger deposits.

A surge in defaults could be especially painful for WCI because the company needs cash to pay down its debt. WCI's debt-to-capital is roughly 66%, compared with an average of 44% among other builders, says Credit Suisse's Ms. Zelman.

To be sure, some analysts say WCI could limp along collecting as much cash as it can.

One source is the deposits that the company gets to keep when buyers walk. Some analysts also believe Mr. Icahn could refinance the company's debt and possibly sell off some of its land