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Posted Jul 2, 2007, 8:09 PM
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Join Date: Aug 2002
Location: SD/SJ, CA, USA
Posts: 1,879
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Interest in downtown San Jose high-rise living shows in deposits
Silicon Valley / San Jose Business Journal - June 29, 2007by Sharon Simonson
Nearly 25 percent of the 124 condos in the first downtown San Jose condominium high-rise are in escrow with sales expected to close in the next two weeks.
Martin Menne, president of MCM Diversified, Barry Swenson's development partner on the City Heights project, says sales have gone better than anticipated and buyer interest had been good since they began marketing the project in November. The company has had permission from the state to actually close escrow on its units only since April 26.
"We have had a price increase already, and we are having good deal flow," Menne says. "There is good interest in downtown, and people are saying they want to be part of the area's renaissance."
New home builders generally are satisfied if they are selling between one and two homes a week in a subdivision. Based on eight weeks of sales time, City Heights is on target with that pace and offers a glimpse into the level of buyer enthusiasm for high-rise condos in the center city. City Heights is situated near downtown's northeast edge, adjacent to San Pedro Square. Its units start in the $300,000 range and rise to more than $1 million.
Another 20 or so high-rise housing projects are in various stages of execution in downtown. Interest in buyer reception has been strong, not only among developers but also the city of San Jose, which is pushing to bring residents to downtown as the necessary spark to jump-start the area's long-awaited rebirth.
Overall, San Jose home sales have slowed in the past two years from the frenzied pace of the national housing boom during 2004 and 2005, but the market remains reasonably healthy, particularly compared to troubled markets in places such as Florida. Thus far, Silicon Valley median home prices have continued to rise, buoyed by sales of houses priced at about $850,000 and up. Entry-level home sales rates have slackened substantially. The pace of home sales above $2 million also has tapered off.
Besides City Heights, three other high-rise condominium towers are under construction in downtown now. But, the only other one offering units for sale is Mesa Development at its 360 Residences. The $200 million luxury high-rise near South Market and East San Carlos streets is in the opening phase of construction; all units are to be delivered by June 2009, according to public record.
The state issued its approval to Mesa to allow the company to enter escrow with buyers only on May 1. Before May 1, Mesa accepted only buyer "reservations" and returnable deposits. Now Mesa can require buyers to hand over "hard money," or unreturnable deposits.
Charles Young, Mesa development director, declined to say how many of the 213 condos in the 23-story tower the company has sold. Mesa is seeking 3 percent to 5 percent deposits for its units, with deposits growing as the units become more desirable, he says. It is asking for 10 percent deposits on its six penthouses. On a $600,000 condo -- the cheapest in the building -- a 3 percent deposit is $18,000.
Mesa's marketing strategy differs markedly from the one employed at City Heights and the other developments now under construction. Neither Hollywood's CIM Group nor Spring Capital of Oregon have yet secured state approval to close sales in their downtown condo towers. Both developments are much farther along in their construction than is Mesa.
Young says Mesa's approach has been deliberate.
"In our mind, it takes some of the risk out of the deal because you know what the demand for your product is, and you're not waiting until the whole building is built," he says. "We wanted to set our financial goals and let the buyer ride the market with us."
Developers who wait until later in construction to sell probably won't have to spend as much money on marketing -- Mesa invested in an elaborate off-site sales office in lieu of having a building to show -- and they're betting that home prices are still rising. Selling later gives those gains to the developer, not the buyer, he says.
Of course, if housing values fall, the developer who waits also must absorbs the declines.
Michael Kriozere, whose Urban West Associates plans to begin construction at the beginning of 2008 on a two-tower condo project adjacent to San Jose's Fairmont Hotel, says he favors the Mesa method and has used it successfully in San Francisco. He plans to begin selling his units as soon as his construction starts with delivery expected 20 months to 24 months later.
California law allowing the earlier sales has only been in effect about a year, he says.
"If you can sell units before you finish a building, and people are moving in right away after it's done, the money you have invested in the building is outstanding a much shorter period of time," he says. "The interest is calculated on how long the money is out, and you can save a ton of money."
Meanwhile, a principal with San Jose's Northpoint Development says the company has secured up to $24 million from new financial partners to complete the initial work on three proposed condo high rises in downtown. Alex Erickson declined to identify the partners for the three projects. The sites are near St. James Park, San Jose State University and the new San Jose City Hall.
"This is the initial capitalization of our projects and will allow us to get entitlements," he says. "It is a huge step."
He hopes to begin construction next summer. He now begins his trek to gain construction financing, he says.
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