Sacramento Proposal/Approval/Construction Thread - III

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This article is kind of a downer :

http://sacramento.bizjournals.com/sacramento/stories/2007/09/10/focus1.html?b=1189396800^1516707

Towering disappointments
Try as it might, Sacramento can't seem to find success in building a high-rise condo building. Considering other cities' vacancy rates, that might be a good thing.
Sacramento Business Journal - September 7, 2007
by Robert Celaschi -- Correspondent

On the list of big-city status symbols that Sacramento can't quite seem to land, add the condominium tower. The most ambitious project to date, John Saca's 53-story twin Towers on Capitol Mall, died in June when the California Public Employees' Retirement System bought out Saca's interests.

Saca hopes to get back in the game with a 39-story condo tower at 10th and J streets called The Metropolitan, but it's very early in its conception.

BCN Development's 38-story Aura project at 6th Street and Capitol Mall is technically still alive, but stalled.

Sacramento isn't the only place where new high-rise condos can't get traction -- Kansas City, Mo., has seen the same pattern of unfulfilled dreams in the past few years -- but most major cities have been building them in significant numbers.

San Jose's first three condo towers are under construction right now, with 20 more in the planning stages. Miami has several dozen under way. Phoenix, Denver, Dallas and Las Vegas have been sprouting them, too.

Why can't Sacramento follow suit?

Blame commutes that are still comparatively short, detached housing that's in the same price range, and a downtown that hasn't quite achieved a critical mass of entertainment and social venues.

Don't feel too bad, though. In cities where condo towers have been a hot trend, the condo markets are becoming glutted thanks to overbuilding.

Sacramento may have dodged a bullet.

EASY ACCESS
"I spent some time watching the Sacramento developments from afar and questioning at the time whether they could get done. I thought they had a chance, but I didn't think at the time Sacramento would be able to support two large developments," said Charles Young, senior development director for Mesa Development LLC. That company is building Three Sixty Residences, a 23-story tower containing 213 condos in downtown San Jose.

As with any product, it comes down to whether the market will support a price high enough to cover the costs of construction, plus a satisfactory profit. The costs aren't that different in San Jose than Sacramento, said Young, but the cheapest unit at Three Sixty is fetching $600,000. Units in Saca's Towers project started at $368,000. When the Towers' original $500 million construction costs rose by $70 million or more, the building site went dormant and liens and lawsuits from contractors began to pile up.

Even at comparatively low prices, the Towers' entry-level price didn't stack up that well against Sacramento's median housing price of $365,500 for the four-county area. In San Jose, the median is $865,000.

You can't drive 20 minutes from downtown San Jose and buy a house for less than the cost of a high-rise condo unit, but in Sacramento you still can, Young said.

And the Bay Area has the high median incomes to match the high median housing prices, he added.

With a falling median price for single-family homes, that's going to make it even harder for a tower with hundreds of condos for sale. Buyers need to sell their current homes in order to buy into a tower.

"If you can't sell it, you can't trade up," Young said. "A high-rise is not a shelter house. It's not just a place you go to sleep. It's a lifestyle choice, and you pay for that choice."

The building itself can't be the only draw. A condo tower also isn't a product that most people gravitate toward naturally or easily, said Lewis Goodkin of Goodkin Consulting in Miami. Buyers must feel tempted by what they see beyond the building.

"The cities that do the best are the ones that have truly exciting downtowns, with a lot of opportunities for retail, entertainment, social activities," Goodkin said, and relatively few cities can deliver that.

In New York, Chicago and a few other places, condo towers have been part of the landscape for decades, but for most of the country, condo towers have become popular only in the past five years, he said.

Then, too, there's the makeup of the buyer market. Goodkin's own city of Miami has downtown jobs to support condo buyers, but it also draws on the tourist and retirement markets.

TOO MUCH OF A GOOD THING
Miami is also a prime example of a city that has overdosed on condo towers. The city has about 25,000 units slated to close later this year, overwhelmingly owned by speculators, Goodkin said.

"Overwhelmingly" can mean 50 percent to 70 percent, depending on the source. In any case, they are people who intended to flip the units at a profit without ever moving in, sources said.

Expect to see similar problems in other cities where condo towers are hot.

"Vegas is a disaster. There is so much hotel condominium and regular condominium, it's really going to be a major, major headache within the next year," Goodkin said.

In some markets now, condominium developers are offering tens of thousands of dollars of incentives to move units, and even that's sometimes not enough, said Jack McCabe of McCabe Research & Consulting in Deerfield Beach, Fla. He's already seeing bulk sales of units to investment banks and hedge funds, he added.

"Previous boom-bust cycles really started in California, but this one seems to have started in Florida," he said. In Miami alone there were 52 projects that were previously announced for high-rise condos, and the land is now listed for sale, he said, and 37 high-rise towers are still under construction.

If Sacramento missed the condo-tower bandwagon, it might have been a blessing.

"Now, lenders are pulling in the reins on condo loans because of the risks involved," McCabe said. That includes requiring a higher percentage of presale contracts before they will release construction funds.

WHAT IT TAKES
In a perfect world, developers design condo towers in a down market and start selling as the market resumes its rise. But it's hard to hit that cycle.

"It's very important, no matter when you design the building, to have the mindset that it's going to be a tough market with lots of competition," said Krysen Heathwood, chief operating officer of The Mark Co., which is marketing the Three Sixty project in San Jose for Mesa Development.

"They came in when the market was already softening, but because we had the mentality as a partnership that we were going to design the building for a tough market with lots of competition, the building is doing very well," she said.

That means not cutting corners on anything the prospective buyer will associate with a top-quality product.

"It's the finishes and the amenities that the buyer is seeing. They aren't seeing how the elevator is built," she said.

And the advertising has to start early.

"High-rise living or high-density living is a new product type for many areas. You have to educate the people on the lifestyle that's built around that," Heathwood said. For a company like hers, that means getting in at the design phase to find out what the target buyers are willing to pay for. Then comes a PR campaign showing how the idea has worked in other cities.

"That whole urban lifestyle is beautiful, and I think it will eventually happen in Sacramento," said Young of Mesa Development. But as long as detached houses offer a reasonable alternative, it's going to be tough for a tower to lure hundreds of buyers in a short time.

The article makes some very good points. However, I'm not sure I completely agree with it. Though it is not clearly stated, I think the author implies Sacramento is not ready to have high rise condos in its down town. (I may be reading this wrong, but that's the impression I get). I don't think so.

True, the housing market's current state makes it difficult for people to sell their homes and purchase expensive condo units. It also offers a less expensive, bigger alternative to pricey, small high rise condos for those looking to buy. Also, I agree with the overall notion that Sacramento probably cannot support today's exorbitant high rise condo costs. Yes, there is a cutoff (which is different for different cities) where prices are just too high. However, I think Sacramento's ceiling is high enough to support high rise condos in reasonable market conditions (housing and construction costs). In other words: Yes, Sacramento has a lot less wiggle room when compared to New York, Chicago, San Francisco, and San Jose (I guess). However, it's price cutoff is still high enough to allow construction of at least a couple towers when construction and materials costs are reasonable and the housing market is not in the toilet. In fact, Aura may have worked (even in today's market) if Nassi had not designed such a poor pricing structure (according to a source). I've spoken to a few people who have some expertise (I've also read a number of articles); they all say Sacramento has pent up demand for high rise condo towers and can support their prices (when times are better).

The willingness to buy expensive condos is affected by a number of things according to the article. These include commute times, tourism, the amount of hip urban lifestyle (I guess), and the price of detached homes within a certain radius of down town. While all of these items (plus many more, I'll bet) can increase the demand for a lot of high rise condo towers, I am not sure the lack of huge numbers in each of those areas hurts the demand to build a few high rise condo towers.

Will we have to wait until our commute times are worse (you mean, they can get worse? ), down town is hopping and full of tourists (like San Jose's down town) and the median price of detached housing within 20 miles increases massively for a high rise condo or two or three to be built? I don't think so. (Well, I hope not )