Downtown struggling with slump
By Mary Lynne Vellinga - Bee Staff Writer
Published 12:00 am PST Saturday, December 16, 2006
Story appeared in MAIN NEWS section, Page A1
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Baltimore, Denver, San Diego, Chicago -- downtowns around the nation have blossomed with new housing in the past 15 years, attracting thousands of new residents to liven up their once neglected urban cores.
But Sacramento's central city housing effort -- despite a mountain of recent hype -- took so long to germinate that downtown largely sat out one of the hottest housing markets in memory.
With the real estate industry in a slump, it's unclear whether some of the ambitious projects conceived at the tail end of the housing boom will materialize.
"In Sacramento, we didn't capitalize on a great market cycle," said Sotiris Kolokotronis, who built more central city housing than anyone in the last decade -- 309 houses and apartments in three separate projects. Kolokotronis has 92 for-sale lofts under construction across from his recently completed apartment complex at 18th and L streets.
"We didn't get it in this cycle," Kolokotronis said. "I hope we get it in the next one."
In total, Sacramento's central city, the area between the rivers and the freeways, saw 1,780 housing units created between 1990 and 2006, most of them rental apartments, according to the city. That compares to 15,332 units built in downtown Denver during the same period.
Just since 2000, Baltimore has added 2,400 housing units downtown; San Diego, about 7,000.
Developers say the demand from buyers and renters wanting to live downtown is substantial, but the process of building in the central city remains excruciatingly hard, time-consuming and expensive. Sales prices and rents only recently reached levels that would come close to covering their costs. Most substantial projects have required millions of dollars in city subsidies.
Meanwhile, the Sacramento suburbs still offer so much more square footage for the money that people who might otherwise choose to live downtown don't.
"We've basically got unlimited land for suburban development, which detracts from the downtown," said John Frisch, local head of real estate brokerage Cornish & Carey Commercial.
To be sure, housing projects have sprung up all over central city neighborhoods such as midtown, Southside Park and Alkali Flat. But most of them have been small -- a stark contrast to Sacramento's powerhouse performance churning out tens of thousands of suburban homes during the past decade. And most are outside the downtown core.
"To my knowledge, we're one of the few major metropolitan cities in the country that does not have a good amount of residential downtown," said developer John Saca, who is trying to build two 54-story condominium and hotel towers on the Capitol Mall.
The local urban market was just starting to take off when the nationwide housing downturn began.
Now, developers say, sales prices have stagnated while the cost of steel, concrete and other materials continues to rise -- making it more difficult to finance already tight deals.
"Market conditions have deteriorated rapidly," said developer Mark Friedman, whose Loftworks group developed successful loft housing, office and retail projects at 16th and J streets. But the firm recently walked away from a 16th Street project it was working on with the Capitol Area Development Authority. "At the moment, nothing will pencil."
Saca, developer of the $500 million twin towers project, was far along in the sales and planning when the downturn hit. He said he is moving forward with construction on schedule.
He has spent millions of dollars driving piles and pouring concrete at his site on Capitol Mall.
The City Council recently voted to contribute an $11 million subsidy for the hotel portion of the project to cover escalating costs. Saca said he and the California Public Employees' Retirement System, a major investor, also had to kick in more money to cover costs.
"We've had some cost overruns and things like that, but we've worked around them and things are going well," Saca said. "We've taken in $26 million in non-refundable deposits -- off of a brochure. That shows Sacramento is ready for a project like this and wants to go urban."
Denver developer Craig Nassi insists he is on track to start construction soon on Aura, a 38-story condominium at Sixth and Capitol. Nassi recently stepped down as one of the managers of a Reno condominium project after the lender complained of cost overruns, but he has told The Bee that won't affect his development here. A court-appointed receiver is now running the Reno project.
"We have a very loyal group of people who have bought in our building and they're ecstatic to move in," Nassi said of Aura, about 70 percent of whose units have been presold.
Unlike Saca and Nassi, some other developers who started planning downtown projects while the market was hot have backed out or said they're waiting to see where prices go before breaking ground.
Citing the nationwide market downturn, D.R. Horton, one of the nation's largest home builders, recently pulled out of two high-rise condo projects planned for downtown Sacramento, one on the site of a vacant county-owned building at Eighth and I streets, the other along the Sacramento River next to the historic Pacific Gas and Electric plant.
On 16th Street in midtown, the ground had been graded for a modern looking development planned by Loftworks, the group of developers that includes Friedman and Michael Heller, when they announced in October they were pulling the plug.
Heller said higher prices for concrete and steel made the project unworkable, especially when combined with stagnating real estate prices.
"We had to let it go, and it was incredibly hard," Heller said. "We overdesigned it, and the market wasn't ready. If we wanted to water it down and cheapen it up, I guess we could have done that. But the way we look at it, what is that doing to contribute to our city? We'd rather not go there."
Friedman said he also has put on hold his plan to build about 2,000 housing units just across the river from downtown on the West Sacramento waterfront.
Most real estate experts interviewed said they're convinced it's only a matter of time before large numbers of people begin moving downtown.
Nationwide, demographics are driving people back to cities, said Bruce Katz, director of the Metropolitan Policy Program at the Brookings Institution.
Baby boomers whose children have left and young people are increasingly eschewing the suburbs, he said.
"There's been a really large shift in people less than 30 years old," he said. "They grew up on a steady diet of 'Seinfeld' and 'Sex and the City.' They were not taught that cities are horrible, crime-ridden places. They were taught that cities are cool."
City officials say one thing they accomplished in the decade was getting more sites ready for development, and streamlining city approval processes so projects like the Towers could get approved more reliably and quickly.
Ray Kerridge, the city manager, is credited with changing Sacramento's reputation as a difficult and unpredictable city to get urban projects built.
"We're looking at getting prepared for the next two market cycles and making sure we have plenty of inventory ready to go," said Assistant City Manager John Dangberg.
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