Twin City Condos

The supply of Twin Cities condos is at an all time high — with developers plopping down 100 and 200 unit projects on any site they can get their hands on. Old buildings are being converted and new ones are being built. The market has been on fire the past three years, but there are signs that demand from condo buyers is slowing. Prices have remained stable, but empty units are taking longer to sell than they did a year ago and new construction is taking longer to hit its pre-sales goals. Where the market goes in 2006 depends on how many people are willing to put some money in the game.

Housing boom bound to run out of steam

Posted on Sun, Dec. 18, 2005

EDWARD LOTTERMAN

News that the Twin Cities area housing market cooled in October is no surprise. Sale prices for existing homes had increased sharply for two years. New construction had boomed. Neither trend was sustainable over the long run.

The most important economic law is that if things cannot go on forever, they won't. The housing boom has to end, and apparently is starting to do so. The only question is whether it will end with a bang or a whimper.

A bang would see house prices falling 20 percent or more, many households defaulting on mortgages and construction coming to a virtual standstill. It would take five years or more to sort out and might be the foremost economic problem on most people's minds during that period. Personal bankruptcies would rise, mortgage companies would write off large losses and many builders would go belly up.

A whimper would see stagnation in prices. Some houses would appreciate a few percent a year while prices of others fell by similar proportions. Overall, prices would remain essentially flat for three to five years as incomes and the general price level caught up to housing. Turnover and refinancing would drop dramatically as people hunkered down in their homes. Mortgage defaults might increase, but would not reach epidemic proportions.

Builders would experience a few slow seasons, but few would go broke. Development of new subdivisions would slow but not stop. Somewhere down the line — say by 2010 — home prices and construction would slowly return to historic trend levels.

Which is more likely? Real estate experts seem to think that a slow, hissing deflation of a balloon is much more likely than a dramatic pop. They are probably right.

While some localized dramatic busts occurred in the 1990s – Southern California being the most dramatic – neither the Twin Cities nor the nation as a whole has experienced a real estate crash in decades.

But markets can bust. The value of the Nasdaq stock index fell 75 percent from February 2000 to September 2002. Many Minnesota farms lost two-thirds of their market value between 1980 and 1984. After increasing by a factor of 22 from 1970 to 1980, the price of gold fell 67 percent in the next 20 years. (In recent months gold has risen to the highest levels in 25 years.)

There are key differences between gold or high-tech stocks and houses. People cannot live in a share of stock or a gold ingot. While houses may be the most important assets most households own, they are even more important as shelter. People are happy when their house increases in value but they don't sell it just because it drops.

So it is unclear whether October's slump is the beginning of a precipitous drop or of a gentle slide. One of the nice things about economics is that time resolves most uncertainty. In a few years we will know for sure what happened to the housing market in 2006. Meanwhile, watching it will be interesting.

Market beginning to shift for Minneapolis Uptown condo developers

By Burl Gilyard
Staff Writer

Downtown Minneapolis has won the bulk of the attention as a hotbed of residential condo development. Now the Uptown neighborhood is a fast-emerging market for condo developers, but as competition intensifies and the market shifts, many are wondering about the depth of the market.

Stuart Ackerberg, president of the Minneapolis-based Ackerberg Group, has two developments in the works that will bring more than 200 units of new housing to Uptown - an unnamed, mixed-use development with 165 condo units and Lumen on Lagoon, a 44-unit project at Lagoon and Emerson avenues.

"We see Uptown as really different than downtown, just given the inherent amenities that are already existing in and around Uptown. It's truly an urban community. For someone that truly wants urban living, Uptown is the best option," Ackerberg said. "In Uptown, there's been very few new housing options available for a long, long time."

Sales for the Lumen began about a month ago. Since then, 18 of 44 units have been sold. Sales for the larger, mixed-use project don't begin until January, but 98 reservations already have been taken. Ackerberg has partnered with Minneapolis-based Financial Freedom Realty on both projects. Both firms call Uptown home.

Projects planned or under construction in the broader Uptown area could add about 700 new condo units to the neighborhood, with more projects looming in the wings.

Business is brisk for St. Louis Park-based Mathwig Development Co., which is developing the 122-unit Loop Calhoun project, slated for completion in early 2007.

"We're about 70 percent sold," said Troy Mathwig of Mathwig Development. "We're very happy. There's still a lot of activity and still a lot of interest on the remaining units."

But not every developer trying to do an Uptown area project is doing cartwheels.

Last week Michael Lander, president of Minneapolis-based Lander Group, pulled his application for 2626 W. Lake St., a proposed 70-unit project on the north side of Lake Calhoun, as the Minneapolis City Council was poised to vote against the project.

Lander has been working on the project for a year, and his option to buy the site is slated to expire at the end of the year. Lander has faced neighborhood objections to the height and scale of the project, which rises to 110 feet - the height of the nearby Calhoun Beach Club - at its highest point.

"I'm very frustrated at this point," Lander said.

Sales were solid for Lander's 72-unit Midtown Lofts, developed by Lander Sherman Urban Development, a joint venture with Minneapolis-based Sherman Associates.

The project was completed earlier this year and has a single unit remaining for sale. But Lander is keenly aware that the market is shifting.

"Right now, the number of projects that are being talked about or proposed are in excess of the current demand. We see that the market has dropped off somewhat. There's definitely more caution," Lander said. "The underlying demand, I would argue, is still growing, but the supply has grown faster."

Out of the Uptown core, the Edina-based Cornerstone Group has shelved its planned Machinery Lofts project at 2848 Pleasant Ave. S. after two different proposals (a 57-unit adaptive reuse and a 123-unit new construction proposal) failed to win neighborhood approval. Cornerstone has owned the site for 10 months.

"We are doing some internal brainstorming about what the possibilities are," said Colleen Carey, president of the Cornerstone Group. "We might look for a temporary solution. I like the neighborhood, I like the building, I like the possibilities. But given what's going on in the market, it isn't clear to me what we should be pursuing there."

Minneapolis-based Hornig Cos. has proposed a 34-unit project at Lagoon and Irving avenues. The company, primarily an apartment owner, wants to test the waters for development.

"We don't have to build anything. We're going to see what the market says," said Jon Hornig, a third-generation member in the family business. "We're exploring the idea of building a LEED (Leadership in Energy and Environmental Design) certified building, which would be like a green building. That would be a way to further differentiate ourselves."

The long-planned expansion of Calhoun Square also calls for new housing. But last week, CARAG (Calhoun Area Residents Action Group) voted against the project for the second time, citing concerns about the height and design of the project.

"There are a number of issues that the neighborhood is concerned about," said Aaron Rubenstein, who chairs CARAG's zoning committee. "We'd like to see the design improved and see it take on a more urban character. Some of the buildings look like they would be more appropriate in a suburban setting."

Solomon Real Estate Group principal Jay Scott did not return phone calls seeking comment about the Calhoun Square project.

The project is slated to come before the Minneapolis City Planning Commission next Monday.

The new, scaled-down proposal calls for 108 units of housing, down from 124 a few months ago.

As the Legal Ledger went to press, it was not clear what the city planning staff would recommend.

Other projects in the pipeline include Track 29 Uptown, a 126-unit condo and townhome project being developed by Ross Fefercorn's RMF Entities. Ackerberg is also partnering with Village Green Cos. on a rental project, an approximately 160-unit apartment building near Lake Calhoun.

Meanwhile, the pace of condo conversions in the Uptown and southwest Minneapolis areas is cooling off. Clark Gassen, founder and president of Financial Freedom Realty, said his firm has converted about 300 apartment units into condos, but that his company is shifting gears.

"We truly are getting out of the conversion business," Gassen said. "We're going to wind down the conversions and focus on urban infill sites. There's no question the demand I'm seeing right now is in new construction."

In addition to his partnerships with Ackerberg, Gassen's group is developing the Edgewater, a luxury 23-unit building.

Gassen estimated that his company has about 100 converted units still available for sale.

"It's slower than we'd like," Gassen said of the pace of sales for converted condo units.

There's a general acknowledgment that the condo market is not as robust as it was a year ago.

"I think if you get outside of the high demand locations, it could be a little tougher going forward," Mathwig said. "It will just take longer to sell out projects."

But overall, real estate observers say the health of the Uptown market is strong.

"The area's always been hugely popular as a residential area," said Mary Bujold, president of Maxfield Research, a real estate research and consulting firm. "That area has always been a very active and desirable area for people to live in, and so I think that the new properties that are going on, I think it's really just a matter of making sites available so that we can get some new housing units into an area that hasn't had a lot of housing development over the past 10 years."

For his part, Ackerberg remains bullish on Uptown, where his company owns a host of commercial buildings.

"We've been investing there since the '70s, and we will continue to invest there," Ackerberg said. "We're not merchant builders. We're not doing one-off deals. We're still the largest landlord in Uptown."