Condos no longer a slam dunk

By Burl Gilyard, F&C Real Estate Writer
June 15, 2006

The condo market continues to cool for local developers. As interest rates have climbed, the pace of sales has slowed and the inventory of available units on the market has ballooned. Many projects are still proceeding, even as the market shifts.

Minneapolis-based developer Schafer Richardson is waiting to hit the 50 percent pre-sale threshold before beginning construction on 730 Lofts, its third building in downtown’s North Loop area following its 710 Lofts and 720 Lofts.

David Frank, project manager with Schafer Richardson, said 35 to 40 of the 112 units are under purchase agreement or reservation. Frank acknowledged that the firm had hoped to be further along.

“We thought we would be there sooner than we will be,” Frank said, noting the start date for construction on the project at 730 N. Fourth St. still hasn’t been determined.

“We are seeing sales as slower,” Frank said. “It’s not that there are fewer buyers, it’s that there’s so much supply.”

Frank sees the greatest softness in the market for units priced from $300,000 to $500,000, with demand at the lower and higher ends of the market less affected.

Frank said lower-priced units were the hottest ticket at the 730 Lofts.

“There’s a few units that are under $200,000, and those sold like crazy,” Frank said.

“Those will get snapped up faster than you can put them on the market.”

At the nearby 720 Lofts, where residents began moving in about three months ago, Frank said that about a dozen of that building’s 98 units remain available for sale.

Steve Minn, principal with Bloomington-based Lupe Development Partners, agreed the market is cooling.

“It definitely is a more challenging market right now; there is going to be a continued shakeout, in my opinion,” he said.

He said Lupe is moving ahead with Eat Street Flats at the corner of Nicollet and Franklin avenues in south Minneapolis. But the project has been repositioned after delays.

“We’ve got a new marketing team in there; we redesigned the project. We got rid of some of the two-bedroom units and put more one-bedroom-plus and studios in there,” Minn said.

As a result, Eat Street Flats now offers 63 units. Original plans called for 54 units.

“There’s a lot of conversion that was competing with us, and there were a lot of new construction projects with subsidy, and we just decided not to add more fuel to the fire. So we changed the mix to more workforce housing — people who want to be near downtown but don’t want to pay downtown prices,” Minn said.

Minn had originally hoped to begin construction last fall. He lays the bulk of the blame with the city of Minneapolis for foot-dragging on planning issues.

“We were going to start right after Labor Day originally. Our plan was to deliver right about now — June, July of ‘06,” Minn said. “We finally lost our window for ‘05 winter construction.”

Now, Minn is aiming for completion next spring. Looking ahead, Minn remains optimistic about the local market.

“Good locations will always do well. We’re still looking pretty bullishy at Flour Sack [Flats] Two,” Minn said, pointing to a pair of condo buildings across the river from downtown Minneapolis.

Lupe is developing Flour Sack Flats with Minneapolis-based Wall Cos.

Minneapolis-based Lander Group is moving ahead on its 2626 West Lake project, on the north side of Lake Calhoun. But it’s been a long road to get there.

Lander’s previous plan for a 70-unit project met with neighborhood opposition. Lander Group now has the green light from the city for a 46-unit project. There could be fewer units, if buyers elect to combine units.

Despite his frustrations with the protracted process, Michael Lander, president of The Lander Group, is pleased that the project is moving forward.

“Certainly there are some things about the project that are improving,” Lander said. “We got a beautiful project.”

Formal marketing hasn’t started yet. Lander said his firm is working its way through a list of potential buyers who had previously expressed interest in the project.

“We’re spending June and July largely working through those folks,” Lander said.

“We are trying to work through our list.”

Mary Bujold, president of Minneapolis-based Maxfield Research, acknowledged that the condo market is shifting, but she said the reasons are varied.

“I think there’s a lot of homes available on the market right now. There’s longer lead times, and that’s affecting the market,” Bujold said.

“Some projects are delayed because they don’t have the pre-sales that they want; some are delayed because they don’t have all the approvals with the city,” Bujold said. “There’s no one single cause for having projects be delayed.”

Bujold’s statistics for downtown Minneapolis condominium projects show 2,100 condo units under construction, 916 units in the marketing phase, 1,300 condo units in the planning stages and 5,700 more units proposed.

Charlie Nestor, a principal with Minneapolis-based Master Development, said he expects his firm to do fewer condo projects in the future. Master has done several smaller, in-fill condo developments in Minneapolis neighborhoods but is getting busier with commercial projects such as multi-tenant industrial buildings and artist office/studio space.

“I would say all around you are seeing a lot of projects go slower or not at all. The market’s certainly changing,” Nestor said. “We are focused more on commercial.”

Nestor said Master is now exploring the idea of developing some rental residential properties as the for-sale market ebbs.

“I would say apartments are going to be the next thing you’re going to see pop,” Nestor said. “It’s the natural progression. We don’t want our skill set that we’ve developed in condominiums to go to waste.”