Institutional Investors Watching Construction Levels Carefully to See How New Crop of Projects Affect Apartment Pricing
|SVN brokered a deal for 160 units in this North Chicago condo project, which also includes an additional development parcel.|
With apartment rents rising quickly in many markets and the single-family home market on the mend, the spreading housing recovery is reviving interest in the long-dormant condominium market. Although still a novelty in most markets, multiple large condo projects are under way in Boston, Washington, D.C., Chicago, especially New York City -- and even in former housing bust markets such as South Florida and Phoenix.
While still well below historical construction levels, the new interest in condos is attracting interest from high level investors, who are keeping an eye on the growing condo construction and conversion market both to see if the trend may produce opportunities in more markets, and to gauge its effect on apartment property pricing.
"The only thing we’re looking at and thinking about is the apartment market," said Bill Maher, director of North American investment strategy for LaSalle Investment Management, during a recent panel discussion during the presentation of the Urban Land Institute/EY Real Estate Outlook Survey. "There's a condo ripple - I won’t call it a wave -- developing, and that may influence apartment pricing down the road. But we don’t have it in our forecast right now."
While today’s condo share of the total home sales is approaching pre-recession levels, the absolute number of sales is still more than 30% short of the previous peak, according to Luis Mejia, director of U.S. research, multifamily, for CoStar forecasting and analytics company Property and Portfolio Research (PPR).
"There is no question, the for-sale housing market is recovering, and with it, the condo market," Mejia said in a note to clients earlier this year. "[But] today’s rent-to-own transition is taking longer and is not likely to accelerate while interest rates and home prices rise, even if it involves a more affordable condo option."
Today’s condo market isn't marked by the irrational speculation of the mid-2000s, when renters fled apartments to get a share of the expanding home price pie, Mejia noted.
For now, developers are testing the water with only a handful of major projects. In the Upper East Side of Manhattan, Zeckendorf Development is leading construction of 520 Park Avenue, a 51-story condo tower slated for completion in early 2017, with sales and marketing to begin soon. 520 Park, a partnership that also includes Eyal Ofer's Global Holdings and Park Sixty LLC, an entity formed by Rafael and Ezra Nasser, is the second Upper East Side project for Zeckendorf, headed by William L. Zeckendorf and Arthur Zeckendorf, who also built 15 Central Park West. Both projects were designed by Robert A.M. Stern.
Similarly, in the South End of Boston, construction has begun on the mixed-use Troy Boston at 275 Albany St. between Traveler and Berkeley Streets. The $185 million project is co-developed by Gerding Edlen and Normandy Real Estate Partners and designed by ADD Inc. architects.
The new projects, most oriented toward mass transit, are being fueled by multiple factors in addition to the quest among younger workers for property ownership, including the revitalization of urban core areas and the desire to live closer to their jobs. Troy Boston resident will have direct access to Boston’s hippest cultural activities and most sought-out restaurants and amenities.
"Investment in [Troy Boston] is revitalizing and reconnecting the neighborhood with Chinatown, the Theater District, and South Boston," said Boston Mayor Martin J. Walsh. "This new smart growth development by Gerding Edlen and Normandy Partners will deliver much needed housing to accommodate the modern family and support the neighborhood's vibrant renewal."
Lenders attracted to all things multifamily are beginning to step up again, albeit gingerly, to provide support. In Miami, developer Melo Group closed on a $39.2 million construction loan for the development of Bay House, a 38-story luxury condo in Miami’s East Edgewater neighborhood.
Construction of the 165-unit tower is already at the sixth floor, and the units are over 81% pre-sold -- more than $89 million in sales, meaning that Melo Group may not even need to tap into the loan provided by Florida Community Bank.
"It is always good to get the endorsement of a reputable financial institution," said Carlos Melo, principal with Melo Group. "That is something a condo buyer wants to know about a developer when making a deposit to buy a unit."
In Chicago, Miami developer Crescent Heights Inc. has acquired 160 of the 201 units at Walton on the Park South, a Gold Coast condo tower at 2 W. Delaware St., along with an adjacent 17,180-square-foot development site zoned for 261 residential units, from Dart Development in a deal valued at $160 million.
The unsolicited offer was made by Jerry Goldner, vice president of investment sales at Sperry Van Ness’s Chicago office, who represented the purchaser in the transaction. It is the single largest deal transacted in the firm’s history, according to Kevin Maggiacomo, CEO of Sperry Van Ness.
Also last week, Scottsdale-based Deco Communities announced plans for Envy, a 90-unit, eight-story luxury condo tower at 4422 N. 75th St. in Scottsdale, AZ. Deco will be developing the project in conjunction with Minneapolis-based Castlelake and California-based Isles Ranch Partners.
Deco Acquisitions, LLC (purchased the development site for $4.05, or $128.87 per square foot, from Hewson 75th St., LLC, in a deal negotiated for the seller by Cassidy Turley Executive Managing Directors David Fogler and Steven Nicoluzakis and Managing Director Don Arones.
"Downtown Scottsdale continues to attract residents that are looking for a living environment that offers convenience and walkability to their jobs, to entertainment venues and to some of the Valley’s best amenities," said Nicoluzakis. "This development site was perfectly situated to meet all of those demands, and was zoned to allow for the new owners to come in and build luxury residential units."