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VOL. 122 | NO. 216 | Tuesday, November 13, 2007

Developers Bring Apartments to Condo-Rich Downtown

By Eric Smith

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MEETING A NEED: The Lawrence Building, at 60-62 S. Main St., is being converted into a multifamily property to meet a growing demand for Downtown apartment units. -- Photo Courtesy Of Downtown Developers Llc

With recent announcements of plans to rehab two historic properties, two development teams have signed on to give Downtown something it's been thirsting for - apartments.

Development groups called 91 Cotton Row LLC and Downtown Developers LLC have joined a growing list of groups bringing multifamily product to a submarket that many believe is oversaturated with condominiums and underserved by apartments.

91 Cotton Row partners Josh Haralson and Bert Robinson have filed a $1.5 million construction loan to renovate a 15,000-square foot, three-story building at 91 S. Front St. into seven apartment units.

Meanwhile, Downtown Developers LLC's Andrew Crosby and Bob Williams are on the brink of turning the Lawrence Building, at 60-62 S. Main St., into a 42-unit complex to be renamed The General Washburn after the alley behind it.

Both projects are expected to be under way in the next several weeks. (For more details about these properties, see the Memphis Real Estate Recap on Page 3.)

By rehabbing and converting these properties to apartment buildings rather than condominiums, these two projects buck the trend of late: turning every conceivable empty Downtown space into condos.

But condo sales have been stagnant, sitting on the market for months on end and causing some industry insiders to toss around the word "glut."

Condo collapse?

The numbers back that up. Though the 88 condo sales for the month of October were up 12.8 percent from September, they were down 16.2 percent from October 2006, according to real estate information company Chandler Reports, www.chandlerreports.com.

And year-to-date condo sales are off 25.7 percent, with just 950 condo sales through Oct. 31 compared to 1,278 at the same point last year.

In the Downtown ZIP code 38103, the numbers look worse, with a 45.5 percent drop year-over-year for the January to October period.

Condo values also have experienced a drastic slide, falling 18 percent from an average $150,509 in October 2006 to $127,554 in October 2007.

Another factor is the relative dearth of apartments for Downtown's population of 28,000 and growing. The submarket has about 5,000 units, according to the latest stats from the Center City Commission.

At the same time, Downtown apartment figures - at least for new construction - are on the rise. Rental rates for new construction apartment buildings are $1.08 per square foot, 7.5 percent higher than year-end 2006, and occupancy rates are around 95 percent, said Blake Pera, senior vice president at CB Richard Ellis Memphis' multifamily division.

"Downtown remains one of the best-performing apartment submarkets in Memphis, boasting the highest occupancy, highest rents and rent growth," he said.

To rent or own

Could the Lawrence Building renovation tap into that success? Jeff Sanford, president of the Center City Commission, said he believes the timing and location of the project are ideal.

"I have said for as long as the developer has been putting that project together that it's an unusually good location because it's within walking distance of the river, the sports and entertainment district and anything else that's in the core of Downtown," Sanford said. "It's a very good location. I expect that they would be successful."

The General Washburn's Crosby said one of the reasons for choosing apartments over condos is because so many Downtown apartments have been taken offline.

"What we're hearing from a lot of people is, 'Where are the apartments? I want to live Downtown. I don't necessarily have the funds to buy yet, or I don't know if I want to buy down there' - whatever the reason, there just aren't enough apartments," he said.

And though the two latest projects account for only 49 new apartments, a host of other scheduled multifamily projects are on the table, including the Lincoln American Tower, the Lowenstein Building and the old Union Planters headquarters.

To conversion and back

If the apartment success continues, one trend to keep an eye on is a mass conversion of condos into apartments - dubbed "repartments." The concept has made waves nationwide in slumping markets, which are ubiquitous amid today's residential real estate woes.

A repartment conversion happens when a surplus of condos coupled with slow sales cuase developers to convert condos into apartments for quick occupancy. It hasn't yet occurred in Memphis, but the threat of oversaturation keeps it alive.

Pera said despite the multifamily demand Downtown, he doesn't believe Memphis will undergo a major repartment craze.

"The single family sales market as a whole is slow, condo sales included," Pera said. "Considering the size and finish-out at most Downtown condo developments, it may not be economically feasible to convert these units to apartments, as condo development costs typically exceed supportable apartment rent. This would most likely happen on a smaller scale, like on individual condo units owned by private investors."

'A lot of room to grow'

Those who are bullish on Downtown apartments should be happy with the news that Pinnacle Airlines is considering relocating its headquarters to the One Commerce Square building, a move that could bring hundreds of employees to the city's core.

Also, in the fall of 2009, the University of Memphis' Cecil C. Humphreys School of Law will move to the historic U.S. Customs House facility Downtown.

"Both events will continue to make Downtown a popular draw for residential developments," Pera said.

The developers behind 91 Cotton Row and The General Washburn both say the law school relocation could be good for business.

"We just feel like Downtown has a lot of room to grow still and with the saturation of condos, we felt like apartments were a good fit for Downtown right now, especially with the law school coming online in 18 months," Haralson of 91 Cotton Row LLC said last week. "We'll probably have a year split between our completion and when they go active down there, but that's what we're most excited about."

Crosby expressed similar sentiments.

"You've got the law school coming with 500 students by the fall of '09, and they're going to want to rent and (The General Washburn) is a block away," he said.

Despite the potential Downtown growth, plenty of other factors could keep multifamily developments in check.

"Development of apartment projects Downtown will be in high demand, but will most likely be hampered by construction costs and availability of land to build a large enough property with supporting on-site parking," Pera said.

Research analyst Kate Simone contributed to this report.

PROPERTY SALES 128 234 13,285
MORTGAGES 80 152 8,323
BANKRUPTCIES 42 79 6,299