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VOL. 124 | NO. 230 | Monday, November 23, 2009

Housing Divided

How the local condo market couldn't stand — and how it's dusting off

By Eric Smith

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Clay Thompson, who lives in a condo in the 4Twentysouth building with border collie Stella, two cats and his wife, Jessica, says that having everything so close is the best part of living Downtown. He also enjoys not having a yard. -- PHOTO BY LANCE MURPHEY

A couple of years ago, when Clay Thompson of Memphis decided it was time to stop renting, he set his sights on the Downtown condominium market. He was especially interested in the old warehouses in the South Main Historic Arts District that had been converted to condos.

Thompson was drawn to that area for a few reasons: He already was living Downtown in the Central Station apartments, his mother had moved nearby and he had long ago ruled out buying a single-family home in suburbia, where he would be saddled with responsibilities such as yard work.

So in 2007, just a few months after the height of the Downtown condo boom but well before the bubble burst, Thompson bought a one-bedroom unit in the 420 South Front St. condo development, a building that combined the “old with the new,” he said.

“I knew right when I saw it that it was exactly what I wanted,” said Thompson, who works for the transportation brokerage firm C.H. Robinson Worldwide Inc. “It had all the brick exposed, the high beams, the original stairwell, and it had all the new amenities as well. It was the perfect fit.”

Fast-forward to 2009. While Thompson doesn’t have any regrets about buying into 420 South Front (although now that he’s married he said he wishes he had bought a two-bedroom unit), after seeing condo sales fall and new developments fizzle, he worries about the value of his investment and his ability to sell it when the time comes. And he doesn’t have to look far.

Across the street from his building is the Nettleton. When that development’s owner was foreclosed, the bank auctioned the unsold units, giving Thompson a conflicting, yet common, feeling about the Downtown condo market.

On the one hand, he worries about the growing perception that condos in his neighborhood are selling at rock-bottom prices in closeout fashion. On the other, since all 30 condos sold, he is thrilled that some Downtown units – any units – were finally taken off the market.

“You’re happy to see anything that signifies positive growth for the community in these economic times,” he said. “To see things actually selling, it’s a good feeling.”

Hope, hype and hard numbers

There haven’t been too many good feelings in the Downtown condo market lately. Sales have registered a steady decline since the market’s pinnacle in 2006. And while most real estate experts hesitate to label Memphis a classic “bust” in the same vein as some parts of Florida and California, the numbers reveal a bleak picture.

For the first three quarters of 2009 (January through September), Downtown’s 38103 ZIP code has seen just 88 condo sales, down 47.3 percent from 167 during the same period of 2008 and down 59.8 percent from 219 condo sales during the same period of 2007, according to real estate information company Chandler Reports, www.chandlerreports.com.

Downtown condos this year have averaged $199,815, an 11.6 percent decline from $226,010 in 2008 and an 8.3 percent decline from $217,811 in 2007. This year’s average price per square foot is just $141.30, down 12 percent from $160.50 in 2008 and down 21.1 percent from $179.17 in 2007.

TOP: The Nettleton at 435 S. Front St. was foreclosed when only five of 35 units sold. MIDDLE: The Machine Shop condominiums sit along the train tracks north of Central Station in the heart of the South Main district. BOTTOM: Developers are offering a number of incentives to entice buyers to Downtown condos like the Front Bluff Town Homes.  -- PHOTOS BY LANCE MURPHEY

Tony Bologna is principal of Bologna Consultants LLC, a real estate consulting firm that tracks condo data. He has seen how the slumping economy, most notably the lack of adequate financing for individual buyers and developers, has taken a toll on the Downtown condo market.

“It’s struggling right now,” said Bologna, underscoring that sales have been cut in half for each of the past three years. “We’re back to ’04 numbers right now. It’s struggling, but the fact that the Nettleton was foreclosed on and they auctioned off all 30 units … at least that gets them off the market. It reduces the price per square foot, or the street price of the units below what everybody would like to see, but at least those units are now off the market, and what it says is that there really is still a market.”

Bologna said the Downtown condo market remains strong at a specific price point, as certain developments and certain pockets of the area continue performing well amid a horrendous lending landscape.

Jeff Sanford, president of the Center City Commission, agreed that tighter financing for many borrowers has put the biggest damper on condo sales. But he also pointed to Downtown’s inventory, which isn’t as bad as many might think.

Downtown has 238 unsold condo units out of 2,100 for an 11.3 vacancy rate as of Sept. 30, according to Center City Commission data. That number doesn’t include The Horizon, whose 155 units are in foreclosure and owned by the bank. While it’s still a daunting number with or without The Horizon’s total, absorption is within reach if the lending landscape improves and no new developments come about.

“In the current market and at the current rate of sale, it would take, obviously … a few years to sell off that inventory,” Sanford said. “But when the economy improves and along with it the consumer’s ability to purchase housing, I predict the rate of sales of Downtown condos will increase.”

Analysts like Bologna remain bullish on Downtown, whose population (combined with the Medical District) is about 25,000, much higher than before the condo surge.

“I’d say the housing market Downtown is holding its own, maybe is the best way to put it,” Bologna said. “It’s not healthy. It’s struggling. But we haven’t hit the panic button yet.”

A steamroller

An empty fenced-off lot sits at the corner of Beale Street and Riverside Drive, where a large luxury condominium project was planned.  -- PHOTO BY LANCE MURPHEY

It’s difficult to imagine a time when “panic button” would be mentioned in the same breath as Downtown condos. When the market took off in the early- to mid-2000s, it seemed like nothing would stop it.

Developers traditionally didn’t view Downtown as a strong residential market because they feared building without PILOT (payment-in-lieu-of-taxes) incentives – programs that aren’t available for owner-occupied residential units, as opposed to apartment buildings, for example.

“As Downtown was developing as a residential neighborhood, virtually all of the construction was multifamily, rental apartments,” Sanford said. “There were a couple of co-ops, which by an earlier interpretation skirted the PILOT ban on owner-owned properties.”

As some apartment projects with PILOTs rolled off their tax freezes, property owners discovered they could convert apartment buildings into condos. Examples include the Paperworks, the Shrine Building and Claridge House, all of which found success as condominiums.

“By then, interest in living Downtown had grown substantially, and developers were less fearful of the condominium market,” Sanford said. “What ensued was fast development of condominiums in the Downtown area.”

The market began booming as developers sought old warehouses to convert into condos or land where a new building might stand. One of the players was Terry Lynch of Southland Development Partners, which developed the land where Beazer Corp. of Atlanta built State Place condos.

When Beazer left the Memphis market in 2007, Lynch’s company bought State Place’s 38 unsold units because he and the company were familiar with the property.

Since that purchase, in 2008, Southland has sold all but nine of those units, a coup for this market.

But Lynch said State Place had the benefit of an attractive product at the right price, something developers didn’t always attain when trying to tap into the boom by getting the most return on their investments. Other factors played a role in State Place’s turnaround, Lynch noted.

“We’re one of the few projects Downtown that was FHA approved before we started, so having that has been a bit of a financing advantage,” he said. “And also the price point is an advantage for us.”

Lynch said the vacant land across the street due east from State Place has been approved for townhouses, but the soft market has delayed construction for that project, a typical fate of many proposed and approved Downtown projects.

Like the rest of the residential housing market, Downtown suffered from the subprime fiasco that first showed up in December 2007, the resulting credit crunch, dwindling consumer confidence and souring jobs outlook. As 2008 rolled on and the country’s real estate woes mounted, condo sales and developments slowed dramatically.

“What's happening in Memphis, as in many areas around the country, there is an overhang of condominium units on the market. Anytime a developer can take a more accelerated approach to selling their inventory, they're going to get out ahead of their competition.”

– Craig King
President and CEO, J.P. King Auction Co.

Despite the impending housing meltdown, however, a handful of developers had either begun the construction or conversion of buildings, bringing trouble to Downtown’s condo paradise.

'In your face'

Realtor Sue Tines of the Downtown Condo Connection stands inside a condo in the 4Twentysouth building Downtown. -- PHOTO BY LANCE MURPHEY

Condo Connection Works to Weather Slow Market

Longtime real estate professional Kendall Haney is owner of Kendall Haney Realty Group and The Downtown Condo Connection, the latter of which he launched in May 2006, the height of the condo boom.
The first year or so the office was open was “extremely busy,” Haney said. Though it has tapered off since then, the Downtown Condo Connection has weathered the storm so far and he said he believes it can be sustained long term.
“It was a brainstorm I had and I just acted on it and put it together to see if it would work, and it did,” he said. “We’re all going through some tough times right now, but some of our competitors have closed their doors and we’ve been able to hang in there.”
Haney noted that sales have picked up slightly in the past couple of months, with a handful of closings in the first week of November alone. He also noted that traffic has been steady, with more than 70 people coming through the door each month inquiring about sales or rentals.
“There are still a lot of people interested in condos, they’re just still doing their homework, you might say,” Haney said. “They’re just looking to see what the prices are today as opposed what they were six months ago, 12 months ago. They are buying if they feel like they found a good buy.”
With developers adjusting their prices or hosting auctions to attract buyers, and with foreclosures affecting values, plenty of good deals exist for Downtown condos, something Haney said buyers are demanding in today’s market.
Sue Tines, a broker for The Downtown Condo Connection, agreed that people are looking for bargains in today’s market. They figure they can get a good deal, whether it’s at an auction or a foreclosure sale on the courthouse steps.
But while traffic has indeed been good in the office, most shoppers are looking to buy next month – or next year.
“They’re just kind of kicking tires,” Tines said.
– Eric Smith

Standing 16 stories high along the Mississippi River bluff with 155 units, The Horizon was supposed to alter the Memphis skyline and become a symbol of Downtown’s condo boom. Near the end of construction last summer, as the financial climate grew worse, Horizon developer The Bryan Co. of Ridgeland, Miss., decided to turn the tower’s almost-completed units into rentals. The property earlier this year was approved for but never received a 10-year PILOT from the Center City Revenue Finance Corp.

That’s because The Bryan Co. – operating as Riverside Bluffs LLC – defaulted on a $58.6 million loan through Capital One NA for the building at 717 Riverside Drive. The problems occurred before the building was finished, so construction stalled and the building stood vacant – the new face of Downtown condo development.

A call to The Bryan Co. was not returned, and Capital One representatives were not available to discuss the fate of The Horizon, but real estate insiders around town have heard a wide range of possibilities, from the bank moving forward with the apartment conversion (because of the difficulty of selling 155 luxury units in a timely fashion) to the bank even razing the building to cut its losses.

Lynch acknowledged that The Horizon paints Downtown as a busted market and that it garners most of the headlines because of its height and locale. But foreclosure is more widespread farther away from Memphis’ city center.

“If you go on the outskirts of suburbia, you’ll find subdivisions that have hundreds of lots and plenty of houses that are being foreclosed on, too,” Lynch said. “(The Horizon is) such a glaring sign being that big of a building. It’s a high-profile location, so it’s sitting right in your face.”

But it’s not the only high-profile location that suffered the ignominious fate of foreclosure. The developers of the 24-unit Goodwyn Condominiums weren’t faced with an albatross quite as large as The Horizon, but their conversion of the old Goodwyn Institute building at 127 Madison Ave. became another example of a wounded condo market.

When the owners defaulted on a $7.7 million loan through First Tennessee Bank NA, only three of the building’s 24 condos had sold, and the bank reclaimed the vacant units. First Tennessee spokesman Anthony Hicks said the bank didn’t have anything to report regarding the Goodwyn, which it reclaimed in an October trustee’s sale, but First Tennessee earlier this month was issued a building permit for general contractor Metro Construction LLC to finish out 12 units.

A call to one of the Goodwyn’s developers wasn’t returned, but one of the building’s former sales agents, Jason Durston, who worked for Henry Turley Realtors at the time, spoke about the hurdles encountered during the conversion process.

“The biggest thing that turned the building into a negative was construction delays that happened right in the middle of the economic crisis,” said Durston, now co-owner of Get Sold Memphis and a broker for Crye-Leike Realtors. “It was hard for not only the development team, but buyers, to come to terms on spending that high price – which was top dollar in this market – in this economy with so many variables uncertain.”

'A good tradeoff'

The fates of some Downtown condo developments are uncertain because they now are owned by banks. As for individual foreclosures, however, Downtown hasn’t been plagued as much as other parts of the area. Of the 4,170 residential foreclosures in Shelby County this year, only 52 took place Downtown, with half of those coming from the Nettleton and another nine coming from the 65 Pontotoc Ave. development.

Although the amount of unsold inventory has forced some condo owners to consider leasing those units, a multitude of foreclosures, coupled with a slow sales pace, has given rise to the condominium auction, now one of the most popular options for Downtown real estate.

Craig King, president and CEO of Gadsden, Ala.-based J.P. King Auction Co., said Memphis is becoming a good market for the company because of recent auctions at River Tower at South Bluffs and the Nettleton. J.P. King sold all 30 of the Nettleton condos that were up for auction following a foreclosure in May of that development’s owner, and it hosted a second auction for the remaining unsold units at River Tower after selling 20 at an auction earlier this year.

“What’s happening in Memphis, as in many areas around the country, there is an overhang of condominium units on the market,” King said. “Anytime a developer can take a more accelerated approach to selling their inventory, they’re going to get out ahead of their competition.”

The mission of an auction is more than just unloading units. The seller has to find the right balance of getting rid of the properties at the right price – something that won’t devalue the units already sold.

“They’re able to really capture the market, take a different approach and close out a quantity of units in one day,” King said. “The tradeoff is this: They take a little lower price often in exchange for the savings of carrying costs it would take through a more prolonged, traditional approach. For most of the sellers that we’re working with in today’s market, that’s a good tradeoff. That makes the auction very viable.”

Mike Maerz, director of investments and multifamily real estate for McCord Development Inc., the company that converted River Tower into condos, said the condo market was hit slightly harder than the rest of the housing market because lending requirements for condo developments were more stringent than on single-family or townhouse developments.

Despite a nationwide softness in the condo market, Maerz said he still believes it was the right move to convert River Tower because of its location Downtown and on the river. While he was familiar with the troubles at the neighboring Horizon, he said those types of situations – a nearly completed residential tower that goes belly up and sits empty – are much more common in other, more unstable markets such as Florida, Las Vegas and Los Angeles.

“I think it’s the nature of things right now,” Maerz said. “At the time they went out of the ground with that deal, we were concerned because we had already seen kind of a swing in the market; the market had begun to change a little bit. It’s tough to put on the brakes when you’re that far along.”

Whoa, Nelly

One project where the brakes were applied at the right time was One Beale, the ambitious mixed-used development proposed by Gene Carlisle of Carlisle Corp. For all the mistakes Downtown developers arguably have made, the fact that this project never got off the ground perhaps saved the market from experiencing a truly debilitating bust.

Calls to Carlisle were not returned, but one of the project’s sales team members, Mike Parker, cited the unfortunate timing of the building, which was being planned as the financial climate grew bleak. Parker, now co-owner of Get Sold Memphis with Durston and also a broker for Crye-Leike Realtors, said presales for One Beale were “close to what we needed,” but overall financing became difficult as the economy tanked.

The building originally called for more than 100 condos, but scaled-back plans reduced that number to around 70. As Parker pointed out, it probably was a blessing in disguise that the development halted because of an already saturated market, but at the same time he hopes One Beale makes a comeback when the market absorbs its vacancies and economic conditions improve.

“In the right economy, One Beale is an excellent project for Memphis,” said Parker, who notched $45 million in presales for the building before it was tabled. “You’ve got people out there – and I’ll be honest, I tried to work diligently to get them to buy something else – that only wanted a project like One Beale.”

A smaller project that did move forward in spite of the economy was RiverTown on the Island, whose first 39 units were completed in 2008. Grant & Co. built the condo development on Mud Island, just south of Harbor Town, delivering almost half the scheduled 86 units during a slow housing market.

Company president Keith Grant said 22 units were sold as of Nov. 4, leaving 17 up for grabs. Slow absorption forced the company to revise its original plan of 200 condos at RiverTown and instead bring a 204-unit apartment complex called Grand Island in place of future condo phases.

“In general ... over the last 12 months, condos have stabilized to some extent because we are getting rid of inventory either through sales or what's happening in the South End with rentals. Or they're going into foreclosure and they're immediagely getting rid of them.”

– Keith Grant
President, Grant & Co.

Meanwhile, the company delayed the start of construction on RiverTown’s remaining units until the market improves. But the company sold more condos this year, and Grant remains bullish on Mud Island.

“In general … over the last 12 months, condos have stabilized to some extent because we are getting rid of inventory either through sales or what’s happening in the South End with rentals,” Grant said. “Or they’re going into foreclosure and they’re immediately getting rid of them.”

Employing a variety of options is crucial for developers. Memphian Tobey Price Hubbard is managing partner of New York-based Blackstar Capital Partners, the company that developed the Residences at The Greenstone, an 18-unit condominium conversion on the northeast corner of Poplar Avenue and North Waldran Boulevard. That project was completed in 2008, but with only a few sales to its credit, Blackstar began looking at lease and lease-to-purchase plans to boost occupancy.

“We’re still selling, but we’re expanding our options, is the best way to put it, in terms of how we stabilize and smartly asset-manage through tough times,” Hubbard said. “We, along with others out there in the real estate business, realize it’s no longer a quick turn type of business in these times. Everybody’s kind of hunkered down and astutely trying to asset-manage what they’ve got.”

Pinching pennies

Was the Downtown condo market overbuilt? People disagree depending on whom you ask, but most experts say the city narrowly avoided a complete over-saturation of condo developments.

“Maybe we did to an extent,” Grant said, “but when we were selling 60 or 70 to 120 (units) a quarter, that was a pretty good clip.”

Bologna said the past few months will look good on paper because of the Nettleton’s 30 sales. And because One Beale was shelved, the market evaded extra glut and dodged a bullet.

“If Gene (Carlisle) had gone ahead and built his One Beale and had the Horizon finished – they had 76 contracts but they had 155 units – and suddenly those were on the market, then, yeah, we’d be overbuilt,” Bologna said.

That assessment is shared by plenty of others, including Lynch, who likes the way the Downtown market is correcting itself through lease and auction.

“I think what’s going to happen is we’re going to see – we are seeing – the burn-off of a lot of inventory Downtown, even if it is by foreclosure and resale,” Lynch said. “At the end of the day, that’s positive, because it is what the market is. And it answers the questions about those properties that have been foreclosed.”

As for Thompson, he and his wife, Jessica, aren’t sure when they’ll start looking for a new place, but they are certain it will be a Downtown condo.

“One-hundred percent. Without a doubt,” Thompson said. “We’ve discussed it. When the market was better, before the bubble burst, we were looking daily.”

For Thompson, it’s the lifestyle that keeps him focused on Downtown for his next move, despite the current slump. From his Downtown condo, he is in walking distance of art galleries, sporting venues and The Orpheum. Or he can meet friends for dinner at the Majestic and a beer at the Flying Saucer.

He wouldn’t trade those perks for anything.

“That’s the great thing about Downtown,” Thompson said. “That’s what we love about it, which is why we won’t leave.”

PROPERTY SALES 51 180 16,377
MORTGAGES 21 57 10,144
BUILDING PERMITS 103 665 39,209
BANKRUPTCIES 31 107 7,704