As Luxury Condos Rise, Demand Hard to Gauge
As Luxury Condos Rise, Demand Hard to Gauge
by Glen Creno
The Arizona Republic ~ Dec. 26, 2006
Buyers for metropolitan Phoenix's most expensive condominiums have gotten pickier and more cautious at a time when developers are racing to build dozens of elite condo projects across the city.
Phoenix-area housing has been dominated for decades by single-family homes. That has changed in the past five years as more developers jumped on the luxury-condo bandwagon.
Now, more than 30 of these urban projects are either finished or under construction in multistory buildings close to restaurants and stores. More than 20 of the projects, mainly in Phoenix and Scottsdale, feature units costing $1 million or more, according to the Sullivan Group, a real estate analysis and consulting firm.
Some projects have only a handful of the most expensive units.
Still, there is disagreement over whether too many developers have piled into what is essentially a niche market.
"There are just too many of these luxury condos," said Bob Kammrath, a Phoenix commercial real estate analyst. "For the life of me I can't fathom why they would be appealing here. People with that kind of money can buy a nice house and hire someone to take care of the yard."
Condo advocates sell the lifestyle: Condos are low maintenance, and the elite buildings offer concierge services, elaborate gyms, rooftop pools and plush clubrooms. Urbanites park their cars and stroll to the movies, a coffee shop, a deli or bar.
"I don't think we have scratched the surface," said Keith Mishkin, founder of Cambridge Properties, a Phoenix company specializing in urban condos. "With more urban product, you create a critical mass and create a community where people can live, work and play in places that are walking distance for them."
The Condo Landscape
The new-home and resale housing markets have been soft this year after an investor-driven boom that pushed prices and sales to records. Condos are feeling the pain, too.
"A lot of this condo stuff was an extension of this hyper housing market," said Jay Butler, head of the Arizona Real Estate Center at Arizona State University Polytechnic.
A new BusinessWeek analysis of the national housing market says prices are likely to fall in many cities next year. It says that rising prices won't exceed the rate of inflation in others. And it puts Phoenix with cities like Miami and Las Vegas that have a "huge overhang" of houses and condos.
The National Association of Home Builders sounded the alarm on condos in April. It said that developers and apartment owners jumped on the bandwagon during the boom in condo production and conversions in the last three years when they should have seen it as a warning that the market could become oversaturated. The group also said the condo market could suffer even before any glut as lenders back away from highly leveraged condo deals.
There already are signs of trouble in the Valley's overall condo market:
• Foreclosure notices were filed against Elevation Chandler, a condo-hotel project near Chandler Fashion Center, and Chateaux on Central, a luxury brownstone project on Central Avenue in Phoenix. Elevation got a bridge loan that staved off a foreclosure auction. Chateaux's developer says he is refinancing the project.
• Some developers are reversing course on condo-conversion projects and turning them back into apartments.
• Houston real estate company Hines decided to build an office tower near 24th Street and Camelback Road in Phoenix rather than the condo tower it considered initially.
Slowdown Expected
Some developers who have ridden the wave on urban condos and the luxury sector are starting to plan for a slowdown. The Weitz Co., a national contractor whose Southwest headquarters is in Phoenix, has been involved in several big projects, including the Summit at Copper Square, the Landmark at Kierland and 44 Monroe, all in Phoenix.
"Condos came around for us at a good time, when office and big retail was down," said Clay Wells, vice president of business development.
Condos have been a big part of the company's business, Wells said, but that is changing. Construction costs have risen 25 to 40 percent over the last three years, and he has seen projects put on hold as estimated costs wipe out the developer's expected profit.
Last year, Weitz had four condo projects in some phase of construction or preconstruction. Next year, it will have just one as the company adjusts for what it expects to be reduced demand.
"That's a conscious business decision on our part," Wells said. "Like anything else in residential, it's cyclical. There was a great rush to deliver product in the first couple of years. I think that demand has softened, but I think it will continue."
Riggs Contracting, a Peoria company specializing in concrete construction, is working on Chateaux on Central, Portland Place and the X (10) Lofts in Scottsdale. Prices at Chateaux start at more than $2 million. Portland Place has a few $1 million units, while X (10) is more moderate, with the top price in the $900,000 area, according to Sullivan Group.
Riggs saw the condo boom coming and went after the business. It estimates that 20 to 30 percent of its business comes from office buildings and condos. Its main business is commercial buildings.
Brian Davidson, a Riggs project manager, said the company would not feel a big impact if the condo business slows.
"We don't have all of our eggs in one basket," he said. "If that fell apart, it wouldn't hurt our business. We'd just look to other stuff."
How many buyers?
There is obviously some market for million-dollar condos in Phoenix. The Esplanade Place high-rise at 24th Street and Camelback has shown an ability to deliver escalating resale prices. Scottsdale Waterfront, the Residences at 2211 Camelback, the Landmark at Kierland and others have units that have fetched more than $1 million.
But it's hard to gauge real demand. Investors have bought into some of the buildings, hoping for quick sales at higher prices. Many of the buildings are so new that they have yet to run through that portion of buyers who don't plan to stick around. Some units have become rentals.
"We don't know how many are being sold to investors," Butler said. "A lot of the market is going to be for seasonal visitors."
People in the business say that only the best locations will command the top prices.
Buyers know there are a lot of choices and can wait to shop around because they are often not buying out of necessity.
Tim Sprague, a partner in one of the development groups at Portland Place, in downtown historic Phoenix near Third Avenue and Portland Street, said the handful of million-dollar-plus units at his project have sold.
But he also questions how deep the elite-condo market may be.
"If you're just doing a project in a condo location that doesn't have anything special about it, you will be the last place to be looked at," he said.
Phoenix draws a lot of out-of-town buyers for luxury homes. But Mishkin said that 75 percent of his buyers are from the Phoenix area, with the rest from outside Arizona.
"There is a deep enough pool of buyers, but buyers are being cautious now to find the right unit at the right price," said Shaun McCutcheon, senior analyst in the Scottsdale office of Sullivan Group. "I think we're going to see some of these high prices shake down a little bit when they realize they can find the right unit at their price."
Overall, you can still buy luxury at great prices in Phoenix, Scottsdale and Paradise Valley.
posted by Laura B. @ 3:55 PM
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