Downtown Condo Flipping

[Jeeper12]

I spoke to a few folks yesterday that were looking for entire buildings to buy and convert to condos. I think they may be a little late.

[Jeeper12]

I thought there were some intelligently reasoned comments on the Tennessean board related to the Flipper article yesterday. You can see them at the bottom of the article on-line.

[Richard Lawson]

All the new conversion interest is also relevant to the point I made earlier about there being so much confusion about the re-sale value of the Viridian units, since this project is serving as such a pricing benchmark. When the first few re-sales started to sell at or above $400/sf I'm sure there were lots of speculative investors looking for nearby buildings to convert at $250-$300/sf, seemingly a bargain if the V was pushing prices up so high so quickly. However, if the V re-sales generally settle closer to $300/sf you can see how this would kind of spoil their return expectations. It's worth noting that in FL and other big markets it was crazy speculation related to conversions that marked the beginning of the collapse of those markets. I hope we don't also have to endure that here.

[Richard Lawson]

I thought there were some intelligently reasoned comments on the Tennessean board related to the Flipper article yesterday. You can see them at the bottom of the article on-line.

[Jeeper12]

There's a lot of wind there. But what cracks me up is that you blasted journalists on not giving full context on stories. Yet this one was OK to you. Is it perhaps because it is negative that you think it's a good story? There was a lot more that should have been in the story to balance it out or put the market in full context. Viridian isn't the only one selling. It would have been better if the writer had looked at other sales in downtown. Maybe those other units were getting the price and Viridian's not because it's like buying into the suburbs.

[Richard Lawson]

I think it was a good story because I don't think the writer was necessarily trying to explain everything about every type of project in the market, including why some might be selling better than others. As the headline suggests, he was simply addressing the fact that developers, bankers and appraisers of large pending projects (a select few) have a watchful eye on the V re-sales because they apparently need to be able to sell their units closer to the top of the V re-sale price/sf range than the bottom. To that end I think he did a pretty good job.

To be sure, I think it would follow that if the V re-sale pricing is now far above what would be considered a fair value to buyers one would expect other lower priced urban alternatives around town to be selling much more briskly, which is apparently the case. However, I don't think the writer had to point that somewhat obvious correlation to his more narrow point ( the V has become somewhat of a pricing beacon or benchmark to developers) for his article to be a good one.

[Jeeper12]

There's a lot of wind there. But what cracks me up is that you blasted journalists on not giving full context on stories. Yet this one was OK to you. Is it perhaps because it is negative that you think it's a good story? There was a lot more that should have been in the story to balance it out or put the market in full context. Viridian isn't the only one selling. It would have been better if the writer had looked at other sales in downtown. Maybe those other units were getting the price and Viridian's not because it's like buying into the suburbs.

[Richard Lawson]

Richard, not sure if (below) this is the "wind" you were referring to. Do you think these conflicts are as bad as it seems ? Click here for the full context: http://forums.tennessean.com/viewtopic.php?t=40004

"I was only repeating what I'd heard. How do these people sleep at night? Shenanigans of this sort seem fantastically dishonest to me; both are rigging the news for their own personal benefit? I'm taken aback.

Is the City Paper aware of these connections? Will they continue to run his series of ads disguised as articles now that he's been uncloseted? It puts a huge dent in their credibility otherwise; I find such a thing to be scandalous for what's otherwise a pretty good little newspaper.

Regarding Courtney's wife's Seigenthaller family connection, I guess she still pulls some strings at the Tennessean, since they run many a puff piece about this Giarratano guy and his various projects. Perhaps the Tennessean does this purely on its own, but all of the shoe-buffing they do on the developer's behalf certainly smells like advertising to me, although these things are made to look like news articles. Could it be that the PR agency writes these "articles" and the newspapers simply run them? The mind reels at it as the stomach churns."

[Richard Lawson]

Richard, not sure if (below) this is the "wind" you were referring to. Do you think these conflicts are as bad as it seems ? Click here for the full context: http://forums.tennessean.com/viewtopic.php?t=40004

"I was only repeating what I'd heard. How do these people sleep at night? Shenanigans of this sort seem fantastically dishonest to me; both are rigging the news for their own personal benefit? I'm taken aback.

Is the City Paper aware of these connections? Will they continue to run his series of ads disguised as articles now that he's been uncloseted? It puts a huge dent in their credibility otherwise; I find such a thing to be scandalous for what's otherwise a pretty good little newspaper.

Regarding Courtney's wife's Seigenthaller family connection, I guess she still pulls some strings at the Tennessean, since they run many a puff piece about this Giarratano guy and his various projects. Perhaps the Tennessean does this purely on its own, but all of the shoe-buffing they do on the developer's behalf certainly smells like advertising to me, although these things are made to look like news articles. Could it be that the PR agency writes these "articles" and the newspapers simply run them? The mind reels at it as the stomach churns."

[Jeeper12]

Sisk's story just scraped the surface. The fact is most of the sellers over there have way over shot where the market is on the pricing. And how Viridian is selling should have been compared to how others were selling. I haven't checked on the Werthan lofts but I think those have fetched a nice price in resales. My thoughts are that the downtown condo prices will settle at a point that is above what people paid but not nearly what they are asking for them. Some buyers of the flipped units will have to hang in there for a period of time because they probably bought too high. That's just like the stock market. Some people buy during the height of the frenzy while the stock price falls back and settles into a certain price. But that price is higher than it was, say, a year before. We'll have to see how long some of the 70 or so units stay on the market. I don't know what the churn has been so far.

[Richard Lawson]

I'm not a journalist but what I do remember from the one journalism class I took freshman year was that the article ought to relate to the headline, and vice a versa. Again, he never seemed to be reporting on much other than that the developers he's talked to seem to be watching the V intently. Why would the resales in a 100 year of old renovated factory offer much to a guy thinking about building a new tower replete with pool, fitness center and staffed lobby ? Sorry, but I think the V is really the only new finished project to look at for those builders.

Also, I don't think the data suggests that the flippers bought to high. Most seem to have paid about $285/sf (averaging) and are trying to sell (now at a reduced price) for about $375/sf. That seems more like good old fashion greed to me but I agree with you that after so many months on the market the 3-4/sf in monthly holding costs is likely bring some sellers in line with patient buyers sooner rather than later. On the other hand, I agree with you that most of the folks BUYING from the flippers will have to wait a looonnng time in order for the market to return to the silly prices they apparently agreed to pay.

[Jeeper12]

I say probably three years minimum before they could sell and break even. The patient ones won't have to wait as long if they squeeze the flippers. There is a sweet spot the prices will hit.

[Richard Lawson]

Since destination shopping and high end retail is still (at least) years away would you venture a guess as to what the sweet spot is today for the listed units to sell quickly ? I posed that question to the entire forum earlier in the thread and I guess nobody had an opinion. I think it is a very interesting question though and judging from Mr. Sysk's artice the answer may be worth many millions.

[Jeeper12]

Not sure it's worth millions, maybe tens of thousands of dollars to the flippers. I bet the range goes from about $335 to $375, depending on the size of the unit, still a healthy profit for the flippers. To hone that, I'd need to look more closely at the the original purchase price compared to the list price now. I haven't look at that stuff since last November.

[Richard Lawson]

By millions I meant the millions that developers appear to be gambling on the answer to my question.

[Jeeper12]

What will happen is that the developers will see where the market settles and price accordingly for new projects.

[Jeeper12]

Edit mistake

[Richard Lawson]

Edit mistake

[Jeeper12]

There isn't another major downtown condo deal in the works. And I mean in the Central Business District. Velocity, Rythm and Rolling Mill Hill are all still in the starting gate hoping to commence. And Eakin apparently has plans with a residential partner for a major tower in the gulch next spring. I've also heard that Novare hopes to commence with a twin tower project this fall on the polar ice storage plant property. That's well over a thousand brand new units as we sit here debating how long it will take the V to shed its 73 listings. And then there's another 100 at Encore plus how many of the solds turn out to be flips (probably at least half IMO). And I haven't even mentioned the condo units associated with ST, WES, W, or Westin...The deal being peddled bythe Lebanon guy you mentioned is so goofy we shouldn't even be talking about it...I'm not saying all the new projects noted above are exactly comparable (they're not) but they're all trying to benchmark off the V's re-sales I think.

Developers can't really mark the price down on a current project i.e. Signature Tower. That is true. The bet buyers at Sig Tower are making is that the market will be at $500 or so per square foot in three years. And that has to be caveated. The product is supposed to be much higher end than the rest of downtown. So if Viridian is, say, like Hillsboro Village, Sig would be like Belle Meade. That's a very rough analogy. What's the average annual appreciation of a home? Something like 6%. That would put a $375 square foot place in the mid 440s. Wouldn't you want to do a lot better than just get your money back, or lose a little after 3 years ? I ran into a guy the other day who had looked hard at the ST and his comment was that he was prepared to pay $500/sf for something in Nashville provided it was first rate. He just didn't think that area of town was where he wanted to be. He also didn't think he should have to pioneer a location if he was paying such a big premium.

Here's one thing we haven't discussed. What's the attitude of lenders for construction loans. Most lenders for big projects are out of market. Will the slow down in other areas affect their thinking in areas where there still may be demand and potential? (I don't think the market has topped out on urban condos just yet. Condo sales have increased each month for the past 8 while single-family home sales have dipped) Be careful reading too much into this month or last months condo sales. Since so many of these projects get sold (contracted that is) over several years and then closed over just a few months it's a bit like reading last years newspaper. And to draw meaningful year over year comparisons you'd have to spread the numbers out over a longer duration, which I haven't seen anyone try to do yet. Obviously, any fool could have predicted the huge spike in condo sales last October and November since so many V units were scheduled to close then, so it was a bit odd that it was reported by GNAR like big news without that explanation. But then throw in interest from foreign lenders with the very favorable exchange rate. You're correct that lenders are getting much more conservative across the board (for developers and end buyers). But I haven't heard that this is being offset to any degree by exchange rate driven foreign lenders. The currency angle, if it's affecting things at all, would probably only make those banks a little more price competitive, rather than drive them to make silly underwriting decisions or bank questionable borrowers.

[Richard Lawson]

I'm making a distinction between core downtown and periphery with respect to pricing and land costs. Velocity should worry about Icon flippers more than anything in the core of downtown.

I'm well aware of the condo closings. The numbers are not driven as much by the short term hit of downtown or urban ones as much as the townhomes in other parts of the city. The urban ones, and more so the downtown ones, are a fraction. I heard today that of the 73 Viridian ones on the market, 10 or 15 of those are under contract.

I think a 6% or more appreciation would be an OK bump on the value. Of course, I'd like to see more than that as an owner. But still on a 300K unit a 6% annual increase the first year or so would cover commission then the rest is gravy. Again, of course, I'd like to buy and not be upside down right away. But that's why I don't live downtown. I bought an undervalued condo next to Belle Meade and my gain is looking like 100% over three years, including the money I'm putting into redoing the place -- ever so annoyingly slowly.

[ATLBrain]

Have I been under the misimpression that Velocity is to be rental?

[GRDadof3]

This thread is an interesting exchange, much like a lot of condo flipping discussions on this board. I used to work for a company based out of Chicago whose specialty is marketing and selling high-rise condominiums in 25 states around the country (I'll keep the name private to protect the innocent, although I won't give away any company secrets or anything). The urban high-rise condo market is slow just about all over the country now, especially the flipping aspect of it. I think it stems from several different factors (off the record by the way Mr. Lawson):

- It was overhyped to begin with. There was a lot of talk about baby boomers and young professionals swarming into urban areas to live a new life without the automobile. When many of them got to the sales office, they didn't like what they saw. For one, upper middle class baby boomers are expected to downsize from a 3000+ square foot house with a garage and basement full of 25 years of memories, to a 1500 square foot 1 BR condo for the same price? Yeah right. Walk to the grocery store? Think again. Urban grocery stores are struggling to compete against the SuperTargets and Walmart Supercenters now offering full grocery lines. People in many urban areas are still driving out to the near burbs to shop at Big Boxes, and that's not likely to change (virtually for the rest of our lives). Pre-selected flooring, counter and carpet packages for a $500,000 condo? Ehh. Don't get me wrong, there are still many people interested in living the urban lifestyle, just nowhere near as many as developers and investors predicted.

- The growth of "condo investment clubs, like this one" helped fuel that hyper growth. These clubs would contract with the developer for a fixed lower price (or at least they thought they were getting a lower price), in exchange for bringing a cadre of investment buyers from around the globe to help developers reach that magic 50 - 60%. Keep in mind that these investors are from around the globe, with the great majority of them never stepping foot in the sales center, have never visited the city and never planned to move in. Does that sound like an enviable situation for a construction loan bank to get involved in? Everyone's banking on those urbanites to come along later and then buy while the building is under construction at a hefty premium? Many of those buyers are not coming (they never existed). These condo clubs are on the way out as the hype balloon has been greatly deflated. Are there a lot of projects in Nashville that seem to be having a hard time reaching that 50% mark? Now you know why.

- Developers would launch a project with "pre-construction" pricing, and then watch as flippers swarmed in, bought at the pre-con pricing, and then turned around a made a huge profit during the 2 year build out or shortly after the condo was completed. The developers watched this happen and said "why am I giving all my profit away to these poachers". So they are doing what many of us would do in the same position: adjusting pricing accordingly from the get-go. What has this done to market demand? Dropped it dramatically. What does that tell you? Many of these projects were overpriced as a complete industry. The majority of which were based on a market demand that never existed (to the extent that was thought) for the price they were being built for. Keep in mind it's not the price that buyers object to, it's the price per square foot. The entire country is "hyper value sensitive" now.

- My guess is many of the downtown condo buyers in most markets are just shifting from one project to another. Are there are lot of listings on the market now for projects that were built 8 - 10 years ago? Find out where those people are going. My guess is they are on the reservation list for a neighboring project.

- Many developers never even conduct true market research of their potential buyers in my experience. They call around a couple realtors they know who specialize in urban living, find out what the going price per sf is and what amenities you get, location, etc.. They look at how many urban condo units have closed over the last couple of years (not even looking into whether they were actual inhabitants rather than just investors waiting for the gravy train). They then option a piece of property, splash a fancy rendering and away they go. No in-depth market analysis to determine the depth or breadth of the market. Of course, that's most developers. The ones that have actually done true due diligence in regard to market demand are the ones you never hear from (because they have learned the real story).

I'm a big fan of seeing so many people move into urban areas and rejuvenating cities that were basically forgotten from the 70's, 80's and early 90's. But it needs to be based on reality, not artificial demand. It ends up hurting the people who really do want to be a part of a downtown revitalization.

Just my $.02. Sorry for the long post.

[Richard Lawson]

This thread is an interesting exchange, much like a lot of condo flipping discussions on this board. I used to work for a company based out of Chicago whose specialty is marketing and selling high-rise condominiums in 25 states around the country (I'll keep the name private to protect the innocent, although I won't give away any company secrets or anything). The urban high-rise condo market is slow just about all over the country now, especially the flipping aspect of it. I think it stems from several different factors (off the record by the way Mr. Lawson):

- It was overhyped to begin with. There was a lot of talk about baby boomers and young professionals swarming into urban areas to live a new life without the automobile. When many of them got to the sales office, they didn't like what they saw. For one, upper middle class baby boomers are expected to downsize from a 3000+ square foot house with a garage and basement full of 25 years of memories, to a 1500 square foot 1 BR condo for the same price? Yeah right. Walk to the grocery store? Think again. Urban grocery stores are struggling to compete against the SuperTargets and Walmart Supercenters now offering full grocery lines. People in many urban areas are still driving out to the near burbs to shop at Big Boxes, and that's not likely to change (virtually for the rest of our lives). Pre-selected flooring, counter and carpet packages for a $500,000 condo? Ehh. Don't get me wrong, there are still many people interested in living the urban lifestyle, just nowhere near as many as developers and investors predicted.

- The growth of "condo investment clubs, like this one" helped fuel that hyper growth. These clubs would contract with the developer for a fixed lower price (or at least they thought they were getting a lower price), in exchange for bringing a cadre of investment buyers from around the globe to help developers reach that magic 50 - 60%. Keep in mind that these investors are from around the globe, with the great majority of them never stepping foot in the sales center, have never visited the city and never planned to move in. Does that sound like an enviable situation for a construction loan bank to get involved in? Everyone's banking on those urbanites to come along later and then buy while the building is under construction at a hefty premium? Many of those buyers are not coming (they never existed). These condo clubs are on the way out as the hype balloon has been greatly deflated. Are there a lot of projects in Nashville that seem to be having a hard time reaching that 50% mark? Now you know why.

- Developers would launch a project with "pre-construction" pricing, and then watch as flippers swarmed in, bought at the pre-con pricing, and then turned around a made a huge profit during the 2 year build out or shortly after the condo was completed. The developers watched this happen and said "why am I giving all my profit away to these poachers". So they are doing what many of us would do in the same position: adjusting pricing accordingly from the get-go. What has this done to market demand? Dropped it dramatically. What does that tell you? Many of these projects were overpriced as a complete industry. The majority of which were based on a market demand that never existed (to the extent that was thought) for the price they were being built for. Keep in mind it's not the price that buyers object to, it's the price per square foot. The entire country is "hyper value sensitive" now.

- My guess is many of the downtown condo buyers in most markets are just shifting from one project to another. Are there are lot of listings on the market now for projects that were built 8 - 10 years ago? Find out where those people are going. My guess is they are on the reservation list for a neighboring project.

- Many developers never even conduct true market research of their potential buyers in my experience. They call around a couple realtors they know who specialize in urban living, find out what the going price per sf is and what amenities you get, location, etc.. They look at how many urban condo units have closed over the last couple of years (not even looking into whether they were actual inhabitants rather than just investors waiting for the gravy train). They then option a piece of property, splash a fancy rendering and away they go. No in-depth market analysis to determine the depth or breadth of the market. Of course, that's most developers. The ones that have actually done true due diligence in regard to market demand are the ones you never hear from (because they have learned the real story).

I'm a big fan of seeing so many people move into urban areas and rejuvenating cities that were basically forgotten from the 70's, 80's and early 90's. But it needs to be based on reality, not artificial demand. It ends up hurting the people who really do want to be a part of a downtown revitalization.

Just my $.02. Sorry for the long post.

[GRDadof3]

Thanks for your input. I haven't really seen those condo clubs here in Nashville. I could be wrong on that. I do agree that the urban living has had so overhype and that people will drive out to the big boxes. And I do think the empty nesters in general are having a hard time with the value aspect -- downsizing but staying in the same price range even though the price tends to include amenities that they didn't have with a house. If I had a big empty house, I'd downsize and not have a problem with it. No yard work, pool, fitness center, smaller area to clean, etc. I think that's what people are having a hard time understanding. Buying into a condo means buy a piece of the larger real estate, which is shared. In Nashville, you can't look at 8 to 10 years of condos in the core of downtown -- there weren't any. The townhomes built in the 1980s are not in the core but on the periphery. I look at a place like Memphis that has added a lot and buyers have gone in in droves. But the price points were far more manageable than in Nashville.

[Richard Lawson]

You won't know whether there are any investment clubs around Nashville, and you'd be hard pressed to get a developer to tell you whether they had an arrangement with one or not. They don't usually set up "satellite offices", it's all handled over the phone or internet from somewhere else in the U.S.. Buyers join "the club", and then can pick and choose condos to invest in all over the globe, without ever leaving the comforts of their keyboards. I was mainly using them as an example of condo flippers gone large scale. An industry that has grown out of hobby for many. Not that they are inherently bad per se, they just have helped fuel an artificial market demand. You can see proof of this in markets like Miami, San Diego, and other hot markets, where condo towers are now sitting half-built with construction financing pulled (because the flippers weren't guaranteed the returns they thought they would get and left behind $40,000 deposits).

Since there weren't any condos downtown Nashville 10 years ago, then that is even more ammunition that a market is trying to be created (much like every other mid-sized city in this country). A market that is much less of a value than its suburban counterparts.

People will say "Nashville is not overbuilt yet", or "Cincinnati is not overbuilt yet", etc.. Based on what? What market research "facts" is that argument being based on? The market is less than 10 years old, and even less than 5 years old in some cities. It hasn't even begun to mature like the suburban condo/home markets, which are now entering 3 or 4 decades (and they still overbuild suburban condos and homes: see the latest existing home market headlines). So if national home builders with 40+ years of experience in home building didn't foresee the housing slowdown and now have massive amounts of inventory they are trying to work through in markets throughout the country, how is an urban developer with 1 or 2 projects under his/her belt and a market that is less than 10 years old going to foresee any kind of market correction? Especially when they do very little real market research.

Again, I'm not bashing Nashville, just speaking on the current state of the industry as a whole. It's my belief that developers need to come way down on price per square foot to keep the market for urban living viable (and real, not imaginary). To me, that means we'll probably see a lot fewer high-rises and a lot more mid-rises in the coming years (or more apartments, as we are already seeing many condo projects being converted to).

The big litmus test, Mr. Lawson, is on the next piece you run on a particular development (forgive me if you have already done this), find out how many contracts are "investors" (could be categorized as 'friends of the developer', 'friends of the sales team', potential flippers, every other warm body they could find to plunk down a deposit to get them to build time), and how many contracted buyers are "actually going to move into the building when it is complete?". You'll then get a better handle on where the market really is. I'd be surprised if you actually get the real percentage breakdown, but it's worth a try.