Downtown Condo Project Shelved

High construction costs and the housing market slowdown are forcing developers to shrink or shelve their downtown condominium projects.
With condo sales stalling, more units are being turned into apartments.
By: DANIEL MILLER: Los Angeles Business Journal Online
A developer has shelved plans to build a 30-story condominium tower in downtown Los Angeles, signaling the area’s once blistering condominium market is cooling.

In another sign of a slowdown, increased numbers of individual owners unable to flip their pricey condominium units are trying to lease them, flooding the market with lower cost rentals.

Astani Enterprises Inc. had planned to construct two 30-story towers as part of its luxury Concerto project at Ninth and Figueroa streets. The first, a 350-unit tower, is under construction and should be completed in February 2008. But the second, a 271-unit tower, which was to break ground in June, has been put on hold.

Sonny Astani, head of the Beverly Hills development firm, said that given the state of the downtown condominium market and rising construction costs, the project does not pencil out, even though most units were to be sold for more than $600,000.

“It’s not a good investment to spend $525 a foot to build over three or four years with the hope of netting $650 a foot,” he said. “It’s a horrible investment.”

Astani is not alone.

High construction costs and a glut of product in the downtown market have caused developers to think twice. Between 10 and 15 proposed condo developments have been shelved or scaled back, according to real estate developers and brokers.

Most loathe to admit it publicly, said Delores Conway, director of the Casden Real Estate Economics Forecast at the USC Lusk Center for Real Estate.

“When you talk to the developers nobody wants to admit they are shelving it,” Conway said.

At the same time, prices are dropping for condominiums that are being rented. In August, 81 downtown rental units were listed on Westside Rentals, a popular online rental marketplace, and the asking prices were generally in the $1,900 to $2,100 per month range. In October, 145 downtown rental units were listed, with average asking prices dropping to about $1,600 to $1,800.

“I think people are getting nervous,” said Mark Verge, president and owner of Westside Rentals. “Owners bought this as an investment and now they have to rent their property. A lot of people thought about flipping them and now they have to rent them.”

Astani waits

Of course, not all downtown residential development has stopped. Indeed, the area is still busy with construction and cranes are visible along the skyline.
Another condominium project by Astani called Vero, at 1234 Wilshire Blvd., is under construction. It will be completed in one month, with buyers scheduled to move in beginning Dec. 31. At a kick-off sales event on Nov. 11, about half of the condos at the 200-unit building were sold at an average price of $425,000, Astani said.

However, in addition to the second tower at Concerto that is on hold, Astani said he is considering scaling back plans for a third development called Opus, located at Eighth Street and Grand Avenue.

The development is slated for a total of 875 units, built over three phases. Astani said the first part of the development – a 15-story building that would include 425 units – is about a year away from groundbreaking with construction expected to last about 18 months. However, Astani said he is considering reducing the building to eight stories.

“If I do not see a light at the end of the tunnel in terms of construction costs slowing down, I may still go ahead but my high-rise may become a low-rise,” said Astani, who maintains he is far from the only developer in his predicament. “Almost all (projects) are shelved of anybody who hasn’t started construction.”

Mark Tarczynski, a senior vice president at CB Richard Ellis Group Inc., who has long specialized in the downtown market, agreed that the area is now less attractive for condominiums, though the reason may not have to do with local issues.

“It’s difficult to finance condo towers today for two reasons: Wall Street’s appetite for funding condo development is considerably less than last year because of inventory overhangs in places like San Diego and Las Vegas. And construction costs continue to rise, making high-rise condo development difficult to pencil,” he said.

The high construction costs largely are a result of more expensive materials such as steel and concrete.

Rental boost

One result of the slowdown in condo construction is a boost to the downtown rental market.

Anthony Yannatta, chief executive of Westside Rentals, said that data indicates that the downtown rental market is quickly growing, with speculators and other owners attempting to make some money on their investments at a time when it is difficult to sell units.

“You saw a lot of people speculating on the condo boom,” he said. “With increased mortgage rates, as well as a wait-and-see attitude by homebuyers, the inventory is being converted to rentals and larger developers are investigating rental opportunities.”

In September, Lincoln Property Co. cancelled plans to sell units at its Mozaic condo development near Union Station and instead is renting units there.

Reg DelPonte, a Lincoln Property senior vice president, said that Mozaic had originally been designed as a high-end rental property, but when the condominium market took off it entered into an agreement with builder Standard Pacific Corp. to sell the units instead. Then Standard Pacific backed out of the deal in September and the project reverted to a rental property.
Over the past month, the company has leased about one unit a day. “We are very pleased, to be honest,” DelPonte said. “Had it not been for the wild swing in condos it’s exactly what we envisioned. We are very excited about the market downtown.”

However, DelPonte said he doubted other developers, especially those with luxury projects originally designed as condominiums, would similarly change course.

“They won’t be built now,” he said. “You can’t afford to build it now, and you won’t build it and convert to rental. Buildings designed as condos aren’t going to break ground because they aren’t economically viable.”

However, several developers contacted by the Business Journal maintain they are indeed moving forward with their downtown projects, despite the market naysayers.

Tom Cody, principal with South Group, says his company’s forthcoming twin-tower Jardin development in downtown’s South Park neighborhood is on schedule to break ground first quarter 2007.

“We haven’t scaled back units,” said Cody, adding that his company’s other developments are moving forward as planned. “We see no compelling reason to alter our course.”