It would have been easy to write off Izek Shomof as foolish.
Even with the housing market in the dumps and many condo developers converting their buildings into apartment complexes, he went ahead and built a condo project last year in Beverly Hills.
But in the last three months, Shomof’s gamble has paid off. He sold all of the building’s 25 units – many above asking price. Now, he has two even bigger condo projects in the works that are slated to add 200 lofts in downtown Long Beach.
“I see a huge opportunity,” he said. “Things took a break, but they are coming back now. At the beginning of the year, we couldn’t sell condos. But in the last few months, it’s started picking up like crazy.”
With increasing customer demand and dwindling inventory, the condo market is showing signs of life for the first time in years, generating a wave of development activity.
At least eight condo projects are under way or moving toward development in Los Angeles County with as many as 600 units – a 64 percent increase from a year ago.
About 50 other condo projects have been approved and are ready to move forward, and big-name developers are jumping into the fray, including New York’s Related Cos. and L.A.’s Capital Foresight LP.
But today’s new condos look a little different. Unlike the expensive, expansive units that were built during the height of the housing market in the last decade, many of the projects now under way feature smaller and more moderately priced condos, even in high-end neighborhoods such as Santa Monica and Beverly Hills, giving buyers an attractive alternative to multimillion-dollar homes.
The new construction is being driven by a sharp rise in demand. Condo sales volume in August was up 13 percent compared with last year and prices are also on the rise, according to Seattle brokerage Redfin. Meanwhile, supply is running low, with listings for new condos plummeting 59 percent for the month.
Still, it’s hardly the boom years again, as it can still be difficult for buyers to secure mortgages and come up with a down payment.
In turn, banks remain cautious when lending to condo developers, whose profits are dependent on selling all the units. Lenders still favor apartment projects, which have been popular in recent years as rental properties have been easy to fill. There are currently more than 4,500 apartment units under construction.
But analysts said the pendulum finally appears to be swinging back to condo construction.
“It’s totally a comeback,” said Garrett Frakes, a principal at data tracker Polaris Group in San Francisco. “It doesn’t mean that the market, after going through what it went through from ’08 to ’12, has completely healed, but … it’s the beginning of a foundation that people in the industry can build upon.”
Between 2004 and 2008, 40,000 condo units were built in the county, according to Polaris. In 2007 alone, at least 12,500 condos were added to the L.A. market.
As the housing market heated up, both condo projects and unit sizes got bigger. Prices were rising as well, reaching a median of $679,000, according to Polaris. But once the market collapsed, many developments that were under way suffered. Some, including the Rowan Lofts and Market Lofts in downtown Los Angeles, sold the units at auction or at bulk sales.
Many projects were converted to apartments, which became more attractive as unemployment rose and banks shut off lending. The 180-unit Avenue in Hollywood opened as an apartment complex this year under new owner Resmark Cos. after stalling as a condo development in 2009. The 82-unit Brockman Lofts in downtown were created as condos but converted to apartments when Simpson Housing LLP bought them this year.
Some condo projects – particularly the ultraluxury developments with asking rates of more than $1,000 a square foot – simply languished. Downtown’s Ritz-Carlton Residences at L.A. Live only recently hit the 50 percent-sold mark after three years on the market.
But with the market starting to revive, some developers aren’t dwelling on past struggles.
Take Related. The development giant has only sold about 30 percent of the 140 condos in its ultraposh Century City project, the Century, but the company is already moving forward with a new local development.
It has started construction on a $350 million, 158-unit project in Santa Monica. Known as the Village at Santa Monica, the project was drafted by the city, and Related won the bid in 2007 to become its developer. An additional component with about 160 affordable apartment units subsidized by the city and developed by Resmark will also be part of the project.
The Village spans three lots at Ocean Avenue and Pico Boulevard. The condo units, which will likely start at $700,000, will average 1,500 square feet and most will have two bedrooms; nearly all will have ocean views.
Bill Witte, president of the company’s West Coast division, Related California, said the units will have an “open, airy” Santa Monica beach feel.
The development will include 158 condos with 20,000 square feet for restaurants and shops on the ground floor.
Witte said he is confident that the project will be successful, noting that the market is starting to come back and the supply of new condos is dwindling.
“I think our timing is extremely good,” he said. “Combine that with the fact that in Santa Monica, in particular, there’s virtually no development sites, we think we’ll be the only game in town in what is a very strong market to begin with.”
Drumming up demand
Indeed, market conditions are starting to favor condos.
Apartment rental rates have jumped 8 percent this year and are projected to increase an additional 2 percent next year, according to this year’s USC Casden Real Estate Economic Forecast. That has made buying a more attractive option, particularly with interest rates hovering near historic lows of 3 percent.
According to local brokers and developers, the typical condo buyer today is a single professional or young couple looking for a two-bedroom starter home for around $500,000 or less. That demographic is moving toward an urban lifestyle and wants to live in popular high-price neighborhoods like Santa Monica or downtown. They typically can’t afford the $1 million-plus homes there, but can afford the lower-price condo in the same neighborhood. For instance, in Santa Monica’s 90405 ZIP code, the median price for a home in August was $1.3 million, compared with $715,000 for a condo.
This has driven demand for condos up sharply. Condo sales made up roughly 20 percent of total home sales in the county in August, up from 18.5 percent last year.
But supply isn’t necessarily keeping up. According to Polaris estimates, only 529 of the 2,479 condos built in the past four years are still on the market.
“Demand is high and supply is low,” said Kameron Eliassian, a broker at Redfin in Los Angeles. “Everything is getting multiple offers and you see it on Sunday and it’s in escrow already on Monday. If we had 100 people show up to an open house this weekend, last year it would have been 30 or 40.”
Competing offers helped drive up prices in dense, high-price neighborhoods – specifically downtown, Hollywood, the Tri-Cities and Westside – to an average of $496,000, a 3 percent increase over last year. Prices are rising countywide as well, jumping 7 percent to a median of $267,000 in August year over year, Redfin said.
Even price increases haven’t deterred sales. The county has the fourth fastest selling market in the nation, for total sales of both houses and condos, with 41 percent of homes selling in two weeks or less, according to Redfin.
Increasingly, though, buyers are finding that many existing condos on the market are dated, Eliassian said.
“They complain about the units not being updated. Most that come on the market are from the 1970s and have popcorn ceiling and stuff they want to take out,” he said. “They are looking for updated move-in condition and that’s why new construction will answer that demand.”
Many developers today are focusing on smaller projects and more affordable, compact units.
Capital Foresight, for instance, has at least five condo projects in various stages of development, including a 260-unit downtown L.A. project comprising loft-style condos starting at $350,000. The project, at 433 S. Spring St., is in the architectural design phase.
President Natty Saidoff said he isn’t deterred by the failures of other projects in the past few years. Noting that the ratio of about 30,000 living units to about 400,000 jobs in downtown Los Angeles is favorable for him, he thinks the submarket is underserved and wants to be among the first to open condo projects here.
“You have to see the beginning of it to predict the future,” he said. “When you hear the music in business, then good things happen.”
His company bought the property for $21.5 million, according to CoStar Group Inc., this year and is planning to convert an old office building into condo lofts with a 116,000-square-foot boutique hotel and 14,000 square feet of retail on the ground floor. Saidoff expects it to go to the city for approval in about five months.
The appeal, he said, will be in creating smaller units at prices that people in the market can afford, between $350,000 and $700,000, based on comparable unit sales nearby.
That’s an enticing prospect for Ed Stone.
The 40-year-old real estate investor wants to relocate from Las Vegas and is in the market for a two-bedroom home in downtown for about $650,000. Like a growing number of buyers today, he’s more interested in a condo than a house.
“(Condos) generally tend to be well located. You get a slew of amenities and the expenses are shared,” he said. “In a private home, the locations are far from the heart of the city.”
Like Capital Foresight, developer Shomof has downsized units to appeal to today’s buyers.
Shomof, who had partnered with Capital Foresight on its downtown project until the parties mutually decided to split, is in escrow to purchase two new buildings at 110 Pine Ave. and 110 W. Ocean Blvd. in downtown Long Beach. He plans to convert the buildings – one an old bank building and the other an office building – into 100 condos each, with exposed brick walls and concrete floors ,and about 10,000 square feet of retail on the ground floor.
He declined to disclose his purchase price but said he thinks he can convert the buildings to condos for about $150 a square foot and then sell the units for a comfortable profit at about $400 a square foot, or a total of $400,000 each, if they opened today. He plans to adjust prices, likely upward, to be competitive with the market when they open in about 18 to 24 months.
He ultimately decided to create 1,000-square-foot condos, about 300 square feet smaller than he would have previously considered.
“There is demand for smaller units, loft style,” said Shomof, who owns about 1,700 apartment and condo units around Los Angeles.
The new developments have been made possible by an increase in the availability of loans. Related Cos. received a construction loan, and Shomof and Capital Foresight expect to take on loans.
That is a big change for banks, many of which wouldn’t even answer the phone for a call about any project – let alone a for-sale condo project – in the last four years.
“It’s beginning to thaw,” said Gary Mozer, chief executive at Century City’s George Smith Partners Inc., which facilitates financing for developers. “People are talking to us about them more in last 90 days than I’ve seen in the last five years.”
Lenders favor financing for condo projects ranging from about 15 to 100 units now, unlike the buildings of 200 or more units that were popular prior to the recession. The smaller projects are easier to build and typically have a shorter time frame to sell out, so returns and expectations are more manageable.
Mozer said most banks will lend an amount equal to about 75 percent of a total projected condo project sales price. But lending criteria is still strict.
“They want to make sure the person knows what they are doing and is financially well heeled,” he said. “Everybody is concerned (that during the downturn) so many condo deals went bad.”
To secure a loan today, some developers must submit a plan that would allow the building to become apartments, which generate income to pay back the debt, if the sales aren’t as robust as hoped. The financing typically covers about 90 percent of an apartment building’s construction costs. Apartments are typically cheaper to build because the finishes, appliances and other amenities tend to be less expensive.
Nonetheless, analysts and developers remain positive that condo development is coming back in a real way.
Several pointed to other major metropolitan markets for a glimpse of what’s in store in Los Angeles.
“People look at Manhattan and see what’s happening there and the rest of the country will follow,” Saidoff said. “With an eye to Manhattan you can see the future of Los Angeles.”
If true, that’s promising for condos: In Manhattan, there are at least 50 new condo projects under way and more in the pipeline.
Polaris’ Frakes said that the condo developments in Los Angeles might be just what the market needs to get the local pipeline flowing again.
“What happens is as you get a couple of those (condo projects) that come out and do well, the appetite for risk increases,” he said. “You’ll see planned apartment complexes potentially swinging back to for sale because most people are waking up to the fact that there’s no condo inventory in any substantial numbers.”
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