Pondering Downtown Condos

Isn't the Austin condo market overbuilt?

The "O" word irritates all of the developers interviewed, Realtors as well. All insist: "No, we are not 'overbuilt'!" Their key argument: After the four high-rise condo projects now under construction sell out, no other projects are in the pipeline. Due to the meltdown of the economy, which has frozen the capital markets and project financing, developers believe we're unlikely to see any new projects get financed for one to two years. (Taylor Andrews is the exception; he is bullish on starting construction on his Ovation tower, much like the 360 and with similar "attainable" pricing, in early 2010.)

The lag in project starts could in fact lead to a shortage of units by 2012 or so. Burns said his market stats for Downtown Austin show that 776 new condominiums were completed and available in 2008. Of those, 670 have sold, with a "net absorption" of more than 600 units in one year. (Most projects, with the exception of the Austonian, did not start construction until they had 40% or more presales.) Now about 790 condominiums are under construction; about 350 of those are under contract. That leaves just 546 units to sell – over three to four years, as little or no new product is coming on the market through 2012 or 2013. (Once developers get financing, likely to take at least a year in this economy, it takes another two to three years to build a project.) Based on these projections, 2012-13 could prove a boom time for the resale market, as the demand outstrips the supply of new units.

Austin's 500-plus unsold units are peanuts compared to other U.S. boomtowns such as Phoenix, Las Vegas, and Miami. In the Miami area, closer to 5,000 units existing and under construction are unsold. Such projects typically are converted to rental apartments, are deeply discounted, or just go belly up. By contrast, Austin's "big four" condo towers rising are expected to sell out – albeit more slowly than if the economy had not tanked. Shoppers are cautious, but deals are closing.

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Who's buying all these condos? Is there much diversity?

A good number of Austin's new Downtown residents have previously lived in the heart of other cities and liked it. "We have a broad spectrum of buyers," said Armstrong of the W Austin Hotel & Residences. "They tend to be progressive thinkers that embrace the idea of urban living." UrbanSpace's Burns agreed, based on his client base: "Downtown is one of the most diverse neighborhoods in Austin. The residents make up a wide variety of ages, cultural and social backgrounds, and family types." At the high-end Austonian, said Mitchell, "We have people from different ethnicities and folks as young as in their 30s up to people in their 60s."

Of course, all Austonian buyers can afford units costing close to $600,000 and up. Economic diversity starts at households making about $60,000 a year (needed to afford a $200,000 "starter" condo) and rises. "However, as far as race, religion, cultural, age, and sexual orientation, these developments show more diversity in close proximity than any neighborhood anywhere in Austin," opined Warshaw. All are buying into an urban lifestyle as much as a particular Downtown building.

"Downtown Austin is far and away the most livable downtown in the South – by some measures, in the country," said Armstrong. "The university, the trail, the nightlife, cultural amenities, and proximity to work really appeal to people."

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What's with all the empty nesters?

Once the kids leave home, Warshaw observed, "by moving Downtown, empty nesters can move closer to the things they really love about Austin, erase traffic as a factor in their lives, lower all their utility bills, get rid of any home maintenance, and give themselves flexibility to lock their door, walk away, and travel."

Empty nesters are willing to reduce the size of their homes – sometimes radically – if it means they can also reduce the hours drained by home and yard chores and commuting. Noted Carpenter of Ardent Residential, "Downtown provides much of the dining and entertainment activities that empty nesters finally have time to enjoy." Mitchell said Austonian shoppers are attracted to a maintenance-free lifestyle, security, interacting with the community in their building, sustainability, and "making their contribution towards reducing our collective impact to this earth," plus the freedom to pursue their passions. "Downtown living truly does create a lifestyle that connects you to your community. It is truly a wonderful, engaging lifestyle to enjoy."

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Are families moving Downtown?

According to the developers questioned, about 5% of condos under construction are likely to house families with children. But that's expected to increase, especially if the next development cycle can produce more attainably priced homes with several bedrooms. "Many younger professionals are choosing Downtown living as a desirable alternative," said Carpenter. "As these families enter child-rearing years, the dynamics of Downtown life in Austin may shift to be similar to other cities on the coasts, such as New York, San Francisco, and Boston – transforming Austin into a livable Downtown for all family demographics. This should be a natural evolution for Downtown Austin as it reaches maturity."

One anecdotal indicator: Kid meals are appearing on Downtown menus. The recently opened Mama Fu's near City Hall sells about 200 kids' meals a month (suburban locations sell about 750). But local owner Randy Murphy expects sales of Ninja Noodles and Dragon Tails to the youngest urbanites to grow in coming months.

"We have plenty of single parents and part-time parents and a few married couples with children," said Warshaw of Spring. The W has attracted a number of families with children; the Austonian so far has only one or two buyers with children at home. The 360 has a number of residents with babies and toddlers. Said Burns, who has lived Downtown with young children and plans to move into the W: "About 5% of our UrbanSpace clients have children. I expect that to increase moving forward. I have also noticed that many people are having kids once they have moved Downtown and are not moving out to the suburbs."

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Are Austinites buying these condos or mostly investors or out-of-towners?

Today, most buyers are Austinites, and nearly all plan to live in their units. That's a change from the market through 2007 and early 2008. Presales to investors and speculative flippers tended to be the ones that fell out; the replacement buyers intend to be real residents (some part-time). Broker Kevin Burns said, "Approximately 90% of the deals that UrbanSpace has done in the past year have been sold to owner-occupants. About half of the deals that we have done have sold to locals, the other half to people moving into Austin."

At the 360, buyers for 18% of the residences stated they were purchased as investments. At both the W Residences and Spring, about 80% of buyers are from Austin. Some 20% at Spring are from elsewhere in Texas, said Warshaw. At the Austonian, approximately 50% of buyers are local, while 40% are from other Texas cities. Mitchell said: "We did not market the project to investor-buyers, because they have a tendency to walk contracts. I have had that happen in other projects. We are building a community."

"The majority of our out-of-town buyers are from Dallas, Houston, and other Texas cities," said Carpenter of the Four Seasons. "Most of these buyers have close official or personal ties to the University of Texas. We have a few buyers from California and New York and a few international buyers as well. We have only one investor that we know of in the building."

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What about the condo projects put on hold or canceled?

Based on a fairly comprehensive list of projects (see the PDF map with "Downtown Condos: What's Up?"), high-rises totaling about 1,400 units moved forward, while another 1,400 units were canceled or indefinitely postponed. (The list includes two representative south-shore towers.) Even in the best of times, some projects announced are ill-fated, ill-conceived, undercapitalized, or just unattractive to lenders and presale shoppers – and thus remain unbuilt.

By summer 2008 in Austin, as credit markets ran dry, project financing had already become scarce. Then the capital markets succumbed fully to the widening financial crisis. Some projects, such as those planned by Novare-Andrews Urban, look strong to restart once construction loans become available again. That could take months or years. Others will never resurface; at least one developer who'd announced a condo tower – the Magnolia on South Lamar – has filed for bankruptcy. With no new projects now starting, some local architecture and engineering firms are suffering mightily; they face the grim reality of massive layoffs or firm closure.

On the bright side: With half the condo supply eliminated and demand still strong, there's broad confidence that all of the units now under construction will find buyers.

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Were projects canceled because there aren't enough buyers?

Developers report that lack of construction financing, not a lack of buyers, is what delayed or killed projects. At Spring, "We are seeing 10 to 20 new, interested parties come through our presentation centers each and every week," said Warshaw in late February. "We took two contracts in the last week at Spring, on a three-bedroom and a two-bedroom. We did about a dozen tours of the building in the last week alone. There is no question the demand is huge." Other sales offices reported that the fall and January were very quiet but interest is again picking up.

What prospective buyers aren't doing as readily is signing contracts and writing checks. Market confidence is off. Those empty nesters can't sell their million-dollar Lakeway and West Lake homes in order to make the move, or they can't get the price they want. "The question is not whether these buyers are out there – the question is When will they feel comfortable making the commitment?" said Warshaw. "I don't know if that is one year away, two years away, or more. The time frame relates to macroeconomic issues that are, frankly, beyond all of our control."

At the 360, a remarkable 17 units closed in January and 16 more in February – an exceedingly weak month for home sales nationally. These were resales of units that had failed to close the first time, often due to the initial buyer's inability to get financing. Some of the last 20 remaining units were discounted to speed up the sellout. But given the economy, "it's remarkable to see how well the Austin market has held up," said Andrews.

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Now that it's tougher to get mortgages, will that affect the condo market?

This has been an issue but primarily on lower-end units, whose buyers typically are the least credit-worthy. At the 360, the building sold out before it was completed, but about 50 of the 430 units "fell out" of contract and had to be resold. (A presale means the buyer has put nonrefundable earnest money down – usually 10%, but 5% at the 360.) Developer Novare has found a 10% to 20% presale fallout rate typical for all such projects nationally, even in the height of the boom – so the fallout at the 360 was not unusual. Nearly 30 of the residences were quickly resold to people on a waiting list. The net fallout was less than 5% – "an amazingly low number based on the economic challenges of the last six months," observed competitor Art Carpenter.

The story is less cheery at the Shore, which at 192 units and 22 stories was the only other high-rise condo tower to open last year. It also had units starting around $200,000, and it all but sold out before it opened last May. But more than 25% of presold units have failed to close. Sales associate Emily Knight recently said about 50 units remain under contract but unoccupied; the Shore chose to give those prospective buyers more time to arrange financing. "Because of the credit crunch, they're in a situation they didn't foresee happening," said Knight. "If they still want to live here, we don't want to just cancel their contract." Some first-time homebuyers need time to put together the larger down payment that mortgage lenders now are requiring. The developer took back 10 units; of those, four were put under contract again in the last month, at a slight discount.

Sales agents at the luxury projects – the Four Seasons, the Austonian, and the W Residences, where most units are more than $500,000 and many are more than $1 million – say their well-to-do buyers aren't worried about qualifying. "Our buyers tend to be well-established financially," observed Carpenter. Some don't even bother with a lender – they just write a check. Others have so much cash on hand from the sale of another home that they put a huge percentage down. Banks love that.

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What economic triggers will make hesitating condo shoppers feel ready to sign contracts again?

"I think people have to feel like the worst is over and that Austin has escaped the worst of it," said Warshaw. Burns expects buyers to resurge "once people realize that the only product that is going to be available in the next four years is what is currently under construction." Said Carpenter: "We believe the number of buyers in the market will increase when there is a general acceptance that a 'bottom' has been found in the financial markets. Although the stock market does not play a direct role in stimulating demand for housing, it is a powerful psychological benchmark." Armstrong agreed: "I would expect presales to pick up once we enjoy a little stability in the stock market."

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Are there really enough rich people who want to ride an elevator to live in tight quarters Downtown to fill a luxury tower like the Austonian?

Among ordinary Austinites, this is a huge source of skepticism. But all the developers say it's no problem. The unsold supply of condominiums in the higher price points – W, Four Seasons, and Austonian – is approximately 250 to 300 units, said several developers. "Given the time frame that these are being delivered," said Carpenter, "I'm very comfortable that we have more than enough demand to absorb the supply. In fact, if the economy begins to settle down, I would argue that we will all sell out pretty quickly. We have lots of interest; people are just nervous."

Mitchell noted that million-dollar residences sell all the time in Austin and that a midrange condo sells for about the same as a median-price home in Travis Heights – which has been around $475,000. He pointed to projections that, over the next four years, at least 100,000 residences will be sold in the Austin metro area. "If just 3 percent of the units sold are a Downtown condo, all of the units will be gone. That is going to happen."

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In the next 12 to 18 months, where do you think the bargains will be?

Those waiting for foreclosed units or fire-sale prices are likely to be disappointed. In general, the relative stability of the Austin residential market over the past decade – with no extreme inflationary bubble or overbuilding – dictates against discounting deeper than about 10%. (Unless, of course, the U.S. has just begun a long-lasting economic depression.)

At the 360, the last two units for sale are discounted by $50,000, off original pricing of $434,000 and $495,000 for two-bedroom residences. But UrbanSpace broker Burns said he doubted that such heavy discounts will last more than the next six months because of the limited supply.

"Buyers have more negotiating power right now than before," conceded Warshaw. "To get cash in hand, developers are willing to take price reductions. I don't think people should be expecting unrealistic windfalls." He continued, "If a project is finished, and there are a couple [of less desirable] units left, sometimes a developer will offer a steep discount simply to close out the project." His advice? "I think people who genuinely want to make this lifestyle choice should try to buy 'near the bottom,' and I think it is pretty clear we are there right now." (Of course, he's got units to sell at Spring and other Constructive Ventures projects.) If demand exceeds supply around 2012, pricing could shoot up.

"You generally will not see discounts until the projects are finished," said Armstrong. The condos most likely to have their prices reduced? Many point to the largest luxury residences priced above $1 million, including top-floor penthouses listed at several million dollars. The last 10% of a project's units, sitting unsold in a slow market, also are frequently discounted.

Carpenter said few prospective Four Seasons buyers angle for discounts. "Much more important for our buyers are the issues of customization and contract terms," said Carpenter. "We spend a lot of time with our buyers on these issues and very little on pricing. We have no plans to reduce overall pricing at Four Seasons, but we do adjust pricing both up and down on residence types as the market demonstrates preferences." At the Austonian, said Mitchell, "We have raised prices on several popular floor plans."

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Could unit pricing come down due to the falling prices of construction materials and labor?

Once construction is under way, that doesn't happen, said Warshaw. But general contractors around town do expect their bids to come down on future projects. Andrews believes that construction costs will fall enough that Ovation units marketed in 2009-2010 can be priced similarly to the 360 – which was marketed several years earlier.

"In the short run, we have seen construction costs come down somewhat," said Mitchell, primarily labor. "Over the long term, we have strong concerns that our industry will be facing inflationary cost pressures due to a variety of reasons, including energy costs and budget deficits. My personal expectations are that, over the next several years, prices will rise." He cited reduced production, leading to possible housing shortages, and inflation and noted, "Large increases in the money supply – like a $780 billion stimulus package – create inflationary pressures."

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I'm working-class, and I can't afford no stinkin' Downtown condo. Why shouldn't I be happy if they all fail?

"It is the working class that does the hard work of actually designing and constructing these buildings and maintaining them once they are built," Warshaw observed. "During construction, over 400 people per day are working on our tower alone." Construction of the full-block W project is creating 1,000 construction jobs (approximately 200 workers were on site by late February); it will add 400 permanent jobs upon opening.

"I think everyone enjoys having Downtown as an exciting destination to visit and bring friends and family, and these projects help to make that happen," he added. The base of residents supports the restaurants, coffee bars, shops, and museums that visitors and workers also enjoy. He also pointed to developers' self-funded participation in the Great Streets program and funding of other amenities and public spaces that make Downtown a fun place to go. "Downtown residents improve the Downtown experience for all," said Burns. "They are eyes on the street making our Downtown safe. They provide a financial base for restaurants and retail to thrive in Downtown. They drive less on MoPac and IH-35, therefore reducing congestion for those that need to commute."

"Even those Austinites that live in suburban locations travel Downtown for free concerts at Auditorium Shores, the Bat Festival, the Memorial Day parade, and a wide range of other free or low-cost activities," noted Carpenter. "Perhaps more importantly, a healthy and growing Downtown generates jobs in the construction, entertainment, and service sectors."

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What other cities really are "overbuilt" in the high-rise condo market, in comparison to Austin?

The most extreme examples are Miami and South Florida. A huge volume of simultaneous projects are flooding the market with some 60,000 high-rise units; some single projects have 1,500 units. Developers there have speculated on sales to second-home buyers and investors (many from outside the U.S.), not area residents.

"One project alone in downtown Miami is larger than the entire number of units being delivered in Downtown Austin over a six-year period," Burns pointed out. By his calculations, Miami is building one condo for every 40 residents; Austin is building one new condo downtown for every 1,022 residents. Mitchell cited a Feb. 13, 2009, Miami Herald article reporting that 17,299 condos had been built since 2003 and 70% have been sold. That leaves some 5,000 to 7,000 condos unsold. In Downtown Austin, just more than 500 units are unsold – many of them not yet completed, and thus not yet attractive to "sniff-and-see" shoppers. Armstrong notes that compared to Miami and Las Vegas, "Austin is a small market, and we did not attract 'investor buyers' that precipitated much of the overbuilding."

Others noted that Austin has a reputation nationally as being a pain-in-the-ass city in which to get a project done. (Thank demanding city regulations and laborious processes, environmental protections, and our activist neighborhood associations and citizens.) Our reputation actually helped stabilize the Austin market, discouraging overbuilding and a Miami-like volume of investor-driven projects. Our relatively healthy housing market in this recession exemplifies how slow-to-moderate growth protects a city's economy more than explosive growth, every time – a lesson to remember.

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Will national investors and construction financing flow to Austin again?

Once the capital markets defrost, Austin will be firmly in the crosshairs of national investors. The Austin Business Journal recently reported, for example, that a California real estate firm, Asset Management Consultants Inc., plans to acquire up to $50 million in Austin commercial properties this year. They like our demographics, the local economy's strength, our positive job growth, and the relative stability of home values here, as compared to California.

Terry Mitchell pointed out that in 2009, according to Builder magazine, "Austin is predicted to be the second healthiest housing market in the United States, just behind Houston." He added: "The list of the 15 weakest housing markets is dominated by California, Florida, and Nevada locations. Those jurisdictions suffered the greatest speculation and greatest overbuilding, from what I can see."

Once construction financing does become available, observed Taylor Andrews, "the Austin market has been so resilient and so strong for the product we're building that we think Austin will be one of the first nationally – if not the first – to rebound." Stable housing prices here make Austin a safer investment. "Other major U.S. cities have seen 20 percent in home price declines – or even 25 to 30 percent in Los Angeles," said Andrews. He cited "The 2009 Housing Outlook," an article in the Dec. 22 Fortune, which predicts a 1.9% price decline here in 2009, then a 0.7% increase in 2010. (Many cities are projected to lose another 20% this year.) Andrews bullishly predicts Austin will beat that projection by 50%: "The demand is really strong here – maybe unique in the nation."

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Are these condo towers paying their fair share of property taxes?

"As Mayor Wynn points out, on average, 80 percent of all taxes generated Downtown go to provide services outside of Downtown, in effect subsidizing other areas of town," said Mitchell. "With the density within our project [the Austonian], I would guess that much more than 80 percent of the taxes generated will be used to provide city services outside of Downtown."

A residential tower with 250 units costs the city far less to support – but yields the same tax base – compared to a new subdivision of 250 homes, because the infrastructure (roads, sidewalks, water pipes, garbage collection, fire stations, etc.) is already in place. Plus, many commuter subdivisions and million-dollar homes are built in areas outside the municipal taxing authority – so Austin gets no property taxes to help run the city. Luxury condo towers Downtown, by contrast, capture hefty property taxes from the well-heeled for city General Fund needs such as public safety, parks, and libraries.

Spring, when fully occupied, will generate more than $500,000 per year of new tax revenues for the city of Austin's General Fund, said Warshaw. (For perspective, that's the amount City Manager Marc Ott had proposed saving, given a $20 million budget shortfall, by substantially cutting hours at every branch of the Austin Public Library.) Annually, Spring also will generate more than $600,000 for Travis County and more than $2 million for Austin Independent School District.

The entire W project is expected to produce $50 million in tax revenue over 10 years. The Austonian's projections show it generating more than $1 million annually in city property taxes, or close to $22 million over 20 years. Carpenter said the Four Seasons Residences will generate at least $2.2 million in annual tax revenues for the city, county, and AISD combined when fully occupied. All of the high-rises will generate sales-tax revenues from their ground-floor retail spaces, as well.

High-rise development also contains city costs, in comparison to the suburban model. "If 178 families live on 1-acre lots, the city is charged with maintaining four to five miles of streets, water lines, wastewater lines, drainage pipes," and so forth, said Mitchell, as well as city services to 200-plus acres. "The Austonian abuts 334 linear feet of streets, water and wastewater pipes, and drainage pipes and consumes less than an acre of land. That makes it far more sustainable, and less expensive to the city, than a sprawling subdivision of similarly priced homes."

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Could high-rise living in Austin just be a short-lived fad?

All the developers interviewed scoffed at the notion. "Downtown Austin is a very rare and special urban area," said Armstrong. "Amenities, amenities, amenities! I believe that the trend to Downtown living will accelerate; families are structured differently now, and the house in the suburbs does not appeal to everyone now." Whatever the challenges and headaches of getting a project done Downtown, noted the Stratus principal, it sure beats trying to develop over the Edwards Aquifer.

"I think the Statesman in their coverage has often treated it like it is a fad that will be here today and gone tomorrow," said Warshaw. "In reality, it has become a separate market segment with steady demand." He believes that "as Austin's baby boomers face retirement and as the city grows, there will be a consistent supply of people wanting to make this lifestyle change." Agreed Carpenter, "The number of empty nesters that are attracted to condominium living will increase steadily over the next 20 years."

"I believe we are at the early stages of a shift from the consumptive, suburban model of housing," said Mitchell, citing the "costs of transportation, commute times, the environmental damage of low-density sprawl, the consumption of our most precious resource – water. All are creating a shift to a more urban housing pattern.

"In addition, the younger home buyers – Gen Y – tend to show a preference for more established communities with services and conveniences within the neighborhood, rather than driving many miles to live away from work, shops, and services," added Mitchell. "Every major city has seen the beginnings of this shift. For many, it is as simple as becoming a more responsible citizen and impacting our world just a little less by how we live."

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Will new Downtown residents truly drive less, walk more, and lower Austin's carbon footprint?

Dense high-rise living in the urban core is the most sustainable city model. The whole idea, as Armstrong puts it, is that "people can park their cars and walk to shops, restaurants, work, and all the great amenities we have Downtown." Several 360 residents interviewed for this article said that they're driving even less than they'd anticipated; they now are considering selling their cars and signing on with Austin CarShare.

"Some buyers work Downtown and have told us that they intend to walk to work," said Mitchell. "Some buyers do not work, but the bulk of their activities – social, charitable, and philanthropic – are Downtown." In both groups, "one of the major reasons they are moving Downtown is to be able to walk and not use the car. In an urban lifestyle, you might get up, walk to your favorite coffee shop – there are about five in the neighborhood – to get a cup of coffee, and then walk to work. Less time. Less pollution. More exercise. Less traffic congestion." Carpenter noted that people attracted to the scene Downtown presumably drive there now. "Once they live Downtown, it is reasonable to anticipate they will walk to at least some of these attractions."

"Many of our buyers are trading their large-lot suburban home sitting on 1 or more acres and moving Downtown," added Mitchell. "Our 178 families will be using zero water for irrigation." He said homeowners on a 1-acre lot, on average, use around 200,000 gallons annually for that purpose. So if the Austonian replaces a luxury suburban development with 178 large-lot homes, theoretically it could save up to 35,600,000 gallons of water a year.

Projects currently under construction are all utilizing green-building practices, with the W and the Austonian the most stringent. The buildings will use substantially less energy than average to heat and cool their homes. That could have an even greater impact on Austin's carbon footprint than residents' behavior. "One of the strongest selling points of our project [W Residences] is that it will be a [Leadership in Energy and Environmental Design]-certified project," said Armstrong. "Our buyers tend to be very aware of the environment and embrace the idea of living a little lighter on the planet."