Bankers pressuring Seattle condo developers to sweeten their sales

Here is a good article out of the PSBJ explaining what’s going on with the Downtown condo market. With the adjustments being made due to the banks pressure, good deals downtown are bound to continue into the foreseeable future. What are your thoughts?

Bankers pressuring Seattle condo developers to sweeten their sales

Dizzying discounts

Premium content from Puget Sound Business Journal – by Kelly Gilblom, Staff Writer

Date: Friday, April 8, 2011, 3:00am PDT

Lenders behind condo projects are stepping up pressure on developers to pay off or refinance their loans— and lower sale prices and big buyer incentives are the result.

Almost every major Seattle condominium tower that was built around the time of real estate bust in 2008 has come down significantly in price in recent months and is offering special deals such as no closing costs or homeowners fees.

Driving the deals are lenders, usually banks, that are ramping up efforts to move the highest-risk loans off their books. Construction loans have been the biggest thorn in the sides of banks over the past three years, causing nearly a dozen institutions in Washington to fail.

The heightened pressure is forcing project developers and owners to go low to get condo shoppers interested enough to hand over their cash.

R.C. Hedreen Co., developer of swanky downtown Seattle Olive 8 condo complex, has felt the pressure from its lender firsthand. David Thyer, Hedreen’s president, said it made the dramatic decision last year to auction its condos at near-40 percent price drops to move Olive 8’s large stack of inventory. If it hadn’t sold the units, it would not have been able to refinance its multimillion-dollar loan with U.S. Bank this year.

R.C. Hedreen now owes less than $20 million to U.S. Bank and the debt is due in 2013, Thyer said. With the rapid rate of sales after the price change, the debt could be paid off as early as next year. Since the first of the year, Olive 8 has closed 19 sales.

“We’re very comfortable, frankly, with the position we’re in now,” said Thyer. “We don’t have significant lender pressure to discount the project further or to push against the tide, so to speak.”

Additionally, Thyer said the auction aimed to reach a certain milestone — selling 50 percent of the building’s units — to meet a standard set by secondary market mortgage buyer Fannie Mae. The government-sponsored enterprise will not buy condo mortgage loans from a bank unless at least half the units in the project are sold, a rule that has become more stringent as a result of the financial crisis.

When the towering Olive 8 project was being built in 2006, Thyer said, 183 of the 230 units presold. But when the market went bust, fewer than a quarter of those sales ever closed.

“As we got into 2008, those sales stopped happening; the real estate meltdown started,” said Thyer.

But the recent auction and repricing has helped R.C. Hedreen, which stayed solid through the recession because it had various other assets that performed well, such as the Hyatt at Olive 8, a separate hotel project in the same tower. Without reaching the half-full point, buyers of Olive 8 condos might have had a harder time getting a traditional mortgage, because the lender could not sell it on the secondary market.

“The auction helped us achieve the 50 percent sold mark, which continues to make available lending options to prospective buyers, and allowed us to refinance with U.S. Bank, which we did successfully,” he added. He said the company has a 15-year relationship with the bank, and it was willing to find ways to restructure the debt.

Like Olive 8, other projects have had a push from their lenders to get units moving. At Bellevue Towers, the developer, Portland-based Gerding Edlen, turned the project back over to the lender, a unit of New York-based Morgan Stanley, in January to avoid foreclosure, said Sotheby’s Realogics luxury real estate broker Connie Blumenthal.

Only a fraction of the building’s units sold in the two years after it was built, leaving little cash to pay back the $275 million loan.

“You have financing created through a construction loan, that’s satisfied by the transaction of the units … you pay off your debt by selling the units,” said Matthew Gardner, managing principal at Gardner Economics.

Bellevue Towers has recently seen sales soar as a result of the hand over to the lender and price cuts of about 30 percent. It has closed sales on around 20 units in 2011, according to the Northwest Multiple Listing Service.

“The lender helped to establish a level of credibility and confidence that they’re buying from the decision maker,” said Dean Jones, principal of Seattle’s Realogics.

Blumenthal added it’s an example of how restructuring prices and offering incentives for buyers has finally allowed some condo projects to successfully sell long-standing inventory.

“Buyers are really looking for value,” she said.

According to Gardner, many banks have distressed real estate portfolios and are trying to reclaim what they’re owed on their biggest projects to help their stressed balance sheets.

He said: “The pressure is starting to come down from the senior debt (primary lenders) to say they want to be compensated.”

That pressure is being placed on the developers, and causing them to drop prices to line up with the rest of the market. In other single-family home sales throughout King County, prices have dropped by nearly a third. So in some cases, buyers aren’t seeing the value of paying above that level for a condo.

The Gallery condo project, in Seattle’s Belltown neighborhood, was a high-end project that struggled to sell out its units. Last month, it auctioned 25 units, and minimum bid prices were about half of their original listings. For example, a $636,500 unit had a minimum bid price of $295,000, according to the listing brochure. King County records show the sale of the 883-square-foot unit is not yet complete.

Suzi Morris, senior development manager at Schnitzer West, the developers of the project, said the project is 90 percent sold. And Schnitzer started a “buy now” program to sell its remaining units. Buyers, she said, are getting about 12 percent off the listing price.

The sales should help the Seattle developer cover its debt, but it doesn’t plan to get back into the condo rebuilding game anytime soon.

“Given the current construction lending environment, it would be very difficult to start a condominium project at this time,” Morris said.

Other developers feel the same way. There were 195 new condo units in downtown Seattle that are coming on the market in 2011, according to data from Realogics — and those units are available only as a result of foreclosure.

“There’s zero appetite in the lending arena for condo construction,” said Thyer. “There’s nobody out there that’s even proposing a condo project in Seattle.”

That means in the coming years inventory will be scarce. While Gardner predicts prices may drop a bit more in the future, the laws of supply and demand indicate there may be a reversal of that trend in the condo market in the not-too-distant future.

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