Despite lacking the cash to put a shovel in the dirt and slow sales, a few prominent developers refuse to give up on their Southwest projects
There are a lot of people in the room. They’re just not ready to come out yet.
That’s how developer Michael Lander talks about potential condo buyers — the ones who are having trouble selling their home or are too worried about the market slump to hang a for-sale sign. Or the ones concerned that a condo isn’t a good investment right now.
Lander said there’s a room full of those people. He’s not looking to drag any of them out, but he’d be glad to discuss his 46-unit project at 2626 West Lake Street with them when they’re ready.
“When we stick our head in the room that’s the message we give — ‘guys, we’re here, we’re still excited about the project, we still have a good selection of units and it’s a good time to buy. If any of you are ready, we’re ready to talk,’” he said.
Lander is among a handful of developers with planned Southwest condo projects who are fighting the residential real estate market’s disfavoring odds. Faced with cautious buyers and even more cautious lenders, the reality of building a condo development is much different than it was as little as two years ago, before the market swelled with units and buyers retreated.
Developers such as Lander who weren’t able to amass enough sales — the industry standard is 50-percent of a building’s total units — to get a construction loan before the market turned have been playing the waiting game for quite some time. And they’re not alone.
The people who have already stepped out of the room to make a condo purchase are hoping to get what they paid for.
Taking the risk
Developer Jon Hornig’s 30-unit project The Portico at 1601 Lagoon Ave. was on the market for more than a year before he decided to put it on hold.
He and his lender agreed on a 50-percent sold requirement for financing, he said. When spring and summer passed without any sign of a market recovery, the eight people who made reservations got their money back.
“Projected return is not high enough for the risks associated with condos today,” said Hornig, who thinks his project might be successful in the future.
He owns the property and said he might roll out the development plans again when the market recovers. Hornig was the first Southwest developer to officially put a large-scale condo development on hold. Several downtown projects disappeared much sooner.
But some developers are still holding on.
Developer Clark Gassen of CAG Development hopes some of the potential buyers from The Portico take a look at Mozaic, a 72-unit mixed use development planned for Lagoon and Fremont Avenues in Uptown. CAG Development is working with Southwest development company The Ackerberg Group on the project, which is planned to incorporate a Graves Hotel.
Sales for Mozaic have stalled around 50 percent, which probably would have been enough to build with no questions asked a couple years ago. But given the market, the project’s lenders are taking a more cautious approach, said Stu Ackerberg, CEO of The Ackerberg Group.
Lenders are looking more at the total sell-out price rather than the sheer number of units sold, he said. The units remaining at Mozaic are the most expensive ones, which are also the most difficult to sell.
Mary Bujold, president of local real estate research firm Maxfield Research, said residential properties above $700,000 — many units at Mozaic and 2626 fall into that category — are selling slowest right now. Buyers interested in those homes usually have an expensive home to sell first, so “there are a lot of buyers in the upper brackets that are just staying put,” she said.
But high-end condo projects aren’t the only ones struggling. Lenders throughout the Twin Cities are being careful about dolling out cash for any condo project.
“With the market as it is today, all financial institutions are looking at developments with much greater scrutiny,” said Jeff Hawkins, chief operating officer for Anchor Bancorp in the Twin Cities.
Hawkins said lenders are paying closer attention to developers’ track records for reassurance that a project will be successful. Lenders are also analyzing developers’ credit and reserves to see if they have the ability to cover costs if something doesn’t go as planned.
Most lenders are looking for a minimum of 50-percent sold before any dollars are offered, but each project is looked at individually and financing a less-than-half-sold project isn’t completely out of the question, he said. Lenders aren’t as excited about condos as they used to be, but they aren’t running away from projects. Hawkins said residential developments can still make it today if they’re done right.
“Without a doubt the strong developers will come through it,” he said.
Terry Kriesel, senior vice president of commercial real estate lending for Bremer Bank in the Twin Cities, said developers have to emphasize unique characteristics of a project to get a loan these days. Lenders need to see what sets a new development apart from the many already out there, he said.
That’s why Lander is quick to mention Lake Calhoun when he’s talking to lenders. No other new condominiums are planned for the Chain of Lakes and the location of his project, named after it’s address, is a big reason Lander isn’t pulling up the stakes.
He said he has to sell a minimum of 50-percent of the development’s units to get financing. So far, about 24 percent of the pricey condos have found buyers.
Lander has a contract to buy the 2626 West Lake property but hasn’t done it yet. He’s not planning to make any changes to plans or pricing at this point, but he said it could happen.
“I think at any point that we think there’s a better opportunity there that we think is acceptable to the community and marketplace, we would pursue that,” Lander said. “We have not pursued any alternatives yet … part of any business is evaluating your strategy.”
Ackerberg said he is in the “final stages” of putting financing together and is hopeful it comes soon. Without a shovel in the ground, he doesn’t expect sales to pick up.
“We believe that until we’re actually breaking ground, we’re probably not going to sell any more units,” he said. “I don’t believe that a lot of people are going to jump on this train at this time.”
Ackerberg has owned the land Mozaic is planned for, which is currently occupied by the Lagoon Theater and a large parking lot, since the early 1990s and is committed to redeveloping it. Like Lander, he’s also confident in the development’s location. But as optimistic as he is about Mozaic, Ackerberg hasn’t ruled out the possibility of retooling the
The late addition of the hotel portion of the project is an example of an earlier attempt to combat the market’s slip. Though Ackerberg always intended to develop a hotel in Uptown, he didn’t plan to make it part of Mozaic.
If the market ultimately dictates that condos won’t work, Ackerberg said he might have to look at other options, such as office space.
“If we cannot figure out the financing in a reasonably short period of time, and I don’t know what that is, if that’s 60 days or 90 days, then we’re going to have to come up with a different strategy,” he said.
Some of the buyers who braved the market to purchase a condo in a planned development have grown frustrated during the past year.
Excitement for the new developments is still out there, but a hefty dose of concern has been added to the mix.
Chuck Pexa and his wife Carol purchased a condo at 2626 more than a year ago and listed their Kenwood Parkway house around the same time. They weren’t worried about the house taking a while to sell since they wouldn’t have a place to live until 2626 was complete.
But after 14 months on the market, their house sold and the development was still not underway, so the Pexas bought a temporary home in Golden Valley. As enthusiastic buyers, the Pexas are willing to wait another year for their condo. They also made a deposit that was too much to walk away from, Chuck said.
But they’re hoping for some action soon.
“At some point, Lander is going to have to say yeah or nay,” he said. “He can’t keep the people with money down waiting
Lander said his team is in regular communication with buyers, giving them updates on the project. He couldn’t speculate on how long the development process would take but said the willingness of buyers to wait would factor into that. He said he realizes that some of their plans might change before 2626 is built.
“We’re here to support our clients,” he said. “We’re their housing choice, and if that needs to change, we’re here to support them in that.”
At least one Mozaic buyer said he’s not receiving that kind of support from CAG Development or The Ackerberg Group. More than a year after making a $32,000 down payment for a condo in the planned development, Chris Douglas said he is frustrated about the lack of progress and what he said has been “a complete lack of communication” from the developers.
Douglas said he understands the market is slow, but he’s been unable to get any clear information about Mozaic’s status. Former Mozaic sales team lead Carolyn Andersson Moore said she left the project because developers were giving her conflicting information.
Douglas and his partner are planning to move to California and are working on getting their money back.
But not all Mozaic buyers are losing faith in the project.
David Niemi has had money down for four months and is willing to wait a lot longer if he has to. Niemi owns a condo in the new Lumen on Lagoon building at 1201 Lagoon Ave. and said he plans to rent it out when he moves into Mozaic. He lived in Minnetonka for 15 years before coming to Uptown, a location he loves because of the lakes, restaurants and other nearby amenities.
He said there’s no condominium complex comparable to what Mozaic will be when completed.
“They’re working on it,” Niemei said. “… It’s just a matter of being patient.”
Ackerberg said communication with buyers could have been better during the past year, but he hasn’t had much progress to report. He said he’s working hard to change that.
“Our strategy is to get our financing done as quickly as possible, start the project and then the proof is in the pudding,” he said. “Then I believe people will be much more comfortable and confident and peaceful that this is a reality.”
Lander, though further away from funding, said he hasn’t lost any confidence in 2626. He’s just waiting patiently for people to come out of the room.
“You go stand on that site on a summer day and it’s not too hard to be enthusiastic even in a down market,” he said. “It’s going to be a great place to live.”
Reach Jake Weyer at 436-4367 or [email protected]