Are condos making a comeback in downtown Minneapolis?
Posted by Richard Newman on Friday, May 27th, 2016 at 4:09pm.
By Burl Gilyard, MinnPost, 5/23/16
Ten years ago, downtown Minneapolis was in a condo-building frenzy. Hardly a week passed without someone announcing a new project or conversion. Developers could barely keep up with the feverish demand for condo units, while investors were pocketing profits from flipping units as the national housing boom continued to push prices higher. The median sales price for downtown Minneapolis homes (nearly all were condos) reached $270,000 in 2006, up 85 percent in just five years. Owners were convinced these were not just homes, they were good investments.
But the Great Recession changed this as much as it affected the rest of the nation’s residential real estate market. Condo projects were scrapped, empty units piled up, development ground to a standstill, no one could land a loan and some properties tumbled into foreclosure. By 2013, only 47 new condos were sold downtown — a drop of 96 percent since 2004, according to Golden Valley-based Maxfield Research.
Today, the numbers show that the downtown condo market is rebounding quickly, with the median sales price up 22 percent from 2011.
The inventory of downtown Minneapolis condos currently for sale is so thin that many properties are changing hands without ever officially hitting the market, according to Luke Kleckner, a real estate agent with RE/MAX Advantage Plus. “My last five resales, none of them have hit the MLS. They get done by word of mouth. There’s no doubt that the inventory is way too low for the amount of demand.”
Of the downtown properties that do make it onto the market, most are sold within two weeks, according to Fritz Kroll, a real estate agent with Edina Realty who has been selling condos in downtown Minneapolis for more than 15 years. “That’s tighter than I ever remember,” he says.
It’s against this backdrop that two condo developers — and only two — have decided to jump back into the game. There are a few boutique condo projects in the suburbs (see below), and a couple of other developers are said to be scouting sites. But only Jim Stanton and Bob Lux are developing condos again in downtown Minneapolis.
Stanton, of Coon Rapids-based Shamrock Development, was the first developer to build a downtown Minneapolis condo after the recession, the 164-unit Stonebridge Lofts, which opened in 2014. With the only new building in town, he had zero competition and the units sold quickly. He is now developing the 112-unit Portland Tower, while pitching bigger plans at the edge of the Mill District for Legacy, a project that calls for 374 proposed condo units.
At this point, Stanton is the only one who can offer brand-new condos in downtown Minneapolis that will be available in a matter of months. In early April, his Portland Towers had sold 40 units, with reservations for another four condos in place. Residents can begin moving into the building in August.
Meanwhile, across the Third Avenue Bridge from downtown Minneapolis, Lux and his Minneapolis-based Alatus LLC plan to build a 40-story tower of luxury condos on land that currently houses a Washburn-McReavy funeral home.
Even amid the current scramble for downtown condo units, real estate development is a risk. Any veteran developer can point to proposed projects that never worked out because of financing, demand or timing issues. But as others play it safe on the sidelines, Stanton and Lux are confidently advancing their developments based on their experience.
Condo kings
Stanton and Lux both established themselves as leaders in the marketplace during the last condo cycle. When Portland Tower is complete later this year, Stanton will have developed approximately 1,000 condo units in downtown Minneapolis. Stanton’s units are generally more middle market, while Lux usually caters to luxury buyers.
Lux was a key player in Grant Park and the Carlyle, two iconic downtown Minneapolis projects of the condo-craze era. But he didn’t do it alone: Lux was then a partner with his previous firm, Apex Asset Management, which partnered with Minnetonka-based Opus Northwest LLC on both towers.
Sign of the times
Then: The 27-story, 248-unit Skyscape condo tower was completed in 2007. But as sales screeched to a halt, its Chicago-based developer sold the remaining 72 unsold units in bulk to a local investment group in 2010. The following year, the new owners staged an auction to clear out the remaining 35 to 40 condos.
Today: Jim Stanton’s Portland Tower, the only downtown Minneapolis condo project under construction, is just two blocks from Skyscape. It’s across the street from where Kraus-Anderson is proposing a major mixed-use redevelopment including a boutique hotel, a 17-story apartment tower, a brewery and its own expanded headquarters. It’s also only a few blocks away from the new U.S. Bank Stadium, Wells Fargo office towers and planned Downtown East Commons park.
Even at the height of condo mania, few towers were built. The 27-story Grant Park and the 39-story Carlyle were both towers, each with a budget topping $100 million. A condo unit in the Carlyle was resold in 2015 for $4.3 million; the owner had paid $2.46 million in 2008.
Lux learned the multifamily housing business by focusing on apartments. In 1985 he became a development associate for Plymouth-based Dominium, today one of the largest owners of affordable housing in the United States. From there, he took a job in 1989 running the local office of Trammell Crow Residential, which focused on apartments. The Trammell Crow name casts a long shadow in real estate circles: By the 1980s, Crow had built the commercial side of his business into a dominant national developer.
Lux says he learned at Trammell Crow the importance of picking good project sites and scaling larger projects. The 39-story Carlyle condo project in downtown Minneapolis, completed in 2007, was the fanciest — and most expensive — building of its era. Looking back, Lux says that they were not simply operating under the “if you build it, they will come” theory.
“We did a bunch of market research and analysis, so it’s not intuition or luck; it’s a lot of study,” says Lux. His firm, Alatus, did the same for its current condo site at 200 Central Ave. SE as it weighed whether to build apartments or condos. Ultimately, Lux says, the market study pointed to condos.
Alatus paid $2.3 million last year to acquire the Washburn-McReavy site, where he plans to start developing a 40-story tower with 207 luxury condos beginning later this year. Unit prices will range from the “mid-to-high” $300,000s up to multimillion-dollar condos, and they are expected to be ready for occupancy within two years of the start of construction. By then, Lux expects demand to still be as high, if not higher, than it is today, especially in this location.
“The North Loop for the most part is built out or has become too expensive to build projects like we like to build,” says Lux. “The next hot area we think is going to be Northeast.
“You have to let the trend be your friend. You don’t try to force something that doesn’t want to happen organically,” he says. “We’re still in the housing business. You can’t afford to pay stupid money for a site. You have to be on the forefront of where it’s going, and you better not make a mistake.”
Stanton started Shamrock in the mid-1970s, specializing in suburban land development. Shamrock built homes on some of the sites but also sold land to a host of smaller builders. He started his condo career with Lindsay Lofts, a 52-unit project in the North Loop that was completed in 2001.
At 80 years old, Stanton is showing few signs of slowing down. Portland Tower is his ninth condo project in downtown Minneapolis. In mid-March he showed up early for a meeting of the Committee of the Whole of the Minneapolis City Planning Commission, which was scheduled to discuss his Legacy condo proposal. He sat through 45 minutes of discussion on other topics, then sat with his team as planning commissioners peppered them with questions about the design.
Stanton is in no particular hurry to talk with the media about his projects, his read on the market or how he selects a site. He doesn’t have much patience for questions and will often use as few words as possible to answer. When it’s suggested that he may be the most prolific developer of downtown Minneapolis condos, he brushes it off — “I could be the only damn fool.”
What drew him to the site for the proposed Legacy condo project? “It was available,” he says, adding that the site is near two of his previous condo projects. “It’s over by the river. It’s a growing area. Bridgewater and Stonebridge are both there.”
Stanton recalls the go-go days, when some players with limited experience thought that they could become developers — “if they could spell ‘condo,’ ” he says.
But there was such demand at the time. Stanton remembers the sales blitz at his Security Warehouse project in the North Loop neighborhood: “That sold 34 in one day. That was before the bottom went out.”
Warranty worries
While apartment construction — especially luxury apartments in downtown Minneapolis — has been on a tear in recent years, many market watchers agree there should be more condos. But a stumbling block for many developers is a state law change in 2009, which instituted a 10-year warranty against “major construction defects” for new homes and condos.
“It has essentially killed condominium development,” says Kit Richardson, principal with Minneapolis-based developer Schafer Richardson. “The issue is the lawsuits that are brought, which are using and, in my mind, twisting the intent of the warranty law.”
Other condo projects in the metro area
Downtown Minneapolis is not the only place in the metro where condos are being developed. Steve Bohl, president of Wayzata-based BohLand Development, now has his second luxury condo project in downtown Wayzata under construction.
Bohl’s group closed on the sale of the last condo in the Regatta, a 58-unit building, early this year. His company is now building the Landing, which will combine a 92-room hotel with another 31 condos and is expected to be completed by Memorial Day 2017.
His condos are one element of the Promenade of Wayzata, which also includes senior housing and new retail space. Bohl bought his sites from Senior Housing Partners, a division of Roseville-based Presbyterian Homes & Services, the master developer for the redevelopment of the former Wayzata Bay Center site.
While the small-town ambiance of Wayzata may seem like a different world than downtown Minneapolis, Bohl says that some of the selling points are the same: “That walkability component is still absolutely critical, even in a suburban market.”
The Wayzata site, walking distance from Lake Minnetonka, offers a uniquely affluent market. “Our average sale price per unit was over a million dollars,” says Bohl of the units in the Regatta. All told, he says, the 58 units sold for a total of $63 million. “Eighty percent of our buyers had two homes,” says Bohl. He says that most of the buyers came from within a 5-mile radius of the site; they had either lived there or had family who had lived in the Wayzata area. “It’s the retired, or pre-retired, market,” he says.
Bohl says that he did not get a bank loan for the Regatta, which he says was financed through “all private equity.”
There are other corners of the market where developers are planning small boutique condo projects. Minneapolis-based hotel developer Graves Hospitality, for example, is planning an exclusive nine-unit condo building in the Uptown area at 3041 Holmes Ave. S. in Minneapolis.
In the previous development cycle, when condos were a hot property, Schafer Richardson developed five different condo projects including 710 Lofts, 720 Lofts and 730 Lofts in the then-emerging North Loop area.
Richardson says his firm was party to a lawsuit where the legal fees exceeded what it would have cost to fix the issue with the property (he did not provide further specifics about the case). He notes that architects, contractors and engineers on a project also have potential legal exposure, so “typically what happens is everybody associated with a project gets sued.”
As Twin Cities Business went to press, legislation to pare back warranty requirements had been introduced at the State Capitol.
In addition to the warranty issue, there remains the challenge of securing financing for a new condo, says Tony Barranco, vice president of development with Minneapolis-based Ryan Cos.
“It is more straightforward to finance an apartment building,” he says, noting that developers can point to the low metro vacancy rate and the performance of other buildings to help land a loan.
If the market were purely following supply and demand, Barranco says there would be more condos in the pipeline. “It’s all about balanced housing choices, and right now there is no balance.”
As the condo market expanded a decade ago, banks kept boosting the requirements for financing. It became common for lenders to require that 50 percent of the units be pre-sold before they would green-light a deal.
Lux declines to discuss how Alatus is financing its tower but says, “We have no presale requirements.” He adds, “We prefer to have institutional capital in our transactions.”
Asked about financing, Stanton offers only cryptic comments: “I guess the bank trusts me.” Some have speculated that Shamrock can finance its own projects and doesn’t need standard bank loans. Stanton simply says, “Lot of rumors out there, aren’t there?” As he surveys the market, Tom Melchior, CliftonLarsonAllen’s director of market research, notes that he’s seeing signs that the absorption of rental apartments is starting to slow. “Certainly we’re not seeing the tremendous preleasing … like we were seeing over the last few years,” he says about new apartments. He also speculates that some apartments could later be converted into condos as the market shifts.
Even as he’s pitching condos, Lux has other types of housing projects on his plate. Alatus completed the 320-unit Latitude 45 apartments in downtown Minneapolis in September. In New Hope, it’s proposing a 183-unit apartment project to be built on a golf course; Lux says he hopes to start construction this fall. In north Minneapolis, Alatus has partnered with the nonprofit Greater Metropolitan Housing Corp. to build about 60 single-family homes on the Humboldt Greenway.
“We have been building. … We just haven’t been building condominiums,” he says. Stanton, meanwhile, remained active in the condo market in part because his 281-unit Bridgewater condo project, finished in 2007, still had units for sale after the economy tanked in 2008.
“Our sales got a little slow for a year. But we don’t cut prices, because it’s not fair to the person who’s already bought,” reflects Stanton. “I know the rest of them, a lot of them that had problems, they either cut the price or the bank cut the price substantially. We didn’t cut them.”
He also kept planning. Competitors say he has more nerve than anyone else, given he was first to return to building condos in downtown Minneapolis after the crash. Says Stanton: “We didn’t really stop.”