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Monday, Apr 15, 2024

The Condo Slowdown

Last year at this time Millennium Pacific Icon Group was selling units at its condominium conversion project in Winnetka at the rate of about 10 a month. These days the company is averaging two to three sales a month. “Just in our area we saw about two or three more conversions pop up over the past year,” said Joseph Yoon, project manager for Forest Glen Villas. “I think that is causing a surplus of units for sale.” Condominium conversions, along with new construction that has come on the market, has had a decided effect on sales, although most stop short of calling it a glut. “Glut may be too strong a word,” said Gary Schaffel, whose Schaffel Development Co. is one of the most active independent condominium developers in the area. “There’s more (on the market) than I’d like to see.” The biggest difference may not be too much supply, but rather the exit of flippers from the market, some say. “It has slowed down, but the buyers are serious buyers, not speculators,” said Bryan Troxler, founder and principal of The Troxler Group, the investment company behind the area’s largest condominium construction project, Metropolitan Warner Center. Since early 2005, when the 1,279-unit Metropolitan opened, about half of the condos have been sold. Troxler concedes that the pace is decidedly slower than it was when the project opened, but the condition is temporary. “Is there an oversupply? There is a short-term oversupply. In the San Fernando Valley, we haven’t seen a price increase in the last six months, but we’ve seen an increase in the absorption rate,” he said. <!– Property: Metropolitan Warner Center has1,279 units. –> Property: Metropolitan Warner Center has1,279 units. The slowdown seems to cut across all price lines, from Forest Glen Villas in Winnetka, where prices start at $288,500 for a single-level, two-bedroom and one bath unit, to Metropolitan, with prices starting in the low $300,000 range for a one-bedroom unit to Schaffel’s just completed Villa Trevi, a Sherman Oaks development where prices start at the low $500,000s and go up to the low $700,000s for a 1,600-square-foot, two bedroom with a private roof deck. Even at the high end, Schaffel’s properties, for example, were selling out in three to four months back in 2004 and 2005. That pace has held up better in markets like Sherman Oaks than in some others Villa Trevi sold eight units out of 42 in three weeks since opening but it still isn’t near the record setting activity at the height of the housing market, even when you factor out flippers. Buyers are kicking the tires a lot more than they did a year and a half ago, condo builders report, largely because the increased supply affords them the luxury of doing so. “We’re finding a year and half ago when we opened, people would come in and write a check on the spot,” said Schaffel, whose sale contracts have always had a clause that prevents buyers from selling for a year to detract speculators from buying the units. “What we’re seeing now is people are coming back three, four and five times. Then on the fifth time, they’ll give us a deposit.” Increased supply The main culprit, these developers say, is the amount of property on the market. Even for high-end builders, the increased availability of lower-priced condominium conversions is, at the very least, detracting shoppers from making purchase decisions. As of last year, some 1,800 units mostly in the Valley were approved for condo conversions, according to city reports, so many that city officials are now reviewing the resulting loss of rental properties. But the increase in conversions, coupled with some discounting in existing properties, is making buyers wary. “People have seen some prices go down and they’re afraid that right now is a bad time to invest,” said Yoon, whose Forest Glen development nevertheless has sold 165 of the 204 units. “A few years ago, you’d buy a house and in some markets it doubled in a few months. Now people are noticing some prices dipping and they’re afraid they’re going to lose money.” The situation in the local area, though certainly weaker, is far less severe than it is on some other markets such as San Diego, where there have been many foreclosures and builders have begun to offer incentives such as free appliances and thousands of dollars in financial credits to induce buyers. “In San Diego, we’re buying a project from a public builder for probably seven figures under what the builder put in,” said Lawrence A. Scott, senior vice president, development at AvalonBay Communities Inc., a builder of rental apartment complexes. “They figure if they write down one-third of the project it’s better than getting half back.” Canceled projects In the past six months, nearly every major builder has reported millions of dollars in write-offs from projects that have been canceled. And while many of those canceled projects are single family home developments, some are condominium deals. But in the Valley, despite the uptick in supply, many believe there are simply not enough products to duplicate the situation in San Diego and other markets. Most of the local condominium developers are truly local and small, with 10 to 15 units each. But even the few public builders operating here say that, long term, they expect the market to remain strong. “The Sherman Oaks market has remained remarkably stable,” said Philip Simmons, president of John Laing Homes Urban which is set to close escrow on an 88-unit condo project in Sherman Oaks shortly. “There’s definitely not a glut. If you add those (upcoming projects) together, it doesn’t touch the demand for this project type. The good news is it’s difficult to get these things entitled.”

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