Spike in San Francisco condo sales may signal comeback

San Francisco Business Times - by J.K. Dineen

San Francisco condo developers are seeing a sharp increase in sales as buyers rush in to take advantage of low interest rates and recession-friendly bargains that in many cases are 30 percent below original pricing.

At the 665-unit Infinity, developer Tishman Speyer has written 90 contracts in 90 days and is reportedly selling units for $600,000 that were originally priced well above $800,000. A few blocks east at the 114-unit Blu, Lennar and Malcolm Properties went from zero sales to eight units a month since slashing prices in February on two bedrooms from $800,000 to $600,000. Homes on Esprit Park and SoMa Grand are seeing more traffic and buyers than they have in over a year. Even TopVision’s Candlestick Point, on the city’s windswept southern outskirts, has sold nine units in the past four weeks — the same number as in all of 2008.

“We wrote 10 contracts last week and will probably do 10 contracts this week,” said Tishman Speyer Managing Director Carl Shannon.

The 246-unit SoMa Grand on Mission Street is on pace to sell 12 units this month, according to Adam Chall, a partner with TMG Partners, which developed the tower with AGI Capital. The project is 75 percent sold out. Chall said they have cut prices some, but less than 20 percent because the SoMa Grand always positioned itself as a cheaper alternative to the downtown highrises.

“We are basically back to the pace where we were a year and a half ago before things slowed down,” said Chall.

Leading the way

The spike in sales is both sweet and bitter for housing developers. On the bright side, it’s gratifying to see that, even in a recession, demand still exists for high-end condos in San Francisco, something that is not the case in over-saturated markets like Miami, Phoenix and Las Vegas. But on the downside, that demand has been created by brutal price cuts. Prices at buildings like the Infinity, One Rincon Hill and Blu — under $700 a square foot for some units — are well below development costs.

“You are buying at values well below what justifies building new product,” said Shannon.

Tishman Speyer started to cut prices in late 2008 and became even more aggressive in the first quarter of 2009 as the economy continued to weaken and the stock market swooned. The cuts set the tone for other projects like Blu, SoMa Grand and One Rincon Hill.

“I think they definitely led the market, especially the luxury market,” said Adam Koval, editor of Socketsite, an online publication that reports on the San Francisco housing market. “People are walking into other sales offices and literally saying, ‘This is what the Infinity is going to give me. What are you going to give me?’”

Chris Foley, principal of Polaris Group, which is doing sales for Homes On Esprit Park and Blu, said, “Tishman is the one who made the first move.”

“Everyone else had to follow suit,” he said. “They are the big dog.”

The increase in new development sales comes at a time when the resale market is still weakening. Home prices across the San Francisco metropolitan region, which includes hard-hit areas of the East Bay, fell 31 percent from February 2008 to February 2009, the third-largest decline among areas tracked in the Case-Shiller Home Price Index, behind Phoenix and Las Vegas. In San Francisco proper, the median resale price declined by $100,000, or 13 percent, since mid-2008, according to Polaris Group.

A shift in sentiment

Chall of TMG said he has seen a shift in attitude among buyers who were on the sidelines in late 2008 when SoMa Grand had months where no units sold.

“Before they said, ‘Everybody is telling me I’d be crazy to buy now,’” said Chall. “You talk to the same people and they are saying, ‘Everybody is telling me now is the time to buy.’”

Keith Tao, a manager in the medical device industry who raised his children in Danville but wanted a place in the city, said he walked into the Infinity in March “when the stock market was absolutely at its worst.”

“The market was down 700 points that day — I knew it was a good time to look at condos,” he said.

Tao, who grew up in San Francisco, had started looking at downtown condos beginning in 2006. Over several years, as condo markets crashed in many cities, and the subprime crisis started becoming more pronounced, he found San Francisco condo developers stubbornly clinging to peak prices.

“The agents were essentially obnoxious, particularly at some of the high-end places. They were arrogant. I walked away and said, ‘This is something I can’t afford and I’m not sure I want.’”

By March of this year he felt the attitudes would be different and he had become convinced that the Infinity offered the best location and highest quality construction for the money. The day he went to the Infinity sales office, Tao brought his checkbook and his tax returns. He started negotiations “with a very low number.”

“I thought they were going to turn around and laugh at me,” said Tao. “The agent looked at the number, did a calculation and said, ‘I think we might be able to make this work.’”
After some negotiation, the two parties agreed on a price that was less than $550,000 for a one bedroom on the fourth floor of tower two overlooking the courtyard.

“I am very pleased,” he said.

The first move-ins to Infinity’s 300-unit second tower took place on April 18, and Shannon suggested that the market already may be starting to rebound. He said improvement in the capital markets and stock market gains since its March lows are together creating more optimism.

“We are seeing great traffic and we are not negotiating as hard as we were a couple of weeks ago,” said Shannon.

Koval said the new pricing represents a “rational approach” for developers who have construction loans to pay off and are paying heavy HOA fees and taxes on hundreds of unsold units.

“The $64,000 question is whether the market clearing price in 2009 is going to be below or above the market clearing price in 2010,” he said.

Despite the sagging economy, condos have been selling well at the Infinity, recognizable by its two curving high-rise towers near the Embarcadero in San Francisco's South of Market.

As of Monday, 351 of the project's 650 units had been sold. About 100 were within the past three months, according to the Mark Co., the project's marketing firm.

In addition to its two towers, the Infinity includes two midrise buildings of eight and nine stories with a total of 128 units. The 37-story Tower I has 237 units, and the 42-story Tower II has 285.

"Over 60 percent of our buyers say their reason for buying is the location," said Alan Mark, president of the Mark Co. The Infinity is close to the Ferry Building, downtown and the Financial District, as well as restaurants, shopping and public transportation. Breathtaking waterfront or city views could be another selling point.

The sales and design center across from the project features a full-scale re-creation of the entry, living room and kitchen in what Mark called "our signature two-bedroom unit with a great view." That view is seen in a panorama of bay photos spanning Angel Island, Alcatraz, the Ferry Building, Treasure Island, the Bay Bridge and beyond.

The Infinity also features amenities such as a 5,000-square-foot, well-equipped fitness center; two-lane, 75-foot lap pool; club lounge with kitchen; 24-hour business center and conference rooms; on-site concierge; screening room with big-screen TV; and saunas. Besides serving individual residents, the concierge will host regular social events for all residents.

Residents may soon be only an elevator ride away from Prospect, a new restaurant created by the owner of nearby Boulevard restaurant, according to Carl Shannon, managing director of Tishman Speyer, Infinity's developer. Nancy Oakes and her Boulevard culinary team will occupy about 10,000 square feet in two of Infinity's four street-level retail spaces. The sign has gone up, but no opening date has been announced.

The new owners can be categorized as move-up buyers; second-home buyers, many of them from the Peninsula; first-time buyers; and empty-nesters, Mark said. Besides the location, they like the choice of floor plans, he said.

The condos themselves can be as small as one bedroom with 700 to 1,020 square feet and prices starting in the mid-$500,000s, or as large as a 3,300-square-foot penthouse with two bedrooms and prices up to about $6 million. Prices for three-bedroom units of 1,630 to 1,740 square feet start in the high $900,000s. Most units are $500,000 to $3 million, Mark said. Views are a major factor in determining prices.

Monthly homeowner dues average about $730. They're about $725 for Residence 2C. Dues cover hot and cold water, trash service and the amenities. Each home comes with one underground parking space.

Designed by Bernardo Fort-Brescia of Arquitectonica in Miami, Fla., and Heller Manus Architects of San Francisco, the towers are linked by a landscaped, public plaza stretching from Spear Street to Main Street.

A water wall along the north side continues into the fitness center. On the opposite side, pyramid-shaped skylights illuminate the lap pool during the day and the plaza at night.

Many units have curving exterior walls with no big beams at the top, yet they're seismically safe, architect Fort-Brescia said during a media tour. This design "really transforms the space, making it feel more connected to the view," he said.

One unit with such a curving wall is the two-bedroom, two-bath Residence 2C. Measuring about 1,182 square feet, it is entered via a small foyer with guest closet.

The U-shape kitchen on the right is equipped with top-of-the-line Bosch appliances and overlooks the living/dining area.

The master bedroom on the left side of the unit has its own bathroom with tub/shower, plus two closets, one of them a walk-in.

On the right side of the unit is a study/office area, also with its own bathroom with shower, plus the laundry closet, which accommodates stacked appliances. The adjacent bedroom has a relatively small closet.

Mark, the marketing director, said he expects the Infinity will be the last large condo project to open in San Francisco in the next five years. He doesn't foresee much new inventory in the next two years because construction has virtually halted during the economic slump.

Once a project gets the go-ahead - plans for the Infinity started 10 years ago - construction can take 30 months or more, he said. Shannon, of Tishman Speyer, said he expects construction costs of future projects to be about 50 percent higher than for the Infinity. Therefore, buyers will see higher prices, he said.