The real estate market may be finally on the rebound, but the news has yet to reach the once seemingly invincible downtown Boston condo market, where sales, in a big disappointment, actually fell in the first half of 2009, a new report shows.
A survey of 13 new Boston condo projects found an average of just one sale a month per building. That’s actually a drop from the already anemic sales rate of 2008, when interest in the luxury market fell off a cliff after the global financial crisis erupted last fall.
That’s quite a turnaround, to say the least.
Sales of multimillion-dollar penthouses in addresses like the Mandarin Oriental and the Ritz-Carlton towers helped fuel the run-up in prices during the housing boom.
And even after sales began to fall in the suburbs in late 2005, the tony new sky-rise perches appeared immune from the downturn. Sale prices of deluxe downtown condos kept on rising seemingly right into 2008.
So it was not altogether shocking that the downtown condo market finally met its match last fall, when fears of another Great Depression froze real estate activity across the board.
The real surprise then, comes now, with a broad and growing real estate recovery that appears so far to have left the pricey downtown market behind.
And it is a trend that, if it continues, could spell trouble for some elite projects.
‘Luxury Market Is Saturated’
At the least, it may be time for downtown condo builders to reevaluate their marketing tactics. So far, that has involved an unimaginative holding-the-line on prices and holding out for the rebound.
But frankly I am not so sure that’s going to work now.
“The Boston luxury market is saturated and the pace is very slow,” said John Ford, a top downtown broker and real estate blogger.
The PrimeTime Urban Report takes an in-depth look at sales at a range of downtown Boston condo projects.
It’s a list that includes major condo towers like 45 Province St. and the new Clarendon, posh harborside perches like Battery Wharf and the InterContinental, as well more pioneering projects like FP3 in Fort Point and Harrison Lofts in the South End.
Last year, these projects managed to bang out, on average, 1.2 sales a month. However, in the first six months of 2009, that average has actually dropped – not risen – to a meager 1.03 sales per month.
All told, just 48 percent of the 1,079 units in these 13 projects have been sold, for an anemic 68 sales during the first six months of the year.
That means there are 558 units still left to be sold, which, at the current pace of one sale a month per project, would take a staggering 100 months, notes PrimeTime’s Thomas Skahen.
That’s nearly a decade.
“The inventory is slowly depleting,” he said, adding “eventually the pendulum is going to swing the other way.”
But Skahen warns: “I don’t think a lot of these places will have the wherewithal to wait and slowly sell.”
Give Credit Where It’s Due
The downtown condo market is hardly alone in feeling left out of the real estate turnaround.
While it was obscenely priced luxury condos and homes that helped drive those runaway prices during the bubble years, it is the average buyer, armed with that $8,000 tax credit, who is generating most of the new sales activity now.
The market nationwide is clogged with unsold homes worth more than $750,000, with nearly 18 months worth of inventory – a huge backup, the National Association of Realtors reports.
And skittish banks are a big part of the problem, both in downtown Boston and beyond.
Many banks won’t or simply can’t write a mortgage on a condo sale in a new project if less than 50 percent of the units have been sold, according to the PrimeTime Urban report. The banks that will write loans typically demand a 20 percent down payment – not insubstantial if you are talking about a $1 million unit.
Well more than half of the new downtown projects examined in the PrimeTime report, or eight, are below that key 50 percent sales threshold.
But there’s another problem here as well.
During all the golden years when it looked like prices of luxury condos in downtown Boston would keep rising, year in and year out, developers rushed to get into the game.
The result is that a market already flooded with unsold luxury units is about to get doused again.
The posh new W Hotel is poised to open this fall in the Theater District, dumping hundreds of new, and mostly unsold, luxury units on the market.
Meanwhile, some early buyers at pricey projects like the Mandarin and the InterContinental have put their units back on the market, adding to the logjam.
Compounding the problem, many of the empty nesters downtown developers had counted on to buy these units are sitting stuck in their big suburban homes, unable to sell themselves.
The Downward Spiral
So what’s a downtown condo developer to do?
One option, of course, is to try what everyone else has, and start cutting prices.
The problem with this approach, though, is that it can easily turn into death by a thousand price cuts as developers chase the market downward.
Another, more viable option, Skahen believes, is the auction approach.
So far, it has only been tried two or three times in the Boston area.
But the results have been encouraging, with the South End’s 1850 complex now sold out after a successful auction over the summer reenergized its marketing.
The downside for developers is obvious: letting units go at prices that are often well below their original asking price.
Yet this can be an effective way of both finding buyers and setting a new floor for prices, Skahen notes.
“It’s new strategies,” he said. “We know the price isn’t going to come back to the threshold they want. Developers do not set pricing – the market is setting prices right now.”
Clearly the luster has finally worn off the downtown condo market.
And for downtown developers sitting on loads of unsold units, it’s time to say goodbye to the glory years and gear up for some bold marketing moves.
