Downtown: Apartments surge, condo market fades
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Apartments are in, condos are out, in Downtown.
After a condominium building splurge five to six years ago, developers are now bullish on apartments, in large part because of financing and market realities.
The two largest residential projects taking place Downtown right now involve apartments -- 218 units at the former State Office Building on Liberty Avenue and 158 units at the old Verizon Building on Stanwix Street.
Foris Property Group is planning another 29 units on Penn Avenue. The 297-unit Cork Factory, which is filled up, is adding 96 more units in the Strip District.
In all, more than 500 apartment units are now in the pipeline Downtown and in the Strip compared to, at tops, 26 condominiums, according to statistics compiled by the Pittsburgh Downtown Partnership.
Experts say the shift to apartment building is in some respects a lingering hangover from the housing crash and credit market freeze several years ago.
Mortgages are still tough to come by, and in many cases condo buyers are facing down payments totaling 20 percent or more. In addition, it is much harder for developers to obtain financing for condominium projects than for apartment construction.
"I think the [condo] market has just soured nationally," said Lucas Piatt, chief operating officer for Millcraft Industries, which is converting the State Office Building to apartments. "It's pretty strong in Pittsburgh but nationally the for-sale market has not rebounded."
Washington County-based Millcraft made its first big splash Downtown by converting the former Lazarus-Macy's department store into offices, commercial space and 65 rooftop condominium units.
After more than two years on the market, Millcraft has sold about 70 percent of the luxury condos there, which start at about $320,000. Contrast that to its second project, Market Square Place, which features 46 apartments.
Those units were fully leased four months after the first resident moved in. Faced with a choice of apartments or condos for the State Office Building project, Millcraft jumped at apartments.
"There is extreme demand for rentals Downtown and we want to act on that," Mr. Piatt said.
The State Office Building rents will range from $900 to $5,000 a month. Market Square Place rents range from $750 to $3,000 a month.
The tightening of requirements for Freddie Mac and Fannie Mae mortgages has helped drive up the down payments that condo buyers face to at least 20 percent in most cases. On a $500,000 condo, that could be sizeable, Mr. Piatt said.
The trend toward apartments, he added, is not just a Pittsburgh phenomenon but one that has been occurring nationally as well.
"It's really just the sentiment about buying that has changed. It's becoming more difficult to get mortgages on homes. The down payments are more significant than they used to be. More people are looking at renting than buying," he said.
Mark Popovich, senior managing director of the Pittsburgh office of Holliday Fenoglio Fowler LP, a commercial real estate brokerage, sees another factor at work: Condo building Downtown is expensive.
The cost of building a quality condo project in the Golden Triangle, whether it is new construction or a conversion, runs $250 to $300 a square foot, he said. For one 1,500-square-foot unit, a developer could be facing a cost of $450,000.
That doesn't leave much room for profit, and it's not exactly a bargain for the buyer, either, Mr. Popovich noted.
"For $450,000, you can buy a very nice piece of property in the suburbs. What we have found is that the market for those high-end condos is very thin," he said.
He sees evidence of that at the Residences at Three PNC Plaza, where the condos start at $500,000. Two years after the building opened, only seven of 27 units have sold.
Generally speaking, the longer condo units take to sell, the greater the carrying costs to developers, Mr. Popovich said. And with units that start at $300,000 or more, parking is a must, adding to a developer's cost.
On the other hand, financing rates for apartment projects are very attractive right now, he said. The level of amenities doesn't have to be nearly as high as those for condos, which lowers development costs, and parking is not necessarily the must-have that it is for condos.
Add to those factors a Pittsburgh market that's "extremely strong for apartments. You put all of those dynamics together and it makes sense to pursue those rather than condominiums," he said.
While Mr. Popovich believes there are too many high-end condos available Downtown, he doesn't think developers will have much problem renting the 500 apartments in the pipeline.
He noted that Downtown right now is "for all intents and purposes 100 percent leased. Most people I talk to feel the market is deep enough to absorb these units," he said.
One developer bucking the apartment trend is Todd Palcic, a principal in Penn Avenue Renaissance. He has developed six loft condos at 806 Penn, four of which are reserved. He also is considering as many as 17 condos at 524 Penn, known as One Fifth, or a mix of condos and apartments.
While other developers are shying away from condos at the moment, Mr. Palcic believes there is a demand for "middle class" condos in the neighborhood of $150,000 and up.
"Everyone says the numbers don't work for most people Downtown. We think that condos can be sold for $200 to $240 a square foot," he said.
Mr. Palcic hopes to create a niche by buying distressed assets that most major developers don't want. If he can keep development costs low, he believes condos will be much more affordable to people, particularly with the 10-year tax abatements offered by the city.
"We're bucking the trend because we're buying the least desirable buildings for a major development," he said.
Patty Burk, vice president of economic development for the Pittsburgh Downtown Partnership, said one condo project doing well is the 58-unit Otto Milk Co. building in the Strip, where nearly all the units have been sold.
She said the condo market Downtown was strong before the national housing crash and subsequent stinginess in the credit markets.
Likewise, despite his current infatuation with apartments, Mr. Piatt sees condos being reborn at some point.
"There are still people looking for condos. Our traffic is very strong. It's not like the market is bad or anything, It's just that we feel more people are looking to rent right now and, nationally, I think we've seen that trend," he said.
Millcraft envisions converting some of the apartments at Market Square Place into condos in five to 10 years. Mr. Piatt believes that some people now are renting as a "primer" for buying and will eventually switch over to condos.
Mr. Popovich agrees demand for condos could increase with the continued growth of the Marcellus Shale industry and the local health care, education and banking sectors.
"I see it getting better. But I don't see any new high-end condo projects on the horizon," he said.
First Published June 26, 2011 12:00 am