Developers of luxury condos are betting demand for upscale projects will keep going up
(Monday, October 30, 2006)
Construction costs are soaring. Real estate prices are dropping, and buyers are backing off. Sounds like a great time to build a super-expensive condominium project, right?
"We think residential prices are going to explode with a vengeance," said Robert Epstein, chief executive of the Abbey Group, which this month broke ground on a luxury condo tower on Province Street in downtown Boston, and is marketing the units at pre occupancy prices of the $700,000s to about $2.6 million.
"A lot of people who are balking at filling their housing needs may be very sorry," Epstein said.
Is this just the optimistic chirping of a developer trying to make money on a $175 million project? After all, the numbers would suggest a more cautious outlook.
Prices for condos in downtown Boston were down 6.9 percent in the third quarter of this year compared to a year ago, and the total number of sales is off by 19.7 percent, according to the Listing Information Service, or LINK, which compiles data from brokers.
Even more telling is that in the market for residential condos priced $1 million and more, sales are down 21 percent in the quarter so far this year, to 265, from 338 in the same quarter last year.
Some luxury condo developers have had to cut prices or resort to unusual tactics, such as the auction the owners of Folio on Broad Street held recently to unload units.
But market watchers and industry officials said Epstein and other developers of luxury condo buildings have sound reasons for being bullish. The luxury condo market, targeted toward very wealthy people, seems less susceptible to cycles that sweep through the regular housing sector.
Broker Kevin Ahearn of Otis & Ahearn, perhaps Boston's biggest residential market cheerleader, acknowledged that 2006 is "off a little bit" from the two previous, record years. But in the next breath added: "Except at the high end, which continues to expand."
For one thing, there are fewer available units. Inventories of condominiums in Boston are at a relatively low five-month supply, compared to a full year's supply of single-family homes in the suburbs, he said.
Ahearn's analysis of available data indicates 2006 will see 82 sales of residential units at $1,000 a square foot or more. While down from the 93 such sales in 2005, that still compares favorably to 61 in 2004, and only 37 in 2003. (The median price per square foot of a condo in Boston proper is now about $544.)
"You could look at this and say, 'Is the market failing? Has the bubble burst?' " said Debra Taylor Blair, president of LINK. "The bigger picture is, yes, the market is down -- however it's down from an all-time high. It's down from something that's unsustainable."
Abbey Group is marketing units at 45 Province St. at an average of $900 a square foot. At Battery Wharf in the North End, half the 100 luxury condominiums have sold for an average of $1,250 per square foot, according to sales manager David Theran.
Moreover, the Residences at the InterContinental, at 500 Atlantic Ave., are currently being marketed by Ahearn at $975 a square foot. About 80 of those have been sold, and the building opened last week for occupancy.
Just two years ago, a smaller unit at the InterContinental sold for about $700,000; recently an identical unit a few floors above sold for $900,000.
Then there's the outer stratosphere of the luxury market: Mandarin Oriental at the Prudential Center in Back Bay. Though not scheduled to open until June 2008, all but one of the 50 units have been sold, at prices that average $1,600 a square foot.
So it would appear there is not a shortage of wealthy buyers. "It's absolutely true that there will be demand for properties of that price range," said John A. Keith, a real estate broker who represents buyers.
A slender, 31-story tower with 150 condos, 45 Province will have parking on the lower floors, and the residential portion doesn't even begin until the seventh floor.
Epstein predicted the views, overlooking a neighborhood of lower, historic buildings, will be "incredible. Our 'ground floor' -- the seventh floor -- is higher than most penthouses in the city."
The architecture at 45 Province is contemporary, by Bruner/Cott of Cambridge. The exterior is extensively glass, with terra cotta panels. The interiors, designed by Celeste Cooper of New York, will have walnut cabinets and bamboo floors in the kitchens. Wolf, Grohe, and Miele appliances and fixtures will populate the kitchens, and bathrooms will have 3-by-6-foot showers -- so big they don't even require a door. Amenities include a restaurant, spa, and concierge.
This kind of luxury -- and urban units more spacious than ever, some covering 5,000 square feet -- is new to Boston.
"We definitely have a shortage of supply of the luxury penthouse unit s that you would see in New York," said Blair, the LINK executive. "They will sell remarkably well.
"Boston has shifted into selling units on a new level of lifestyle platform -- full-service amenities, garage parking, four-star restaurant at your door," Blair said. "They want almost a hotel quality of life, and that's what these new projects offer."
Abbey Group has a solid track record and has been through several real estate cycles, with 100 projects since the 1970s, including the Landmark Center redevelopment of an old Sears building near Fenway Park.
Moreover, Robert Epstein argued there are additional factors that favor proceeding with a luxury building now: 45 Province is expected to be finished and ready for occupancy in 2009, and the whole of the market should have firmed up by then. Meanwhile, high construction costs are scaring off developers of other projects, meaning there could be fewer new housing units coming on the market to compete with 45 Province.
One other downtown residential project may be getting out of the gate at about the same time as 45 Province. This month the Boston Redevelopment Authority gave the go-ahead to Hayward Place, a $200 million mixed-use development with 277 luxury condominium units, to be built on a parking lot between Chinatown and Downtown Crossing.
Epstein also sees the Boston economy remaining on an upward trajectory. "A growth economy pushes prices up harder and harder," Epstein said.
Brian Rugg, executive vice president of business development for ERA Boston Real Estate Group, said Epstein and the Abbey Group appear to have timed the real estate market cycle correctly. "The optimum time to start a project is when the market is at its worst. If he becomes one of the few, if not the only one, developing this ultra-high-luxury product 30 months from now, he will look like a genius," Rugg said.
And if you think $900 a square foot is a lot now for a downtown condo, Epstein said he expects to raise prices as marketing for 45 Province St. builds over time. By spring 2009, when the building is done, Epstein boldly predicted prices for 45 Province will reach the $1,600 -square-foot average of the Mandarin.
"We typically don't run that far behind New York, and prices in New York are $2,000 to $3,000 a square foot," he said. "Can people absorb higher costs? The answer is yes. People have got to have a place to live."
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