Presales - Developers Holding Back

The market has finally responded with presales in secondary locations just not happening fast enough. Several developers have put on the brakes and moved to a wait and see mode.
Mike Mitchum



Sunday, February 19, 2006
By KATHY JUMPER
Real Estate Editor
In a resort market, slow presales can make or break a project.

Add to that a couple of major hurricanes, rising material costs and a tight labor market, and property sales at the Gulf just about stop, according to developers and Realtors.

Condominium units that a year ago sold in a few days at the full price of $800,000, with two back-up buyers, are now just a handful of the 2,615 units on the market. Developers once eager to start selling preconstruction units are now waiting for demand to meet the supply before releasing presales.

"Before we have more preconstruction units, we need to see a lot of people absorbing what we have on the market," said Chuck Norwood of REMAX of Gulf Shores. "And I can assure you that not all of the preconstruction units were bought by end-users. Many were bought by speculators who will put those into the inventory as well."

A total of 1,244 new condominium units are scheduled to open in 2006 in Orange Beach and Gulf Shores, according to the Alabama Gulf Coast Convention & Visitors Bureau. There are 11,852 existing condo units at the Gulf.

At least two developers have put condo projects on hold due to lagging presales, and Realtors expect others to follow.

When presales of the 97-unit Villas at Homeport next to Lulu's Landing on the Intracoastal Waterway in Gulf Shores hit the market, there was a waiting list for the $650,000 to $800,000 units.

"Unfortunately, we issued hard contracts at the end of June, and when Katrina hit, it shut us down," said Hugh Headrick of REMAX of Orange Beach. "Because of Katrina, we weren't able to convert contracts fast enough and the costs of construction went up significantly."

The 60-slip Homeport Marina is open and Lulu's restaurants has plans to expand, he said.

Waterdance developers have stopped their plans to build 770 units on the Intracoastal Waterway, citing disappointing presales of the first phase of 295 units, according to Peter Pappas of Pappas Properties in Charlotte, N.C., who designed the project. The land owner, Jim Mattei, a native Mobilian, is said to be reevaluating the project.

"We have a lot of investors who have preconstruction units that they haven't been able to sell," Headrick said. "Once the buyers come back, we'll see the existing units gobbled up."

The market may never be as hot as it was before Hurricane Ivan hit in September 2004, according to developer Rick Phillips, a partner in Mandalay Beach, a planned 500-unit project in Orange Beach. "But the buyers are still out there, the demographics are still there and people are still looking for places," he said. "They just have to get over the storm scarring."

The hurricane fallout has widened for developers left scrambling to replace subcontractors who left for higher-paying hurricane repair jobs in Mississippi and New Orleans, builders said.

Material costs and the shortage of subcontractors, is "killing everybody," said Rick Skelton, one of the developers of Bon Secour Village, a mixed-use community on the Intracoastal Waterway in Gulf Shores. Any material prices that weren't locked in are going up, he said.

Another hit for developers' budgets is the new impact, or development, fee adopted by the city of Gulf Shores last August. It requires that developers pay an upfront fee of $5,000 per condo unit to help offset city expenses. The new fee is separate from the cost of a building permit.

"The city has been great to work with, but this was a big surprise to us, and an unpleasant one," said Skelton, whose project has 103 condo units in its first phase. "The home buyers are the ones who will end up suffering."

The development fee will help the city provide utilities, wider streets and other infrastructure, according to Steve Foote, city planner for Gulf Shores.

While Orange Beach does not have an impact fee, some Florida cities have adopted them, developers said. For example, Panama City Beach's commissioners are considering imposing a $16,000-per-unit fee, according to city officials there.

The added fees and construction costs aren't causing many developers to bail out along the Waterway, according to Skelton. But, "some are saying they have got to pull back and watch the market, or do some redesign and watch our pricing."

Some of the presale buyers from projects put on hold have been looking at units at The Wharf, according Beason Wilkes, director of development for the AIG Baker project that will put retail, entertainment and 741 condo units on the Intracoastal Waterway.

"Our sales are accelerating," Wilkes said. The Wharf's first two buildings are sold. There are several units remaining in a third, 234-unit building, where "we had a little fall out from Mississippi and Louisiana buyers," he said.

With so much inventory on the market, buyers are aggressively negotiating for units, agents said.

Many developers are offering incentives to Realtors to sell their preconstruction units, including giving top sellers a sport utility vehicle or sports car. Some companies are paying agents $10,000 of their sales commission at the time of purchase, rather than ask them to wait the two or three years until a project is built and sales are finalized.

A year ago there were 1,200 to 1,500 units on the market versus 2,615 today, according to Realtors.

"We've got to have some absorption of inventory," Norwood of REMAX said

And while he added that he's not "doom and gloom," he likened today's buyers to chiefs and Indians.

"Unfortunately, we've been building for all the chiefs," Norwood said. "How many Indians can afford $800,000 to $2 million condos? We may be missing our mark a bit."