Condos: Frenzied building turns to bidding

Nashville’s early projects were met with open arms, but a credit crunch and oversupply left some developers out in the cold

Nashville Business Journal - by Eric Snyder Staff Writer

Within a few years, all of the condo units downtown that didn’t exist a decade ago will have sold — but tracing that trajectory hardly makes for a straight line.

Over the past 10 years, hundreds of millions of dollars in glass-and-steel condos went up, while other grand plans fell apart, leaving behind only pretty pictures and ambitiously optimistic feasibility studies. Square-footage rates also have been up and down — from topping $400 a square foot as confident investors awaited even higher rates in planned buildings that never came to be, to plummeting below $150 a square foot as investors snatched up units at auction.

It all began in 2004, when Tony Giarratana and the Atlanta-based Novare Group broke ground on Viridian. Units in the $70 million, 31-story development were sold out months before it was complete. Within months of opening, several buyers put their units, many bought for between $260 and $270 a square foot, back on the market. They fetched upwards of $380 a square foot; a few non-penthouse units broke through the $400 ceiling.

People took notice.

Bristol Development Group wasn’t even thinking about condos as it built The Bristol on Broadway, a 171-unit development they’d conceived as apartments. According to Ashlyn Hines, a Bristol principal and co-founder, construction was halfway complete when Village Real Estate Services approached and said they believed they could sell the units outright.

Bristol became sold on the idea and halted construction for months as it retooled aesthetics. The project was a hit, selling out in October 2006. Bristol West End, also conceived as an apartment development, was switched to a condo before construction commenced.

Sales also were strong for the Adelicia, a luxury Midtown tower developed by Ray Hensler, now president of Market Realty Advisors, that opened in December 2007.

“They were looking at a demographic that was completely underserved, and probably continues to be underserved,” said Grant Hammond, a real estate broker with an emphasis on condos.

Bristol Development Group, born in 1999 as an apartment developer, went on to build two more condo projects — the Gulch’s Icon, which opened in the spring of 2008, and Velocity, which opened in the fall of 2009.

By this time, the Nashville condo market was no longer an uncontested one, the result of bountiful capital for developers and exceedingly accessible mortgages for buyers. In addition to the Icon, 2008 saw the opening of Giarratana’s Encore and Affordable Housing Resource’s 5th & Main. Crosland Tennessee’s Terrazzo and Rhythm Partners LLC’s Rhythm at Music Row both opened in 2009.

The ground floor

Nashville codes forbade residential uses downtown until the mid-1990s, but early in the past decade, city officials and downtown advocates began championing a livable downtown.

In 2003, the office of then-mayor Bill Purcell issued the Downtown Living Initiative, which was created to “encourage the production of well-designed market-rate and affordable housing in a healthy downtown neighborhood.” The initiative touted Economics Research Associates’ 2003 findings that Nashville had a “deficit” of 4,400 residential units.

Then as now, advocates for downtown living pointed at the huge numbers of downtown residents in cities like Charlotte, Indianapolis and Memphis, compared to the 5,000 or so living in downtown Nashville.

But the momentum didn’t last. As the economy tanked and more units came on the market, many buyers with contracts got cold feet.

“Just like everywhere else — our demand curve, at a certain price level, turned out to be much smaller than we thought,” Hensler said.

Bristol Development Group sent letters to Bristol West End and Icon buyers, threatening legal action if they did not close on their contract. Rhythm Partners sued some of its would-be condo buyers.

The 5th & Main project, built by Nashville nonprofit Affordable Housing Resources, was taken over by Wachovia Wells Fargo & Co. in February after the developer fell into default. Wachovia is now offering discounted units itself.

Three condos at Rolling Mill Hill, a housing development spearheaded by MDHA, also fell into receivership last year when RMH Development 1 LLC, MDHA’s development partner, couldn’t pay $21.4 million in construction loans.

Several other projects were floated — and in some cases, widely trumpeted — but never got off the ground.

RCR Construction scrapped plans for The Meridian at West End Park, a 52-unit project off West End Avenue, in 2006 after high asking prices — about $300 per square foot — resulted in little pre-construction interest from buyers.

Developers Sonny Belew and Mark Lineberry announced plans in 2007 for The SoBro, a $50 million, 16-story condo tower south of Broadway with more than 200 units. Construction never commenced, and the project’s Knoxville bank won back the site at a December foreclosure sale.

Giarratana announced plans for Signature Tower in early 2005, with original plans calling for office and hotel space in addition to hundreds of condominiums in what was to be the Southeast’s tallest building. The project now is on hold, its loan having defaulted multiple times.

More visibly stalled is Alex Palmer’s West End Summit. Palmer acquired the last of the necessary parcels in 2005 for what was to include more than a half-million square feet of office space, a luxury hotel and 60 deluxe condominiums. A billboard is still vaunting the project on-site, where ad-covered fencing obscures the dormant construction area, whose large pond resembles an abandoned quarry.

Possible sales momentum

Hines, of Bristol Development Group, disputes claims that condo sales have “stalled.”

“That’s not true. People are buying condos. It’s just a matter of how much supply you’ve got on the market,” she said, claiming that 200 Icon units have sold since August 2008.

Dozens of units were sold at auctions in the fall: 27 were sold at auction for Terrazzo at an average discount of 33 percent, while 32 were sold for roughly half off in John Coleman Hayes’ West End luxury condo weeks later.

“The momentum that I’m seeing is in the velocity of sales,” Hammond said. He expects the drop in prices that have lubricated a higher sales volume to continue this year. Several said today’s current inventory will be sold in the near term; Hines estimated this could take between 18 months and two years, while Hammond predicted 36 months.

“My sense is that we’ve hit a lull with the world economy, but we’re still underserved downtown with our working population,” said Mark Deutschmann, CEO of Village Real Estate.

Hensler said a stabilized market will bring smaller projects with it: “I suspect the next much smaller wave of density we’ll see will come from smaller rental projects. As a market, I think we’ll have to more gradually work ourselves back up to doing large projects.”