The crash of the condominium market has created a real estate landscape littered with partially filled condominium buildings in both downtowns and the suburbs, leaving builders stuck between a rock and a hard place. Mortgages are harder to come by, cutting off the flow of potential buyers while the lenders who financed the projects are waiting impatiently to be repaid, sometimes resorting to foreclosure to gain control of the properties.
In the midst of this wreckage there have emerged a few real estate investors and developers who, under the right circumstances, are buying unsold condos in bulk -- frequently at prices below what it cost to build them. So far, large-scale en masse purchases of unsold condos have been restricted to a few instances, but a range of smaller-scale buys have revealed a newly emerging market for distressed condo properties.
The best-known example is the Skyscape condominium projects in downtown Minneapolis. There, a partnership controlled by Minneapolis-based Opportunity Advisors bought nearly 30 percent of the 248 units in 27-story building at 10th Street and Portland Avenue S. The firm said it bought the units at below what they would have sold for to individual buyers and indicated it plans to sell the units.
The partnership last year also purchased 18 units in Brooklyn Park's 56-unit SummerCrest condominium development in Brooklyn Park.
There have been at least two other instances of such "block buying" of unsold condominiums in the Twin Cities market, said Tom Melchior, a housing analyst with Larson Allen in Minneapolis.
"The key thing in these transactions is that the developers can unload a lot of units and are willing to lower the price per unit," he said.
In some such instances, bulk investors -- including local and national groups -- come in with plans to hold the units for up to five years, filling them with renters in hopes the market will recover and they can eventually be sold at a profit.
Such deals aren't yet commonplace, and that's a good thing for the Twin Cities housing market, added Scott Parkin of Hoffman Parkin Urban Realty, one of the metro's most active firms in condo sales.
"I'm apprehensive when I hear of that happening," he said. "It's an indication there was some weakness in the property as a whole. And it can affect the ability of an individual to finance a purchase with a mortgage. If there's any one entity that owns more than 10 percent of the units in a building, it can cause problems because Fannie Mae considers the mortgages ineligible for underwriting."
Parkin called buying condos as investments rather than as homes to live in an "artificial approach" that "helped fuel the bubble" and ultimately works against the purpose of trying to develop urban neighborhoods.
Others seeking to buy out unsold condos are taking a different tack -- converting them to 100 percent rental buildings. One such firm is St. Paul-based Exeter Realty, which ironically developed one of the most successful condo projects of the last decade, the Cobalt Condominiums on University Avenue SE. in Minneapolis.
Exeter's Rob Stoplestad said the firm has established the Ironton Asset Fund to seek out and turn around distressed real estate of all kinds, mainly retail and office properties, but is also actively scouting "fractured" or "broken" condominium properties.
"We're not comfortable with the concept of buying condominiums in bulk with the intent of keeping them as condos, not that there's anything wrong with that approach, but we're not set up to do it," he said. "What we're doing is finding condo developments where only a few units have been sold, then buying out those owners and the unsold units and converting it to all-rental."
Unfortunately, he said, most struggling condo buildings have 50 to 70 percent of the units sold, making it unfeasible to buy out all of the existing homeowners.
Senior housing developer Tim Trimble of Rochester-based Oxford Property Management said he's facing the same problem as he seeks out such condo developments to turn into senior rental housing, as his firm did last year with its Twin Rivers Seniors Campus in Cannon Falls.
In that case, he said, Oxford came across a project that began as a 61-unit seniors condo building, and after sales didn't materialize, purchased the unsold units and bought out the few existing homeowners.
"We've been looking for other opportunities," Trimble said. "We're in conversations with a bank on a condo building that went into foreclosure.
"But for these to work financially, you need buildings where they haven't sold a lot of the units, because you have to buy these units back and buy the unsold units as well, so you can only afford to do so much for to make it make economic sense."
Don Jacobson is a freelance writer in St. Paul.
