Suburban home builder Standard Pacific Corp. has opted out of an agreement to buy a major Los Angeles condominium project, another sign that downtown's once-sizzling condo market might be losing steam.
The condo development, adjacent to Union Station, was behind schedule and was having trouble attracting buyers for the units priced in the $600,000 range. Instead of being sold as condos, the 272 units will be leased as apartments beginning today by the project's owner, Lincoln Property Co. of Dallas.
"The delays of getting buyers into the building, combined with the market softening, all conspired to cause us to reach the conclusion we did," Steven Ross, director of planning for Standard Pacific's Los Angeles division, said Tuesday.
Although prices in the downtown market -- one of the last in the Southland to heat up and stay hot -- continue to rise year over year, sales have slowed considerably while the supply of units continues to grow, creating what some analysts say is a condo glut.
From January to June, sales of existing downtown condo and loft units plunged 25% compared with the year before. But developers have added 6,900 condo units and lofts in the last five years, with an additional 5,600 slated to be built in the next two years.
Condo developers downtown and elsewhere are starting to reevaluate their projects, particularly those who entered into deals at the height of the housing boom, as prices were driven higher with the help of short-term investors.
Some projects slated to begin sales this year have been pushed back to 2007 or 2008, analysts say.
"Maybe downtown has gotten a little ahead of itself," said Jack Kyser, chief economist for the Los Angeles County Economic Development Corp. "Downtown is a young market, and we don't have that much history as to how it will perform in a true cycle."
Developers "have to take a hard look at the crucial combination of what they paid, what it will cost to build and deliver their units and what they will actually get," said Peter Dennehy, senior vice president of the Sullivan Group of Real Estate Advisors.
Some developers with projects well underway are devising strategies to adjust to the slowing downtown housing market.
For instance, Kor Group, which is close to finishing its Eastern Columbia condos at 8th Street and South Broadway, presold nearly all of its 96 units. But the company purposely held off the market 10 of its highest-priced units: penthouses starting at more than $1 million each.
"We made the decision to hold back and we don't regret it," Kor Group Senior Vice President Kate Bartolo said. "We now have a list of 40 people who are on hold and waiting."
In the meantime, the developer has upgraded the penthouses to better justify its asking prices.
"What we're seeing is the quick-flip artists falling out and now we have a different type of buyer" who is more deliberative about making a purchase, Bartolo said.
Irvine-based Standard Pacific's decision to back out of the condo project stems largely from its position as a publicly traded builder with stockholders to please.
Nationwide, building companies are recognizing that certain deals may no longer make business sense. Last week, Los Angeles-based KB Home sold its stake in a master-planned community under construction in Palmdale.
In the second quarter, Standard Pacific, which built close to 12,000 homes last year, making it the nation's 12th-largest builder by revenue, reported a 56% drop in new-home orders and a 40% cancellation rate among its Southern California communities. The company accounted for the cancellation of the downtown project in the second quarter, when it took a $16.3-million pretax charge related to write-offs on deposits and other costs of abandoned projects in Southern California.
Standard Pacific had sold 41 of the units at its downtown project, formerly called Axis at Union Station. In June, sales were suspended and buyers were told they would receive refunds on their deposits. Last week, Standard Pacific sent letters to buyers making clear that the company would no longer be acquiring Axis and that refunds were forthcoming.
The four-story complex abutting Cesar Chavez Boulevard and Alameda Street will be renamed Mozaic. Leases will range from $1,400 to $3,000 a month, said Reg Delponte, senior vice president of Lincoln.
Lincoln started building the project in the spring of 2005 as an apartment complex. But as the downtown real estate market heated up and demand for for-sale housing gained steam, Standard Pacific made a deal with Lincoln to sell the apartment units as condos. The units went on sale this year as the market started to slow.
Rising condo prices have pushed many would-be buyers to the sidelines, prompting some to rent instead.
But until recently, renters had fewer options. The mad dash to build for-sale condo units depleted downtown's rental stock as developers turned existing apartment buildings into so-called condo conversions.
But that has started to change as more rental units are slated for construction in and around downtown, said Delores Conway, a USC professor and author of an annual report on Southern California's multifamily housing market.
From March 2005 to March 2006, more than 1,200 new apartment units became available, Conway said.
After a brief drop in the downtown occupancy rate to 83% this year, as of June, downtown apartment buildings are 98% filled, Conway said.
"There was a dip but it was reabsorbed very quickly," she said. "I'm sure developers are seeing this ... and possibly rethinking their positions."
The average downtown rent is about $2,000 a month, according to Conway's research.