Market Interrupted

Market Interrupted

DEVELOPMENT by Sean Roth | Real Estate Editor

If real estate was football, then Phil McCabe just called a time out. Instead of facing a sure-armed quarterback or an opportunistic defense, McCabe is up against market uncertainty, price weakness and rising costs. And instead of a simple game on the line, in this case it's the Naples multimillion-dollar Intermezzo, and on a larger scale, it's a snapshot of the condominium real estate market along the Gulf Coast.

On April 14, McCabe, owner of Gulf Coast Commercial Corp., announced he had closed the sales office for the proposed mid-rise condominium at Goodlette-Frank Road and Central Avenue. McCabe says he is suspending sales until the current real estate market conditions improve.

"Our marketing company, Premier Properties, came to me after the collapsing market with plans to reposition it," McCabe says. "My conclusion was that this was basic macroeconomics. The simple fact is the buyers simply aren't here right now. It was my conclusion that the market just isn't there, no matter the price point."

Instead of spending money now, McCabe decided he would hold off until higher prices and buyers return.

McCabe refunded deposits on 20 of the units that he had taken so far, well shy of the 50 units he had hoped to pre-sell. The 146-unit Intermezzo was planned and permitted as a community of two six-story buildings, one seven-story building over parking, a 12,000-square-foot, two-level club and 54 boat docks.

"I own the land right out free and clear so I don't have those costs," McCabe says. "I don't have to keep the project moving to keep the income. I have five years to complete the project under the current permits."

McCabe owns hotels and restaurants in Collier County, including McCabe's Irish Pub, The Inn on Fifth, the Inn of Naples and the Inn at Pelican Bay. At the same time, the break lets McCabe focus on developing the sold out 218-unit Botanical Place condominium in East Naples. That condominium is scheduled for completion in August.

Phillip Wood, president and chief executive officer of Naples-based John R. Wood Realtors, says there will probably be similar sales suspensions in the Naples market.

"Most of the developers here have the financial capabilities to wait to see if things improve," Wood says. "I expect we could start to see some signs of improvement in the next three to six months. There is a lot of inventory on the market right now. I do expect there will be some developers choosing to hold off and wait until next season."

Wood says the region's fundamentals are still good; sales volume is just down from the high-growth period in 2005.

"We really haven't seen a huge drop in condo prices," Wood says. "There has been some slight declines, but the million-plus market has been very strong."

An evaluation period

Developers and builders in other Gulf Coast areas are talking about similar situations. Ali Ebrahimi, president of Houston-based Ersa Grae, developer of the high-rise condominium, office and retail project Plaza in Five Points in downtown Sarasota, expects some developers to hold off for the immediate future.

"I don't expect to see any cancellations in Sarasota because there isn't really a lot of new product that has started," Ebrahimi says. "Those that did were pretty much 100% sold out before they began. I think a lot of developers though are going to take a wait see attitude."

Ebrahimi thinks his company's primary product,constructing high-rise condominium projects, is dead for the time being.

Michael Saunders, president of Sarasota-based Michael Saunders & Co., the largest brokerage in Manatee and Sarasota counties, says a period of evaluation is only natural for many developers, especially in response to the recent boom times.

"These developers are still saying they want to bring it to the market," Saunders says. "They just want to wait until the market conditions are right so they have the best chance of success. We haven't had any developer pull out and say, 'We're out of here.'"

Brian Fenster, principal of the BAP/Newleaf, developers of the 32-story 316-unit The Cypress Club, doesn't expect the downtown Fort Myers market to experience delays in project completions. Still, following a decline in sales, Fenster says BAP/Newleaf shifted its marketing a couple months ago.

"We're not going after investors in any market anymore," Fenster says. "Going after the international market is the classic Miami investor model. We are following the more natural migration. We're advertising in the Midwest and using in-flight marketing. We are reaching out to brokers in those select markets where their clients are typically looking for second homes."

'Turn the lights back on'

Blake Thompson, principal for St. Petersburg-based developer Beckett Whitney Thompson Co., expects a lot of the developments planned for the Tampa and St. Petersburg markets will never materialize.

"Tampa has some additional issues with infrastructure and logistics on top of the market concerns," Thompson says. "There is really no community glue that holds those projects together as a group. Pinellas County / St. Petersburg has the advantage that there is a finite amount of land."

Eric Collin, vice president of development for Sarasota-based Finergy Development, which recently bought land for a condominium, hotel and retail project in Tampa's Channelside district, says he is still seeing projects move forward in that area of Tampa.

"In the Channelside area alone," Collin says, "there are 1,854 units that are under construction since the start of the redevelopment plan."

One thing developers such as Finergy are doing, Collin suggests, is looking to build more mixed-use projects.

"For us," he says, "the hotel component is a really good way to diversify and keep the project active."

As for McCabe, he plans to continue to move the project through its final stages of permitting and to start work on the development's infrastructure.

"We will just move slowly forward," McCabe says. "Right now all we have to do, when the market is more certain, is to just turn the lights back on."

McCabe says he may look to develop a hotel property while the Intermezzo is on hold.

"The hotel business is very, very strong," McCabe says. "The hotel room inventory in Collier County has been on the decline for the last 24 to 36 month, principally due to the real estate bubble. It's somewhat ironic, but that's what I may do."

Surviving

the slowdown

Gulf Coast developers are universal in pointing to a few smart ways to keep doing business well when others aren't. Here are some of their suggestions:

• Diversify both the product and the price.

• Avoid pre-sale constraints in financing. Condo customers are typically more excited by a construction site rather than vacant land.

• Have a contingency plan, because the market can experiences drastic changes and is susceptible to world events.

• Hire an independent consultant to verify the project and offer early suggestions. It's better to pay $5,000 or more to avoid a multimillion-dollar mistake.

• Know your financing. How long can you hold on? Could you complete it on your own if one of your partners were to pull out?

• Budget and plan for the worst. Remember Murphy's law: Whatever the project, it's likely to take longer and cost significantly more than you anticipate.