May 15, 2009
As Go Condo Values So Goes The Land Upon Which They're Built
"BayRock Residential has slashed the price of its approved condo site on Sutter Street from $18 million six months ago to $8 million, an indication that central San Francisco land prices are catching up with the decline in housing prices the city has seen."
∙ Value of entitled land plunges dramatically in S.F. [San Francisco Business Times]
∙ 1285 Sutter Street: The Proposed Design To Replace The Galaxy [SocketSite]
∙ 1285 Sutter: Fully Entitled, Retail Pre-Leased, And...On The Market [SocketSite]
First Published: May 15, 2009 5:00 AM
Comments from "Plugged In" Readers
That should give you an indication of where the market thinks condo prices will be heading in about the few years it will take to get something built here.
Posted by: tipster at May 15, 2009 7:19 AM
I disagree with tipster. It speaks more to where these developers are NOW, financially. Many have debt coming due and selling assets even in this market is their only option. They are not even looking down the road at the Condo market.
Posted by: wayne at May 15, 2009 8:10 AM
This is a 55% price reduction off a price that was nrealistic to begin with. It has less to do with the future of condos and more to do with unrealistic initial pricing. No serious land buyer could even consider the original price based on the construction costs associated with this site.
Posted by: serenity now at May 15, 2009 8:30 AM
The value of raw land embeds an option on future development, and the value of this option (like all options) will magnify the effects of changes in the underlying (here, the profit potential inherent in SF development).
Therefore, it's not fair to say that developers expect finished condo prices to fall 55%, as tipster implies. So, maybe implying "only" around a 40% fall, which sounds about right :)
(Just kidding - I don't know all the inputs, and besides developers are not pricing this like prop trading desks do... But, clearly, the prospects for development are way down, which makes sense, because SF is very much dependent on the the general US ponzinomics of the 1982-2007 period, which I doubt will continue. Look out below!)
Posted by: LMRiM at May 15, 2009 9:43 AM
Sorry Tipster - way off. A 55% decline in land prices would indicate less than a 25% decline in condo prices, if that. Tony Crossley has it right in the article - the movement in condo prices either up or down is mostly reflected in the land value as construction costs are not as elastic. If the finished value of condos moves up or down 20%, the land value will move at least 40%. There are a couple of other factors affecting development land as well so that it is taking a larger hit than finished condo prices - namely that getting a construction loan in this environment for a project that larger is virtually impossible so you are likely looking at holding and carrying the property for several years until development is feasible and construction financing is available.
Posted by: Miles at May 15, 2009 9:50 AM
"clearly, the prospects for development are way down"
should help values climb faster after we hit bottom in the condo market even if it is a long way out.
Posted by: gowiththeflow at May 15, 2009 10:01 AM
I totally agree with that, GWTF. Of course, about how far down and how long from now that bottom will be.....
Posted by: LMRiM at May 15, 2009 10:18 AM
Oh man, I HATE to disagree with you LMRiM (every day I look at the price of oil, for example: what are you up, 80% on that trade?), but if next year, the developers sense that things will be better in a few years, they can start building well in advance of any upturn.
Second, condos sell in ANY market. If a developer can buy land for 70% cheaper and profitably sell condos for 40% off the peak, they'll start building tomorrow no matter how "bad" the market is because the market is only "bad" at current pricing. So this is actually a bad sign for the condo market because costs underpin development. If costs start falling like a rock, developers will start building like gangbusters again.
When the land owners throw in the towel as this one is doing, development will start up again LIKE MAD. And if landowners are desperate for cash, they'll sell at a price that allows a developer to build right now and sell out at market pricing.
So it's a standoff between a lot of parties. It looks like the land owners are going to blink first because they are the most desperate for cash right now. That's GREAT NEWS for future buyers.
Posted by: tipster at May 15, 2009 10:34 AM
At some point, the price might get right for Sangiacomo. In the meantime, I hope Trader Joe's is looking at alternate locations, like the vacant old Mercedes dealership also on Van Ness.
Posted by: flaneur at May 15, 2009 10:45 AM
Tipster your forgetting that most people are not as smart as you. Once the public see's condos going up like mad they will think "I better get in now" pushing prices up not to mention people need places to live until the new pads are ready. Given drops will most likely be a larger % by that time, past purchasers in the condo market must be patient wait for the false and smaller than past bubble and when the new buildings are almost done they put what they have on the market for a little less and get out before it falls again. Obviously speculation on my part but it could go either way.
Posted by: gowiththeflow at May 15, 2009 10:59 AM
Your also forgetting the rush to build new development will bring jobs which again will create false security for the masses who have been waiting on the sidelines and will than jump in.
Posted by: gowiththeflow at May 15, 2009 11:01 AM
Up 80% on an oil trade. Might I inquire what oil market this is in tipster. I'm holding dec 09's, its closing at 61. Low was around 46. That figures out at 35% approx.
That's optimal, would that one could buy at the bottom and sell at the top.
Posted by: el aguila at May 15, 2009 2:31 PM
Thanks for the props, tipster, but I actually close out that oil trade a while ago. I just did it using DIG (only suitable for a very short term trade, so please people that is not the vehicle to use for structural positions!). As I recall, I made about 39% in 4 or 5 days, or something like that - if there's really any interest I could try to "dig" it up in the archives....
I'd be inclined to be short oil here (due to the huge contango, technicals and general exuberance over "green shoots" that are illusory) but I don't have a position right now.
Posted by: LMRiM at May 15, 2009 3:27 PM
'landowners throw in towel/developers will build like mad'
Earth to tipster: were talking about SF, not vegas or even sacramento. Not easy to build in SF. Period. Most landowners will hold their precious lots until economy turns around/construction money becomes available again. This seller is in the unfortunate position of having to dump a large, illiquid asset at a terrible time, so will have to discount heavily to to so (probably for liquidity purposes, and they have little choice.). I doubt that you will see many other lots selling in SF. Most owners who can will hang on. Don't forget, SF is precious :)
Posted by: 45yo hipster at May 15, 2009 10:38 PM