Though announcements of downtown-area condominium projects have been sprouting like spring flowers in recent years, developers here say that housing sector might not reach full bloom for years, as they struggle to develop units that middle-market buyers can afford.


Demand for downtown condos is strong, but rising construction costs have put a damper on development plans, particularly for affordable units, developers say. The result, at least for now, is that inventories remain low, and condo prices are escalating, limiting the downtown housing markets potential to grow. Although sales have been strong for luxury condo units, developers say there are not enough of those units available yet to determine the depth of the high-end market.


Rising costs have forced Spokane developer Ron Wells to revamp his plans for the former Joel Inc. building at 165 S. Post and have raised questions about whether Tacoma-based Prium Companies LLC will go ahead with a 126-unit condo tower at 153 S. Wall.


Still, developers say its mostly a matter of time before the downtown condo market takes hold, and theyre optimistic about its potential.


If you look at the history of the growth and development of downtown condos in every other West Coast city, the demand continues to go up, says Wells, owner of Wells & Co., of Spokane. The level of interest here is still very good; you just have to have the right combination of market appeal and pricing and construction costs.


Prium now is unsure whether it will go forward with its roughly $30 million tower, at least as currently planned, says Robert Marmaduke, an engineer at the company. Prium expected to receive a final cost estimate and a condo market evaluation, compiled by a Spokane developer whom Marmaduke declines to name, on May 15. If Prium decides to go forward, it could start construction on the project in July and complete it by January 2009, he says.


These days, you really have to sharpen your pencil, Marmaduke says. The totally unknown risk when you pull the trigger is what will happen to costs when you move forward; at some point, youre just not making a profit anymore and theres better uses for the money.


Through May 3 of this year, 26 downtown condo units, at an average price of $297,531, had been sold through the Multiple Listing Service here, says Rob Higgins, executive vice president of the Spokane Association of Realtors. In the same period last year, 32 units were sold at an average price of $217,451, Higgins says. The downtown areas boundaries in this instance are the south side of the Spokane River, the eastern boundary of the U-District, the western edge of Brownes Addition, and Interstate-90.


That tracks right with the entire real estate market, because while the number of units sold is decreasing a bit, the price continues to appreciate significantly, he says, adding, though, that not all condo units are sold through the MLS.


Spokane developer Mick McDowell says he and his wife, Shelley, plan to move forward with development of a planned 17-story condo tower west of downtown overlooking Peaceful Valley. That project was held up until recently, when the McDowells settled a lawsuit with the city of Spokane over the city hearing examiners rejection of the project last year, but the couple had been planning it since 1999, and waited to launch it until demand for upscale condos grew.


I think the condo market in Spokane is in its infancy and has nowhere to go but up, he says. We had to determine that the market was there. I firmly believe that theres 52 more people who will spend a quarter of a million dollars and up for a condominium.


Wells says that 21 of the 28 residential condos in his Morgan Building development, at 315 W. Riverside, have been sold, and that hes been selling an average of one unit a month since December. He says he expects to sell the remaining units, which start at $312,000, by the end of the summer.


Wells also is marketing the West 809 Lofts, at 809 W. Main, and says its owner, CPC Development Co., has sold half of the 20 available units there. Living units at West 809 range in price from $679,000 to $1.2 million. CPC Development is a subsidiary of Cowles Co., parent company of the Journal of Business.


Meanwhile, The Edge Development Group LLC is converting The Western Soap Building, at 103 E. Sprague, into a mixed-use building with 19 condo units, and Spokane Partners LLC expects to wrap up work this summer on a 14-unit condo building at 1016 W. Railroad. Several other projects have been announced within the last year, including developer Rob Brewster Jr.s proposed 32-story, mixed-use Vox Tower; San Francisco-based Presidio Development Partners LLCs proposed 30-unit Upper East Falls Condominiums; and Spokane-based Executive Court LLCs planned City Place project in the Ridpath Hotels former Executive Court building.


Wells has pre-sold four condo units at his planned 10-unit Carnegie Square Townhouses, at 8 S. Adams, but had to redesign the building after bids came in too high for a proposed foundation system, he says. Construction now is expected to start in about a month, and prices of those units will range from $579,000 to $850,000.


Rising construction costs also forced Wells to revamp his plans to convert the former Joel building, on Post, into condo lofts. Wells had planned to build an addition on the south end of the building so that it could accommodate a total of 18 residential units, but says hes now scrapped the addition idea and instead is looking at creating 16 units that possibly would be sold as unfinished shells.


Real estate prices for downtown properties have taken dramatic increases, Wells asserts. In addition, one of the most costly components in condo development is the extensive city code requirements for such projects, he says.


Add in skyrocketing concrete and steel prices, says Spokane developer Mark Pinch, and its easy to see why its difficult to build downtown condo units for the middle market.


By the time you build new and provide the kind of parking the market demands, its real tough to provide anything under $400 a square foot, Pinch says. We cant take all our costs and a normal profit margin and create a product we feel the market will be willing to pay for; thats why the public is not seeing more inventory.


He claims that concrete prices are higher here, by about $10 to $20 per yard, than anywhere else in the Northwest.


Pinch has worked on several proposed condo projects downtown over the last few years, including a 14-story condo tower he had proposed on the YMCA of the Inland Northwests property at the edge of Riverfront Park. That plan fell through when the Spokane Park Board exercised its right of first refusal to buy the property, negating an offer by Pinch for it.


Some developers have opted to convert apartment buildings into condo units, rather than doing new construction. An example of one of the largest of those projects is The Ridge Condominiums in Brownes Addition, Pinch says. Such projects are appealing to developers in part because that can be a less-expensive strategy, but even those projects are more difficult to pencil out now, says McDowell. Thats because the number of apartment buildings that are suitable for such conversions is dwindling, and the cost to acquire them is rising as demand grows, say both McDowell and Pinch.


You still see some conversion projects, but the truth of the matter is that weve converted everything we can convert, Pinch says. At some point, if were going to build the housing stock downtown were going to have to build brand new, and its going to have to be real safe and real spectacular. The safety aspect includes how people feel in the downtown area, Pinch says.


One benefit to residential developers downtown has been the citys 10-year property tax abatement program, which exempts property taxes for eligible property owners on buildings that provide additional multi-family housing units in targeted urban areas within the city, Pinch says.


The increasing costs of building condos, however, leave developers and buyers only two alternatives, he says. Either the market accepts higher prices for large units, or developers offset costs by building smaller units.


Inventory


Fully understanding the strength of the downtown condo market is difficult because the market is still too small to get a good feel for the various sectors within it, says Pinch.


While the recently completed Upper Falls Condominiums 32-unit luxury development on the north bank of the Spokane River has nearly sold out, that project is one of only a few luxury developments here, he says.


We dont really know where that high-end market is because weve had some absorption, but theres no inventory on the market in that segment, at least in the short view, he says. If there was a ton of supply, you could read the market a lot better.


Wells expects the proposed Kendall Yards mixed-use development on the north bank of the Spokane River between Monroe and Maple streets will drive condo development downtown further. For now, he suspects that some builders might be reluctant to develop condos for fear of bringing too much inventory onto the market.


Wells says hes found, though, that having a greater quantity of inventory is better than not having enough.


Its a question of how prudent it is to build ahead of the market and risk having it sit on the market, he says. Were seeing that if you build it, and have something people can move into right now, theyll do it.


In the mid-price range, Prium Companies plans for its 15-story condo tower just south of the railroad viaduct on Wall is the big gorilla in the market, Pinch says.


If Prium does change its plans, rather than scrapping its project altogether, it might decide to cut costs by reducing the planned parking-garage portion of its tower to three floors, rather than seven, Marmaduke says.


Initially, Prium wanted just to build a parking structure on that site, to serve the nearby Wells Fargo building it had bought from Spokane developers Walt and Karen Worthy. It decided to build condos atop the parking to help pay for the garage, he says.


If Prium scraps the condo project, it likely will continue to lease the lot to Diamond Parking until it finds a better use for the property.


Demographics


The demographics of prospective condo buyers here include a pretty even mix of Spokane residents and people from outside the area, developers say. Wells says the lowest and highest priced units in the Morgan Building sold first, which shows demand is high at both ends of the pricing spectrum.


McDowell says that developers need to make sure there are condos available at a full range of prices here.


Thats one of the more difficult charges we havefiguring out how to bring $150,000 to $200,000 condos on the market that are appropriate, McDowell says.


Downtown condos compete with single-family homes on the lower South Hill, which appeal to buyers who want to be close to downtown and often are priced lower, Wells says. As median house prices have risen in that area over the last three years, however, the gap has narrowed, he says.


Contact Emily Brandler at (509) 344-1265 or via e-mail at emilyb@spokanejournal.com.