Hue's calculated risk

With 200+ condos, lease-to-own may be developer's best strategy

Staff WriterJune 11, 2009 

  • The plan for Hue comes as sales at pricier properties slow:

    222 Glenwood opened last summer with 100 reservations on its 117 units. But it sold just 66 units by the end of the year. So far this year, a dozen sales have closed. Developer Trammell Crow Residential recently had a limited-time offer of up to $70,000 off five units. Not all of them sold.

    All of the 139 units at RBC Plaza were under contract. When it opened last year, more than one-third of the contracts were delayed or canceled.

    At Bloomsbury Estates, where 56 condos were finished in Boylan Heights months ago, not one sale has closed, property records show.

In a couple of months, a generous dollop of condominiums will be dropped on an already-heaping pile of unsold units in downtown Raleigh and fed to a market that has largely lost its appetite.

It has a rich deep royal blue and mustard exterior, which helps it live up to its subtle-but-vibrant name, Hue. But Hue's gray accents seem to personify its place in today's real estate market. "It's the elephant in the room," says Stacey Anfindsen, a Cary appraiser who follows Triangle real estate trends for area brokers.

With 208 units, the multicolor monument to the housing boom is the biggest condo project ever attempted in this 217-year-old downtown. The project, at Dawson and Hargett streets, will almost double the number of available condominiums inside the Beltline -- where a five-year high of 15-months of supply already awaits potential buyers.

Many developers might duck this battle by simply swapping the sign in the window, opting to rent units. And that's a strategy that could work in Raleigh's growing downtown, which has a scant supply of apartments.

Rumors have persisted among brokers and prospective buyers that Hue will sway that way. Competing developers have crossed their fingers -- no, clasped their hands -- hoping those rumors are true.

But Hue's developer isn't interested in being a landlord. Even if less than one-fifth of its units are under contract.

"We're in the for-sale business, and that's the mission of our company," says Henry G. Cisneros, executive chairman of CityView, a Los Angeles group that is developing Hue with Trammell Crow Residential.

But he points out: "There is a middle option between pure sales and rental."

That middle option is deferred ownership, which is a sort of lease-to-own strategy, Cisneros says. A 12- to 18-month lease goes toward a buyer's down payment. During that time the buyer can square away credit, clear up questions related to employment or solve other issues that are making it hard for buyers to qualify for mortgages these days.

CityView, which is involved in 40 projects in 12 states, has used deferred ownership in Phoenix and New Orleans and is considering it in Atlanta.

"We're going to try very hard to make that an option here," Cisneros says. But he will need buy-in from lenders and investors.

The strategy illustrates how the market has fallen since Hue was envisioned in 2005, when lending standards were more lax and builders were feeling blessed.

And Cisneros, who was secretary of the U.S. Department of Housing and Urban Development under President Bill Clinton, is a good guy to have on the team because the strategy's success may hinge on, and be challenged by, the federal government's efforts to turn things around.

Hue is already benefitting from its initial tack, by pitching many of its condos to first-time buyers who are eligible for federal tax credits of as much as $8,000. And it offers one of the lowest prices for a new condo downtown: $159,000 for a one-bedroom, one-bathroom unit. Units top out at $345,000 for a two-bedroom, two-bath unit.

There is momentum. Sales of condos are up in central Raleigh. Seventy-one inside-the-Beltline condos sold during the first four months of the year, up 15 percent from the same period last year. But would the market be ready for more supply, even with price perks and tax incentives?

That quandary may bedevil Hue. Many first-time buyers are having a hard time getting mortgages. The same goes for those who are looking to move up; those buyers usually have to sell a home before they can buy again.

The challenges are particularly acute at condo projects, where less than half the units are pre-sold. Projects that haven't crossed that hurdle won't qualify for government-backed mortgage insurance programs, which in turn deters some mortgage brokers. That could stall Hue's efforts to become eligible for other mortgage programs, including one through the Federal Housing Administration that could lower down payments for buyers. The deferred-ownership strategy could be a way to hit the necessary benchmarks.

Cisneros thinks sales will pick up once the project opens in August and buyers can see the units, rather than a brochure. But so far, Hue only has 37 pre-sales, about 17 percent of the total. "That's more units than we're selling at any project in our system that is not yet opened," he says, noting the stability of the Raleigh market compared with the rest of the country.

To be sure, there is still a chance that Hue could become a traditional apartment complex, assuming lenders give the OK. "It has been considered," Cisneros says.

And while that's not the preference, it's not the worst Plan B, and it's not without precedent. Two years ago, Crosland made the switch, choosing to rent 179 condos at Tucker Street and Boylan Avenue.

As downtown has revived in recent years, demand for center-city rentals has grown. Hue is expected to open right before Campbell University moves its law school a block away, bringing all those house-hunting students from Buies Creek. Indeed, because the project was built when construction costs were high, Hue may have to ask for rents that would appear steep to a core of renters who are looking for ways to economize.

CityView's partner in the condos, Trammell Crow Residential, is equipped to figure it out. And it has experience filling a place with renters and eventually offering units to individual buyers. Trammell Crow did that at Alexan North Hills four years ago, except it halted the condo reservations, opting to keep renters in place. Back then, as condo sales were ramping up and plans for Hue were forming, investors were buying rentals and converting them to condos. Alexan sold a year later for a record price.

Things are different now. Instead of seeking maximum profit, Hue is seeking stability. "The main thing is to, first of all, keep the project viable from an economic standpoint, return our investors' capital by whatever means we can, and do so responsibly," Cisneros says. or 919-829-8917

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