By: Daniel McGinn
For the condo developers Jeff Blum and David Franco, the evening of Sept. 14, 2006, couldn’t have been more perfect. For two years the partners had worked on plans to construct a nine-story condo building called View 14 at the intersection of 14th Street and Florida Avenue in northwest Washington. On this night, they welcomed nearly 1,000 potential buyers into a nearby furniture store that they’d transformed into a nightclub. A D.J. spun music while bartenders poured an orange concoction called the View-tini. And as the party hit its peak, the partners unveiled a giant Lucite model, complete with dry-ice fog and glowing lights, of their building, which would cost $55 million to build. ‘‘It was like the Detroit debut of a new car,’’ Blum says. ‘‘We had everything except the turntable.’’
The morning after the party, the View 14 sales center opened. Over the next few weeks, a crowd of potential buyers came through, ogling floor plans and artists’ renderings of the units, which had an average price tag of $500,000. The sales team signed contracts for the penthouses, with one fetching $1.2 million. But sales of run-of-the-mill units were agonizingly slow. ‘‘People loved the building, loved the finishes, but they weren’t writing contracts,’’ Blum says. According to the partners’ business plan, 50 of the building’s 180 units should have sold in the weeks following the launch party. But by early December, during a meeting with a key financial adviser, the partners closed the door to talk candidly. ‘‘We haven’t sold 40 or 50 units,’’ Franco said. They’d sold only 18. The adviser’s jaw dropped. A minute later, they gave him another shock: instead of selling View 14 as condos, Blum and Franco were thinking of converting the building — on which construction hadn’t yet begun — into rental apartments.
It’s an act of real estate hocus-pocus that’s starting to become common. ‘‘It’s happening all over,’’ says Greg Willett, the vice president for research at M/PF YieldStar, an apartment-market consulting firm. Willett saw the first signs of the shift in early 2007 in places like Washington, Boston and Miami, where the condo boom had been particularly frenzied. Buyers were realizing that condo prices had reached a plateau. The speculators who once loved to flip new-construction condos had disappeared. Instead of rushing in with deposits, buyers began taking a wait-and-see approach, hesitant to risk watching their investment lose value during the course of construction. The credit crunch that began in mid-2007 made things only worse. As condo demand has fallen, some developers have tried to adapt by turning their projects — some of them still in the planning phase, some partway through construction, some completely finished — into rentals. ‘‘We’ve been tracking this market for 35 years, and we haven’t seen anything like this,’’ says Gregory Leisch, the chief executive of Delta Associates in Alexandria, Va., which recently counted 15,000 capital-area condo units under development that would eventually hit the market as rentals.