business

An old limestone flour mill on the Mississippi riverfront near downtown Minneapolis that was supposed to be the site of East Bank Mills, an upscale housing development, is headed toward foreclosure and set to be sold at auction Nov. 15.

Just across the river, developer Jim Stanton has financing lined up to build a 150-unit condo project overlooking Gold Medal Park and is only awaiting city approvals.

The projects' divergent paths reflect the conflicting nature of the downtown Minneapolis condo market. While condo sellers are offering huge discounts and sale prices are falling, supplies of new and existing condos are the lowest they've been in several years, leading some, such as Stanton, to believe that the time is right to build new units.

Mike Christenson, head of the Minneapolis Planning and Economic Development Department, said that in recent months he's entertained a flurry of inquiries from prospective condo developers who are interested in various building sites, most of them along the Mississippi River corridor. He expects developers to initiate two or three new condo projects during the next year.

He notes that's a shift from the current focus on building new rental units, a trend that's being driven by a recent shift in attitudes toward homeownership. Hundreds of rental units are already under construction downtown.

Still some worry a fresh supply of new condos for sale could hurt the market. "There's a fine line between being cautious and having optimistic foresight to gauge what's coming next," said real estate agent Cindy Froid, who focuses on downtown condos at Keller Williams Integrity.

Just five years ago buyers stood in line -- some even waited overnight -- to buy downtown condos. Sleek units were in short supply and high demand, particularly among empty nesters eager to drop their rakes and snow blowers off at the nearest Goodwill store. Developers responded by announcing plans to build thousands of new units, many of them along the gentrifying Mississippi riverfront, but within a couple of years the economy soured and the housing market collapsed, taking with it plans for hundreds of unbuilt condo units.

At the peak of the market in 2007 1,664 new units came on the market in downtown Minneapolis and in the neighborhoods just across the river. Last year there were 281 and this year there have been none, according Mary Bujold of Maxfield Research.

Total condo inventory, including resales, has fallen as well. In September there were 414 units on the market in downtown Minneapolis alone, down 40 percent from a September peak in 2006, according to the Regional Multiple Listing Service.

Bujold said that throughout downtown and in neighborhoods across the river there are 124 new unsold units in eight buildings, not including possibly 100 more that have been kept off the market and are now being rented.

Froid said that she's cautious about the need for new units, not so much because of soft demand, but because of what another 150 units could do to the value of condos in surrounding projects.

In the central downtown district the median sale price of condos has fallen steadily since 2007 because of an increase in sales of inexpensive units, but also because sellers are offering steep discounts. So far this year the median sale price was $226,000, down 7 percent from 2009.

Bujold said some sale prices have been less than it cost to build them. Construction costs now average about $380 per square foot, she said. Some new projects, however, including Schafer Richardson's Phoenix on the River, is selling for upward of $400 per square foot.

Fighting foreclosure

David Frank is all too familiar with the realities of the market. He's the project manager for Schafer Richardson, the downtown property developer and management company that, besides Phoenix on the River, is behind East Bank Mills, which never got off the ground.

The ambitious plans, first proposed in 2004, were to transform 2.5 blocks on about 8 acres into a mixed-use development that would include 1,000 condos and apartments in several residential towers. But the project was delayed by a lengthy planning and approval process that included historic preservation groups who wanted the developer to maintain the integrity of the historic Pillsbury A Mill, which anchors the site. Shortly after buying the property Schafer Richardson started construction on another luxury high-rise building next door, and by the time the firm started marketing East Bank Mills the housing market already had started to collapse.

Schafer Richardson hopes to find a way to restructure its $19 million loan from Bismarck, N.D.-based BNC National Bank. Already the firm has repositioned certain elements of the project and is focused on finding a partner for the commercial part of the project. There's plenty of demand to justify building rental housing on the site, but it's difficult to get financing for such a project, Frank said.

And the firm is too committed to the project to let it slip away, he said. Frank said that he's lined up several layers of public financing, including a grant from the Legacy Fund, and federal money that will be used to help clean up the site and to document and preserve the unique underground structures that helped power the mill. A TIF proposal is on the table, too, which could be worth millions of dollars.

Christenson said that he's optimistic Schafer Richardson can save the project, and that the firm's vision will eventually become reality. "We're hopeful," he said. "But there's a lot that needs to be resolved to allow that to happen."

Developers in training

Stanton, known for his renegade confidence, wants to be ahead of the competition when demand returns. Though he's yet to finish selling about 60 remaining units at his latest project, Bridgewater, he's already planning to build 150 units just down the street. He's calling it Park Vista, a 12-story tower with a rooftop vegetable garden and other green features, with units that would sell for $250,000 to more than $1 million. And if he can work out a disagreement with the city about the number of parking stalls in the project, he'll be ready to start construction in the spring.

Stanton blames much of the market's problem on what he has dubbed "developers in training," or DITs, who built undesirable condos that were difficult to sell.

"We're aware of what the market is doing," Stanton said. "But we had too many DITs in the market, and when we work our way through those bad projects the market will be stabilized."

Jim Buchta • 612-673-7376