Which projects will survive the condo shakeout?

For condo developments, the survival game is in full swing.

While some projects continue to fare well, market forces ranging from tighter mortgage standards to the huge overhang of unsold units are putting developers' plans to an acid test many never expected just a year ago.

In just the last month several proposed projects in Minneapolis have been abandoned, even though some had taken reservations on 30 to 40 percent of their units. More such setbacks are likely to follow.

"It's just much harder in a period of sluggish sales" to keep projects alive, said Tom Melchior, multifamily real estate analyst for LarsonAllen.

Throughout the 13-county metro area, there were 4,608 new units on the market as of the third quarter, and of those 2,699 were not yet under construction, according to a report by MetroStudy. At the current sales pace, that leaves the equivalent of a 30.8-month supply on the market.

In Minneapolis the picture looked worse: 2,193 new units were on the market, 1,284 of them not yet under construction, leaving a nearly four-year supply to work through.

Those numbers also include a high percentage of projects that exist only on paper. If the units in the metro area not yet under construction were canceled, the absorption rate would fall to a much healthier 13 months. Subtract the units in Minneapolis that are being marketed, but not under construction, and the current supply falls to 20 months.

"Clearly, some proportion of those will be put on hold and some will never get built," Melchior said.

Those unbuilt projects are among the most vulnerable right now because they're competing with hundreds of units that are ready for occupancy. But for those that will remain, price, amenities and location are more important than at any time in recent years.

"It's a mixed bag out there," said Ryan Jones of MetroStudy. "You read about the foreclosures and those projects that have stopped, but you don't really hear about some of the others that are doing fairly well."

In the downtown Minneapolis Warehouse District, for example, the 710, 720 and 730 Lofts that are being developed by Schafer Richardson are nearly sold out, primarily to first-time buyers and young professionals who didn't have to sell before buying.

Jim Stanton of Shamrock Development is being hailed as a success story for his ability to attract buyers to the Bridgewater, a 282-unit development overlooking Gold Medal Park. That project has sold 140 units and is selling about 12 units a month despite the fact that just down the street three projects have gone away.

He, too, attributes his success to having price points and a location that appeals to value-conscious, first-time buyers.

He blames the glut of unsold condos on "DITs -- developers in training" who came to the market too late and with too little experience, carrying ill-conceived projects that were only viable at the top.

"If you compare this market to 2001, we're wheeling right along," he said. "But it isn't a 2005 market."

It's not just projects conceived of junior developers that are going to fall to the wayside, however. Even some experienced developers have struggled.

Brighton Development, which almost singlehandedly led the revitalization of the downtown Minneapolis riverfront and Mill District, has pulled the plug on two projects that were not yet under construction. And down the street, David Bernard Builders, part of national home builder Rottlund, gave up on plans to build the Revue.

The shakeout benefits developers like Stanton.

"As the other projects fall out, we get buyers coming in," he said.

Sharry Schmid, vice president for Edina Realty's builder resource group, said the condo market's main problem now isn't a lack of potential buyers, but their lack of confidence.

"There are a lot of buyers on the fence who want to buy, but every time they hear that the market isn't doing well, they get scared," she said.

Jones said that the absorption numbers in the Twin Cities are in line with his expectations for this market, and that compared with other cities, such as Chicago, the Twin Cities is doing fairly well.

"On every corner [in Chicago] there's a new building that's been started, you have 500 buildings that are all 50 percent sold and that's where they're sitting," he said. "Here, we've been lucky that these projects have not been started."

Jones said that the condo market is like the broader housing market in that projects that are well-conceived and in good locations are going to do well in the end, but only after some of the current inventory is sold.

Today, in downtown Minneapolis alone, 380 new condo units have sold or been reserved so far this year, down from 705 at this time last year, according to Mary Bujold, who tracks residential construction for Maxfield Research in Minneapolis.

The market peaked, she said, in 2004 when 1,300 units were sold.

The resale condo market downtown has been somewhat robust as well, compared with last year. From January through September there were 272 resales, down from 356 in 2006.

The strongest market -- relatively speaking -- is in parts of downtown Minneapolis and inner-ring suburbs where condos are attached to amenities including shopping, restaurants and parks.

Many condo buyers want a more urban lifestyle, views and a sense of energy and vitality. That means parking the car in a heated garage and being within walking distance of shops, restaurants and services. That's not what they're getting at many proposed projects in the suburbs.

Melchior said the suburban projects that aren't connected to shops and services could suffer more than the downtown projects.

In Apple Valley, which has been trying to establish a downtown near a major crossroads, developers tried for several months to get enough presales to start building a 197-unit condominium building. The buyers didn't materialize and now the project, which is across the street from a new hotel that sits alone in the middle of a field, has been recast as an upscale condo-for-lease building in which the units will be offered as rentals while the developers waits for the market to rebound.

"We have such a volatile market right now," said Randall Pedersen, project owner/developer. "This could totally take a different direction."

Other suburban projects timed the market better. Excelsior and Grand in St. Louis Park, a mixed-use project with housing above retail and a connection to an existing retail community, recently sold out its third phase. In Bloomington, the Reflections at Central Station, which offers residents door-stop access to the light rail station, is still selling eight to nine units every month, Schmid says.

Jay Demma, director of market research for Bonestroo in Roseville, said that with housing starts near a 35-year low and construction under way on only a handful of new projects, the market could be approaching bottom barring further carnage in the mortgage markets. But it's only a matter a time before another condo project hits the skids, he said.

"When there's a lot to choose from and not many people are choosing to move, some projects are not going to succeed," he said.

Jim Buchta • 612-673-7376

Jim Buchta • jbuchta@startribune.com