Switch to rentals saves mixed-use projects

New plans for a block in downtown Hopkins look an awful lot like those abandoned for the same site back in August.

But one big difference -- apartments in place of condos -- might mean that this time, the project gets built.

"When the city came to us, their first question was, 'Would you be interested in doing this condo project?'" said Kelly Doran, president of Doran Development. "Our quick answer: no. But if it were luxury apartments? Then we're interested."

In Minneapolis, a Mill District condo project could soon become a Mill District apartment project. In Minnetonka, a mixed-use building planned for Excelsior Boulevard was "saved" by the switch from owned to rented. And in St. Louis Park, a major, multiphased redevelopment is "well on its way" thanks to the phase involving luxury apartments being moved up and a second condo phase getting pushed back.

They're projects caught in a larger market shift from condominiums to rentals, cities say. Apartments are in, condos are out.

"In the previous three to five years, conversations with developers focused on condos, condos, condos," said Kevin Locke, St. Louis Park's community development director. "Now they're talking about market-rate to luxury apartments.

"Certainly developers are thinking in different ways."

Although the shifts have elicited mixed responses from residents who live near the projects -- some have worried about apartment "riffraff," as one Minnetonka resident put it -- cities have generally welcomed the adjustment: It can often mean moving a stalled mixed-use project forward.

The Minnetonka City Council supported developer Tom Wartman's switch from condos to apartments in one of his Glen Lake redevelopment's three phases. It was a "good decision," Wartman said in an e-mail, and the apartments are on track to open May 1.

"We were ahead of the curve," he said. "We've already pre-rented several units and have had numerous inquiries -- 80-plus already for our 52 units."

In Hopkins, GPS Development jettisoned plans last summer for 220 condos on Mainstreet after struggling to secure financing. Within the same month, city staff began approaching other developers, who relayed "the realities of the market," said Kersten Elverum, the city's director of economic development.

Apartments aren't ideal. The city had hoped to add owner-occupied residences, as the majority of the city's housing -- 65 percent -- is already rental.

"But we don't have a comparable product [in luxury apartments], and we haven't had a whole lot of rental units constructed in the last 20 years," Elverum said.

Plus, she said, high-end apartments would bring an affluent and perhaps younger group of people to the city's downtown. Rents for the 254 units would likely range from $1,100 to $1,900.

"People are living in apartments by choice," Doran said. "You could go buy a house for the amount of rent you're going to pay."

But there can be a down side to ownership. Some people are taking a look at the lack of buyers and the glut of condos in this market and are deciding to avoid those problems altogether, Doran said. That trend will likely continue throughout 2008, according to a report by GVA Marquette Advisors, a company that tracks rental projects in the Twin Cities area.

Generally, cities and developers are optimistic about the demand for rental units.

Doran Development's market study showed that high-end suburban apartment complexes -- such as the Bluffs at Nine Mile Creek in Eden Prairie -- had an average occupancy of 97 percent.

GVA Marquette Advisors' report for the 2007's fourth quarter found that "another 870 units are expected to come online during 2008, mostly high-end urban product."

But it also found that during that fourth quarter, the highest vacancy rates were in the higher price ranges -- topping at 8.4 percent for units over $1,500.

Anticipating market reversal

In their pitch to cities, developers often promise that they'll build apartments in such a way that if the market changes, they can easily be converted to condos.

That means increasing soundproofing, separating utilities and including amenities such as party rooms and exercise facilities, among other things.

They're being careful, cities' staff say, to anticipate possible reversals in the market.

In fact, some developers are hesitant to even define the housing in their proposed projects as rental or owner-occupied. Presbyterian Homes and Services has submitted a detailed plan to the city for its $170 million redevelopment of the Wayzata Bay Center site.

One question unanswered in it: Whether the conventional (versus senior) housing units will be high-end apartments or condos.

St. Louis Park's Locke recalls when the market situation was reversed. In 2001, "The expectation was that the [Excelsior and Grand] project would have 600 residential units -- all rental," he said.

Then, the condo market blossomed -- and so did condos.

Jenna Ross • 612-673-7168