Star Riverside Auction: Bizarre Side Show or Outright Scam?

Star Riverside, a large condo project under way on the south shore of Ladybird Lake near I-35, has announced that it is going to auction 64-units in partnership with ibidcondo with no minimum price and no minimum bid. Before you call your mortgage broker and grab your credit card checks, the fine print on the Star Riverside auction is downright absurd.

Star Riverside Austin Condo

Instead of using a starting or reserve price, ibidcondo starts the process by selling a limited number of "virtual auction seats" which are sold until a minimum price is reached. The auction seat price for each of the 64-units is $100. Here is the crazy catch: the auction doesn't actually happen until enough people have paid $100 for ibidcondo to purchase the unit. So, for the typical $690,000 condo, 6,900 people need to buy $100 seats before the auction starts. Once the auction starts, 6,900 people (or fewer if someone buys multiple seats to compete against themselves) compete to buy the unit. The highest bid wins. The proceeds are then donated to charity after the company takes its undisclosed but likely significant fees.

After the auction, 6,899 people are losers: they are down $100. The one lucky winner gets to participate in one of the least friendly buying processes ever: they have 48 hours from the close of the Auction to (1) deposit the entire bid price into an escrow account maintained by iBidcondo at the Nominated Title Company and (2) execute a purchase and sale agreement with the developer or owner of the property.

Unlike the real auctions taking place soon for units in Brazos Place, this auction is somewhere between a scam and an ill-conceived dot com get-rich-quick scheme. For all the units in Star Riverside to sell, 441,000 bid seats would need to be sold. This, obviously, is never going to happen. The big question is why Star Riverside would associate themselves with such a sketchy endeavor: each auction is bound to leave a bad taste for 6,899 bidders and maybe even the one winner. This is a terrible way to try to sell condos.

On the auction site, there is a link to see previous sales from the company. Currently, the link does not work.

See the ridiculous auction firsthand here.

CNN Report: Condo Auctions Common (Mentions Brazos Place)

An article from earlier today on cnn.com discussed the national condo auction market (it is growing fast) and the incentives provided to move condos nationwide. The issue is that condos take years to develop while condo demand can change very fast. As real estate markets across the country have retracted over the last year, condo developers continue to deliver units that have been on the drawing board for years before the current downturn.

While the announcement of the upcoming condo auction at Brazos Place sent shock waves though the Austin condo market, further analysis has shown that these auctions are increasingly common, and that final prices are not nearly as low as the teaser opening bids suggest.

Here are highlights from the CNN article:

A free Lamborghini in Miami, Florida.

Complimentary housekeeping in Phoenix, Arizona.

Two bedrooms for the price of one in Atlanta, Georgia.

It's a buyers market again for condominium shoppers after years of artificially high prices and speculation. Marketing gimmicks, along with auctions, upgrades and incentives, continue to be wildly popular for developers desperate to relieve the inventory glut.

"We want to move the products as fast as we can," said Summer Dunham, marketing manager for Starpointe Communities, which develops luxury condominiums in Scottsdale, Arizona, one of the first states slammed by the nation's housing crises. "It was very slow in 2008. Everyone had difficulty selling."

So in February, the determined company auctioned off 20 four-story condominiums overlooking a golf course, private park and three swimming pools against a mountain backdrop. The upscale properties were priced as high as $1.6 million before the market sank.

The auction was declared a success for the company, which sold nearly all of its units in a weak market where only 115 out of nearly 2,000 available units have closed in the first quarter of this year, according to a report by Metrostudy, a research firm tracking the condo market.

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Exclusive: March Downtown Condo Sales Disappoint

We've updated the AustinTowers | urbanspace Downtown Condo Market Index for March and the news is not good. While month-by-month results fluctuate wildly, March saw a drop of 71% in the number of units sold -- from 14 units last March to just 4 this March. For the first quarter of 2009, sales dropped from 25 units sold in 2008 to 14 units sold in 2009.

Needless to say, March of 2008 was a very strong month. Amazingly enough, it wasn't a new project that drove last year's volume: sales during the month included 14 units in 11 projects including Milago, 5 Fifty Five, Brazos Place, Westgate, Railyard, Sabine, and the Brown building.


Month
Sales
Avg. Price
$/SF
Avg SF
Avg Year
% Ask
ADOM
Mar-08

14

$355,004

$345
1,022
1977
94%
86

Mar-09

4

$431,625

$285
1,442
1985
94%
107

Change

-71%

22%

-17%
41%
8.00
0%
24%

On the bright side, this March saw sales of three units larger than 1,000 square feet including a 2,500 SF unit in the Nokonah. However, this 41% increase in avg. SF was accompanied by a modest 22% increase in average price As a result, $/SF dropped by 17%.

During the same period, Inventory dropped from 187 units to 183 units with an average listing price of $613K.

See the updated index here.

Analysis: Brazos Place Auction

The Brazos Place auction is big news: residents are outraged, bargain hunters are taking note, and the media is marking the first downtown condo auction with glee. The big story is that opening bids start at less than half of original listing price for most units. The real question should be: what will the units likely sell for? This answer is most relevant to Brazos Place residents and potential buyers alike.

On the assumption that this is not the first condo auction that Beverly Hills-based Kennedy Wilson has conducted, we've done some research.

Last December, 300 people packed the underground basement of a Hyatt in Seattle to bid on 15 units from the Capital Hill Press Condos (shown below) in a similar auction run by the same firm. The auction drew a youngish crowd of potential buyers, in particular people who previously felt priced out of Seattle's downtown condo market. As in Austin, the units were listed at about 50% of their previous listing price.

So what happened? All 15 units sold during the auction. The teaser opening bids worked: the auction was packed and competitive and the units sold for an average of 80% of the listing price. While 20% is still a good discount, it's a lot less than the 50% lowest bid that lures many people to look at the property. When the developers consider mortgage interest, taxes, real estate commissions, marketing costs, and the price of maintaining model units, sales staff, and a sales center, it's easy to see why these auctions are becoming more common around the country.

In Los Angeles, a similar Kennedy Wilson auction drew similar crowds with minimum bids set at nearly 50% off the last asking price. As a result, more than 1,500 shoppers toured the models and about 4,000 requested auction catalogues. On auction day, 387 registered bidders showed up. One again, all units sold during the auction with an average price that was more than 50% above the minimum bid. According to the LA Times: "Even successful bidders said they offered more than they planned on bidding."

While these auctions provided similar results, every building and every market is different. If anything, these comparable auctions show why the developers may have chosen this path. Supposedly, Kennedy Wilson auctioned more than 1,000 condos and houses last year alone. The Brazos Place Auction, it's turnout and activity, will provide a more vivd picture of demand for downtown Austin and for units in converted buildings in particular.

Units at Capital Hill Press Condos in Seattle Were Auctioned in December

Surprise "Fire Sale": 20 Brazos Place Units in Upcoming Auction

In an unfortunate turn for the downtown Austin condo market, the Detroit-based developers of Brazos Place -- a 72 unit condo conversion project on 8th and Brazos -- have posted the remaining 20 units for sale in a surprise auction on May 17.

Like most auctions, the starting bid price is very low -- as little as $80,000 for a small 1/1 to $200K for a 1,400 SF 2/2. While low prices draw the crowds, the units likely have higher reserve prices making it unclear how good a deal awaits buyers. For the developers, the auction is a desperate move: they are clearly sacrificing profits for quick cash, signaling either an immediate cash crisis or, even worse, pessimism in the marketability of the project.

With an average starting bid of $154 / SF, the auction prices start with a 58% discount off the average sale price of $370 for the 12 units listed on MLS over the last year. As a result, current Brazos Place residents are furious. They are rightfully concerned that the fire sale disposal of comparable units will devalue the building and the units that they have invested heavily in.

In reality, it is very difficult to assess the impact of the auction on current residents. First, it's a problem for residents that 20 units are currently on the market. Such a large new developer inventory makes the resale of existing units difficult. The sale of units and elimination of inventory could help by pulling inventory off the market. While the auction will be public record, the sales will likely not be recorded in MLS and will not appear in realtor comparables. The biggest worry for residents should be a failed auction: it would be bad if a large number of units went unsold, especially if some units sold at prices far below recent comparables.

The problem with auctions of this type is that they are really only likely to attract bargain hunters and investors. Unlike with single family homes and cars and furniture and other auctionable goods, condos are not a commodity. The problem is that condo buyers tend to pick the building they want to live in (based on a number of factors including price) and then look for the perfect unit. An auction like this diminishes the value of the primary asset -- the building and its brand -- at the same time it tries to lure 20 buyers to bid in a process that is very different than the normal buying process. The result is likely to attract bargain hunters who will walk when the prices rise towards market levels.

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BartonPlace Construction Update & Pictures

I walked by BartonPlace on Barton Springs Road today and was shocked at the rate of progress on construction: the 6-story multi-building development has already topped out. In fact, the steel is being put in place to form the project's distinctive curved roofline (the top units actually have 15' curved ceilings -- some are still available). In addition, we received a full construction update from the developers:

- Roof Installation on Buildings 5 and 6 is ongoing.
- Level 6 of Buildings 3 and 4 will be poured next week.
- The entire garage structure is complete.
- Masonry and Window installation on Buildings 5 and 6 has begun.
- MEP and Sprinkler rough-in continues in Buildings 3, 4, 5 and 6.
- Interior Framing in Buildings 3 and 4 has begun.  

In other news, the developers announced that buyers at BartonPlace will receive complimentary Social memberships at Onion Creek Club in southeast Austin. Onion Creek Club has a 27-hole Jimmy Demaret designed golf course as well as other fitness and recreational activities. They also announced and upcoming construction tour at 3:30pm on Sunday, May 3rd (following the taping of Real Estate 101 for 1370AM at Uncle Billy's next door) and a 4PM wrap party at the BartonPlace presentation center. RSVP
here.

Barton Place Austin Condo

BartonPlace Austin Condo

60-Unit East Austin Condo Project Sells Out

While it's not our primary focus, there are plenty of interesting condo developments rising outside of downtown Austin. In the portion of East Austin, close to 6th street and within a mile of I-35, a number of affordable, interesting mid-rise projects have risen over the last couple of years.

Today, the 4-floor 60-unit 2124 Condos (located on 6th, one mile East of downtown) announced that they too had sold out. 2124 offered 3 configurations of units ranging in price from the $190s to the $280s. According to the developer, units offer 11ft ceilings, concrete floors, granite countertops, and amazing views of the city. About a dozen units are currently listed for sale or lease on the Austin MLS.

These days, it is simply great news to hear the words "sold out" and "condo" in the same sentence. An article in the Statesman provides additional details:

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Austin's Unique Urban Employment Core

Austin Contrarian discovered a very interesting report on "job sprawl" in major metropolitan areas. The report looks at 98 major metropolitan areas and tracks job decentralization -- the increasing percentage of jobs located more than 3 miles from the urban core. According to the report, 95 of 98 cities, including Austin, saw the percentage of jobs located outside of the urban core increase.

This trend is no surprise. As cities grow, it's easier to add jobs to newly developed areas than to the previously developed urban core. More alarming, however, is that quite a few metropolitan areas actually lost jobs in their urban core during this period -- a trend which shows the urban deterioration of many metropolitan areas. On this list were Houston, Dallas, and San Antonio with absolute job losses of 17,683 (a 6.5% decrease), 19,356 jobs (a 7.8% decrease), and 2,655 jobs (a 2.6% decrease) respectively.

While Austin saw the percent of jobs located in the urban core slide from 27.8% to 24.4% between 1998 and 2006, the City actually added jobs to its urban core. During the period, Austin's urban core added 16,400 jobs, an amazing 12.6% increase. With 24.4% of jobs located in the core, Austin is far ahead of the average of 19.6% across all metropolitan areas.

What makes Austin different? First, in addition to a mostly-commercial downtown, the City has the University of Texas and most State government workers located well within 3 miles of the core. During the period covered in the report, a significant amount of office space was added downtown with the construction of the Frost Bank Tower, City Hall, CSC, and 300 West 6th Street to name a few.

Looking forward, the next decade may not show the same trend. With minimal downtown office construction planned, most of today's growth is occurring outside of Austin's urban core. Condo development may reverse this trend; if new projects bring residents downtown to live, retail and office capacity may not be far behind.

WSJ: Austin Apartment Vacancy Surges

The Wall Street Journal is reporting that Austin experienced one of the largest increases in apartment vacancy rates last quarter among major metropolitan areas. The vacancy rate, which jumped to 9.2% from 7.5%, is both high and rapidly growing --- a major problem for landlords and apartment developers.

The problem with the rental market is rooted in recent history. For a long time, Austin has been one of the strongest rental markets in the country in terms of absorption and rent growth. Even as developers rapidly increased the number of units earlier in the decade, the market remain strong as vacancy rates stayed very slow. When the market run finally ended, Austin developers had a record number of units still in the pipeline. The glut of new units is one of the major drivers behind the high vacancy rate.

This phenomena has played out downtown as well with delivery of the Monarch last year and the upcoming completion of the 36-story 259 unit Ashton at 101 Colorado and 31-story 183 unit Legacy on Town Lake. Making things worse, condo investors in major projects such as 360 are adding their units to the leasing market as well.

With oversupply and more units coming, rental rates are bound to drop. Already, existing and prospective tenants have found lots of room to negotiate as the major projects work hard to fill their units. When rental rates drop, there will also be a small negative effect on the condo market as the equation for condo investors shifts for the worse. With strong restrictions on investors in most new projects, this part of the downtown Austin condo market remains relatively small.

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Federal Courthouse to be Constructed by Republic Square Park

Thanks to the Federal stimulus package, a controversial Federal courthouse will be constructed on the west side of Republic Square Park in the heart of downtown.

The $116 million project will be constructed on the former Intel site. Earlier in the decade, the city pushed the feds hard to locate the courthouse on the abandoned Intel site, only to reverse course later. Once downtown started to flourish with development, the City decided that the prime block would be better used with a multi-use project that would engage the neighborhood. Due to security concerns, the mammoth brutalist courthouse will result in the permanent closure of San Antonio Street between 4th and 5th, assuming that the original plans will be followed. In addition, the single-use building will not include any retail or restaurant space, it will simply be a highly secure federal courthouse.

New Federal Courthouse Repblic Square Park Austin

Here is a summary from the Austin Business Journal:

The long-delayed federal courthouse planned for downtown Austin has been approved for construction with money from the federal stimulus package, according to a congressman’s office.

The White House today approved $116 million from the American Recovery and Reinvestment Act for the U.S. federal courthouse in Austin, said Wyeth Ruthven, a spokesman for U.S. Rep. Lloyd Doggett.

“This $116 million means local construction jobs now when we need them most, a significant addition to downtown Austin, and a long overdue improvement benefiting all who rely upon our federal justice system,” said Doggett, D­-Austin. Doggett voted for the stimulus package.

The planned seven-story Austin courthouse has been delayed for years because of financial reasons. It will be built at the corner of Fifth and Nueces streets, across from Republic Square Park. The design is mostly done.