Emerald Opens

High-rises Buck Housing Slump

Galveston County Daily News, March 9, 2008
by Laura Elder

GALVESTON —After some delay, the high-rise tower Emerald by the Sea, a forerunner in the skyline-altering island condominium boom, is scheduled for completion by month’s end.

Sunhill International Inc., developer of the 15-story project, said crews were making final touches to the white tower with green-tinted windows at 500 Seawall Blvd. on the East End.

The Emerald, which developers began building in March 2005, comes on line while demand for condominiums along the Texas coast remains strong, even as other housing sectors, including high-rise projects across the nation, languish.

The Emerald is among the most visible monuments to the island’s entry a few years ago into the luxury resort market. But more have followed and still more are certain to, said Jim Gaines, research economist for the Real Estate Center at Texas A&M University.

Condominium development on the island and elsewhere along the Texas coast may experience fits and starts, he said. But the high-rise market here has nowhere to go but up as baby boomers and second-home buyers gravitate to where luxury condominiums are still affordable and values are likely to increase.

‘One Of A Kind’

“It’s inevitable,” Gaines said. “You can see it coming.”

Houston real estate investor Barbara Quackenbush, who in May 2005 signed a contract for a 1,419-square-foot unit on the Emerald’s seventh floor, said she can see the market’s potential. Although Quackenbush was frustrated by delays in closing on the purchase, the final product was worth the wait, she said. The Quackenbush family and friends already have made use of the condominium, she said. She had considered other high-rise properties on the island, but settled on Emerald for its design, she said.

Quackenbush said she particularly liked the sweeping views of the island and the harbor.

“It’s one of a kind,” she said. “Seeing the cruise ships coming in on the weekends is just breathtaking.”

Quackenbush, a real estate attorney for ExxonMobil Corp., paid $445,000 for the unit, which she plans to eventually lease, and invested another $30,000 for custom shutters, furnishings, art and electronics, ceiling fans and closets, among other things.

“I wouldn’t sell the unit now for less than $650,000,” she said.

In November, Quackenbush became the third buyer to close on the purchase of an Emerald unit.

Cheryl Price, a Realtor with Personette & Associates, said all the Emerald’s units are spoken for and are in the title process.

As of last week, seven deeds were on file, according to records at the Galveston County Clerk’s office.

On Wednesday, Andy Hadley, a selling agent for the property who also is buying a unit on the 12th floor, said he had sold 82 of 108 units that are under contract.

The city of Galveston has issued certificates of occupancy for floors seven through 10. Floors one through five are for parking and storage. The sixth floor contains such common areas as an infinity pool, spa, theater room, wine room and other amenities.

High Expectations

Late last year, construction stalled as the developer and contractor G.T. Leach Builders sorted out disputes. International Bank of Commerce, construction lender for Emerald by the Sea, agreed to inject more funding into the project to resolve contractor liens and get construction back under way.

Delays in such large projects are inevitable, said Quackenbush, who owns seven investment properties.

Quackenbush had wanted to close on the unit in May last year, she said. But the developer wanted to wait until the sixth-floor common areas were complete.

Emerald prices range from $375,000 to $1.5 million. Units range in size from 1,014 square feet to 1,776 square feet. Penthouse units range in size from 2,383 square feet to 2,751 square feet.

Emerald by the Sea arose on the old Jack Tar Hotel site, a tract of land upon which developers through the years planned and promised projects that never materialized. Expectations for the project were high.

Randall Davis Touch

In the summer of 2004, when Houston developer Randall Davis announced he was involved, interest and confidence in the project surged.

Davis’ luxury projects in Houston and Las Vegas earned him a solid reputation in the luxury loft business. His developments include a 65-unit Art Deco loft building on the famed Las Vegas strip. He’s credited with reviving Houston’s downtown by transforming historical buildings into urban lofts.

In July, Davis said he no longer was involved in the project. He had been a fee developer, meaning Sunhill International called upon his expertise while maintaining ownership and control of the project.

Davis, who is developing a luxury condominium project on the island’s West End, said disagreements about compensation were settled through arbitration.

Some prospective Emerald by the Sea buyers have sought return of their deposits because of construction delays and after learning that Davis was no longer involved in the project.

David Hass and F.L. Riederer assert in a Feb. 8 lawsuit filed in Galveston’s 212th District Court that they were told by the sellers the condominium would be complete in March 2007. Hass and Riederer are seeking return of $27,500 in earnest money on what would have been a $555,000 purchase.

But in a Feb. 25 correspondence — obtained by The Daily News — with another prospective buyer seeking the return of earnest money, legal counsel representing the condominium development said that Randall Davis helped design Emerald by the Sea and there had been no deviations from design plans. Contractor G.T. Leach builds other Randall Davis properties, according to the correspondence.

“The quality of the property therefore did not change as a result of Randall Davis Co.’s involvement or lack thereof,” according to the correspondence.

Mary Jo Naschke, a spokeswoman for the project, said it wasn’t unusual for some early investors, who were hoping to resell quickly for a profit, to change their minds.

Market Shakeout

“People invest thinking they’ll make a quick sale and return for their money and they really have no intention in living in the place,” Naschke said. “If time is not on their side and they can’t hold out, they tend to get angry because they panic.”

Tightening credit markets are shaking out some types of investors, those who buy during construction with intention of flipping the property for a profit. Flippers represented about 10 percent of the market, Gaines said. Nervous lenders aren’t so quick to finance such deals lately, he said.

Early on, some developers who declared their projects to be almost “sold out” before construction, were basing the claims on deals with buyers who were in it for a quick buck, Gaines said.

“You flat-out just lost some buyers,” he said. “Some who were looking to flip have canceled out or can’t get their financing.”

The island market isn’t immune to the mortgage market meltdown, which began with high default rates on subprime and other adjustable-rate mortgages made to borrowers with splotchy credit histories, but it is buffered, Gaines said.

Exotic mortgages and aggressive loan incentives inspired borrowers to buy what they couldn’t afford, with hopes of refinancing later at better rates. But when housing prices began to dip in late 2006, refinancing became tough. Defaults rose and the situation morphed into a global financial crisis.

Galveston Buffered

Galveston condo buyers are more likely to be affluent and therefore less discouraged by trouble in the credit markets, Gaines said.

“I think Galveston will do reasonably well,” Gaines said. “I don’t think it’s immune from everything going on in the housing market, and it’s not immune from tightening credit,” he said.

“People who are looking to buy condos are going to have to understand that the free and easy money of the last three and four years is not free and easy any more.”

But Galveston has an advantage over other Texas coastal markets, because it’s close to the vast Houston metroplex, he said. And there’s a strong demand for second homes among baby boomers and retirees, he said.

Bargain Prices

Also, Texas prices still are dirt cheap compared with Florida and California condominium markets, Gaines said.

Luxury condominium units still can be had for about $400,000 along the Texas coast, he said. But that’s soon to change, he said.

As the market evolves in 10 years to 15 years, those same units could be selling from $500,000 to $1 million, he said.

Not a week goes by that Gaines isn’t getting calls about the Texas coastal condominium market, either from news organizations or groups representing retirees, he said.

Sales of condos for the period Oct. 1 to Jan. 31 rose 31 percent — from 39 units to 51 units — compared with the same period a year before, according to the Galveston Association of Realtors. The average price of a condo in that period rose 8.1 percent to $205,500.

A Good Year

David Bloom, CEO of Galveston Real Estate Resource and operator of www.CondosofGalveston.com, predicts the island condo market is poised for a strong year.

Proximity to Houston, affordable prices and wide range of product — especially compared with markets such as those in California or Florida — bolster the island market, Bloom said.

“The unique attraction of the island condo market is the diverse selection of properties to choose from, as well as pricing that fits most budgets,” he said. “Currently, there are a number of condos on the market priced in the ($60,000s), which are very attractive to first-time buyers, most of whom live within a relatively short driving distance of Galveston.”

A booming energy market also is fueling Galveston condominium sales, he said.

“The strength of the Houston economy has created a new and very well qualified pool of prospective buyers and, at the same time, gas pump prices will play a much larger role in the public’s summer vacation plans,” he said. “Both aspects should bode well for the island’s overall economy this summer, especially our real estate market.”

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By The Numbers There are 368 condominiums listed for sale in the Galveston Multiple Listing Service. Pre-construction properties are not included.

Year-over-year, same-period comparisons for island condominium sales:

• Jan 1, 2008-Mar 5, 2008 — Sales: 24

• Jan 1, 2007-Mar 5, 2007— Sales: 22

• Jan 1, 2006-Mar 5, 2006 — Sales: 25

Most active properties with multiple unit sales in 2008: Marina Pointe, Pointe West, Club of the Isle

Source: www.CondosofGalveston.com