Pressure And Opportunity At The John Ross

Posted on 07/2/08 12:05 PM

Heralded as an icon in Portland’s skyline and widely considered the pre-eminent condominium structure of Portland’s South Waterfront, the John Ross is facing increasing pressure. Units went on sale back in November of 2005 – arguably at the height of the condo boom – initially attracting significant attention as more than 222 reservations were accepted in a short period of time. However, as the condo market began to tighten up in 2007, more and more would-be owners backed out of their contracts, leading to several court battles over earnest money deposits. Now, 2.5 years down the road, the developer is stuck with more than 83 units to sell. (source: New Home Trends)

So what does the future hold for the John Ross? Here’s my somewhat controversial take, which may not appeal to everyone out there, but does warrant some consideration. The basic premise is that something has got to happen. Those 80 odd units aren’t going to sit there for ever. At some point the developer (GED) will need to repay the $93.6 million loan in full. The loan has already been extended once and is due on Aug. 22, 2008. It is unlikely that that the lender, JP Morgan Chase, will remain patient indefinitely. There are a couple of options at this point:

Option A: The lender forecloses on those 80 units. This appears unlikely, given the amount of public interest in and continued funding of the South Waterfront, never mind the awe and respect GED garners in the community.

Option B: Fire sale i.e. The developer lowers the prices on those 80 units and eventually the market absorbs them. This too is very unlikely. Developers are notorious for avoiding price reductions at any cost, since this would start a downward spiral for the entire neighborhood.

Option C: The remaining units are converted to apartments. This would allow the developer to hang on to the units and possibly sell them when the market picks up. However, this option rests on the developer’s ability to obtain an interim loan from another bank in order to pay back the current loan. In the current credit environment, obtaining such as loan clearly represents somewhat of a challenge. Alternatively, the developer may opt for a bulk-sale to an institutional investor, who then manages the units as rentals/apartments. Whether the latter or former alternative, Option C appears to be the most likely solution for the John Ross. It is essentially what happened to 3720, the South Waterfront building originally destined as condos, but then converted to apartments.

So let’s assume Option C unfolds, how will that effect pricing at the John Ross? Bear in mind that in addition to the vacant new construction units, there are also a number of units at the John Ross that are up for re-sale i.e. homeowners that bought in 05 and are now trying to sell. Now, if the remaining new construction units are converted to apartments, this essentially reduces the supply of condos at the John Ross. Economics 101 tells us that when supply is reduced – all other things being equal – prices tend to go up. I don’t exactly expect prices to go up at the John Ross anytime soon, but I do think the conversion will act as a floor, preventing further drops and providing some degree of stability. So, if you are a risk taker, this may actually be an opportune moment. Several of the re-sale units made it into this month’s Desperate Sellers Database. Typically this situation creates an opportunity to purchase at an attractive price. Assuming prices do indeed stabilize in the near future, purchasing form a Desperate Seller now at a discounted price would provide a margin of safety for a solid investment.

Like I said at the outset, this approach probably is not everyone’s cup of tea, but it is not an entirely unrealistic scenario. Given the forces at work (PDC, OHSU, Developers, Lenders) it is unlikely that the South Waterfront will turn into a barren wasteland. Whether there is a deal to be a had will depend on actual negotiations with sellers, but at the very least I hope you’ll agree that amid the gloom and doom there is also opportunity.

To locate the John Ross, check out Agent503’s Condo Map.