Banker waxes confident on condos

The answer to that question matters intensely to the bankers who have financed the condo boom with hundreds of millions of dollars in loans. Wells Fargo Bank, which has financed construction of 1,739 units since 1996, has the most on the line. Its construction loans and mortgages for urban condos in Portland total more than $1 billion during that time.

Nelda Scott Newton, Wells Fargo's manager of commercial real estate lending for Oregon and Southwest Washington, found in a recent market study that even with nearly 3,500 units in the pipeline, there's no cause for worry about a saturated market. Even if demand fell by half, she said, empty condos would still sell within about a year after completion, she believes.

Of course, bankers have been wrong before, most famously in the 1980s. Newton discussed her assessment of the condo market earlier this week. Excerpts are shown here, edited for clarity and length.

The condo market and the overall housing market have slowed down in the last year. Do you think we're overbuilding condos?

Well, the condominium market continues to absorb and do well. When one looks at all of those cranes throughout the downtown area, it's important to remember that there's a lot of product differentiation among the projects -- The South Waterfront, the Waterfront itself, the Pearl District, the Northwest, the Arts District (near Portland Art Museum).

There are studios, up to million-dollar-plus penthouse units. So there is a depth and maturity to the market that didn't exist five to 10 years ago.

What did you find in your recent market study?

Right now, there are about 3,500 units under construction or in planning. That is roughly half what was built in the last eight to 10 years, so it is quite a large number.

Developers typically start to market their projects about a year before the project is completed. In the past, these projects have been pretty much sold out by the time the construction is completed.

That changed with the last couple of projects that came into our market. That frenetic pace has slowed. And the rate of absorption of the units has slowed.

In this study, how deep a downturn did you assume the urban condo market would suffer?

Because we could ascertain there was a slowing, we assumed the market would slow 50 percent.

We assumed these projects would be 50 percent sold at completion, and instead of the units selling at eight to 10 units month, that they would absorb about three units per month. Our intent was to see how many units at one time, excluding resales, might be unsold and available on the market.

If new buildings are 50 percent unsold upon completion, who goes bankrupt? Does the sky fall?

No, we don't think the sky falls. Assuming that occurs, some time around the first quarter of 2008, we would have conceivably around 700 or 800 standing, unsold new units -- so very different than anything we've experienced to date. Also, this is a more conservative assumption than is likely to exist: We aren't predicting a 50 percent decline in the market.

We assert that there's a potential for a year of inventory under this 50 percent scenario. That's something that our market can weather, that our developers can weather. Interest rates are still at historically low levels, we still have good in-migration, and we have a nice quality of life. There are unique attributes to Portland, coupled with that being a manageable number that gives us confidence that the market will be fine for downtown housing.

Is the Portland condo market more risky, or less, than other markets? How does our market compare to other markets?

We've enjoyed a healthier market in large part because of the control by our local developers. We're a smaller market, so we haven't attracted some of the outside national capital that some of the larger markets have attracted. We also haven't had the level of speculation that other markets have seen. That's really a positive for us.

When there's too much speculative investment, it creates the appearance of demand that doesn't really exist. We estimate that the units that recently sold, about 15 percent have sold just for investment purposes. In some of the overheated markets, those figures are as high at 70 percent, and that makes a market that is not sustainable.

In the last 10 years nationally there has been a trend toward downtown living and efforts by cities across the country to revitalize their downtown to make them 24-hour centers. There are many reasons people cite for the trend: demographics, baby boomers, people downsizing, lack of available land. So there are many variables that account for the booming condominium market.

We think that urban living is an established and desirable lifestyle choice that's not likely to just evaporate. Particularly, when we have a city like Portland that's really nationally and internationally recognized as a very attractive, vibrant community.

Certainly real estate is cyclical and remains cyclical, but we drew comfort from these numbers that indicate that we don't have an excess supply, we have a manageable supply, even with a downturn in the market.

There's a perception in the community that what's fueling the condo market here is Californians relocating with high equity from sales of homes there. Is that your perception of what's driving demand here or is it more diverse than that?

Yes, there are people who have moved here from out of state, including from California, Idaho, Washington.

Seven or eight years ago when we were financing these, the first response was "People from the West Hills will want to sell their homes and downsize." That has been some element, people from suburban areas, that has been an element, people who live on the coast and still want to have a tie to the city. . . .

We've derived comfort from the fact that there really is no single demand factor that can be compromised and undermine the health of the condominium market. We view it as very positive that there's not one single answer to where these buyers are coming from.

The newest Pearl District condo buildings are the Pinnacle and Edge. Projects currently under construction area:

* Encore * The Casey * Wyatt Condos * Metropolitan * 937 Condos