O'Brien attributes the sales fall-off to the disappearance ofspeculative and investment buyers, many of whom were funding theirpurchases through refinancing their homes. The remaining marketconsists almost exclusively of owner-users. But many of them havebeen sitting on the fence to see what happens in the credit market."Most of these buyers are financed through SBA programs, and whilerates have come down on those, they're watching to see if they dropeven more," says the Guthrie exec.

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Richard Eggemeyer, president of Eggemeyer Commercial Real Estatein Bellingham, WA, says a condo project his company completed lastyear, the first in his market, did very well, but projectscurrently in construction are selling very slowly. "We probablyhave a 12-month inventory with what's standing and what's comingout of the ground," he says. "We're getting quite a bit of priceresistance. There's a disparity between construction costs and whatthe consumer is expecting."

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Eggemeyer pegs asking prices in the Bellingham market at $100 to$110 a sf, with $20 a sf in tenant improvements. He says buyersexpect to pay $80 a sf tops. "Most people do not understand howenergy costs have impacted construction costs. Costs are up about30% to 40%. We still have a disconnect," he tells GlobeSt.com.

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O'Brien says there's a similar disconnect between sellers andbuyers of development sites. "We haven't found any land in ourmarket that makes sense in terms of what we can sell our productfor," he remarks. "Sellers have high expectations as to what theycan achieve, but we're not going to stretch. We're going to staypretty disciplined."

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Tulfra Realty Co., a Rochelle Park, NJ company that specializesin buying and repositioning Northern New Jersey industrialproperties, has acquired the 50-year-old, 507,400-sf L.A. DreyfusCo. building in Edison for conversion to industrial condominiums.Though Tulfra partner S. Lloyd Tulp says his company and itsacquisition partner, investment funds manager Hampshire Cos. ofMorristown, NJ, are confident of the project's viability, theacquisition comes at a time the industrial-condo market appears tohave entered a period of slackened interest. Tulp says the Dreyfusbuilding's age reduced its value to a point where the cost madesense in his market.

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Despite the fall-off in demand, O'Brien believes the underlyingfundamentals remain strong. In fact, he is using the down time inSouthern California to scout Phoenix and Salt Lake City forlower-cost development possibilities. But those markets, especiallythe latter, remain largely untested, which could beproblematic.

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Ryan Smith, vice president of San Antonio-based Cross & Co.reports his company abandoned plans for what would have been thatmarket's first industrial condo project and will rent the spaceinstead. "We marketed it for six months but really didn't have anyactivity," he says. "I don't know if it was the lack of depth inthe market, the change in economy or our inability to market. But Idon't see any upside in condos here at this point."

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O'Brien acknowledges each market is unique when it comes toindustrial condos and must be closely examined, but he says marketswhere the product has proven itself will turn around as lease ratesalso rise in response to higher construction costs. "SouthernCalifornia rents were fairly flat for a decade, but we've seen apretty steady increase recently," he says. "We lag that, but oncethe guy who needs 5,000 sf and will always need 5,000 sf gets tiredof rental increases, he's going to look into buying. And we'll bethere for him."

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