Swallowing the Sword
In a sense, investors are a double-edged sword to developers and condo converters. Without investors driving up prices the past couple of years, the condo business wouldn’t have been nearly as profitable. But what happens if new investing opportunities, higher interest rates, or a stronger dollar draw these buyers away?
Many think the condo market will survive just fine. “There will be times where there is a leveling off and a decline because prices ran up too quickly, and people can’t afford those prices,” Jeff Stack, managing director and principal of The Sares?Regis Group in Irvine, Calif. “But long-term, there will be strength in condo markets. There’s a whole group of people, both younger and empty-nesters, wanting to move back to the city and be closer to things and not have to drive to get everywhere.”
NAHB’s Seiders expects a “flat” landing for condos, where demographics keep prices from collapsing. “The markets [with condo appreciation] are in parts of the country where people insist on being,” he says. “We’re putting demand pressure on these areas and there are significant supply constraints.”
But in many of these markets, there are a number of units opening in 2006 and 2007. In the next two years, 2,500 condos will be brought on-line by Lane Co. alone, according to Bill Donges, CEO of the Atlanta-based multifamily firm. But when you have a waiting list of 8,000 people for 200 new condos, as Lane had in July, building condos sounds like a smart business strategy.
Others think the fallout will only occur in certain markets. Equity Residential, a REIT in Chicago, is focusing on starter condos instead of the high-priced waterfront product because company executives believe those higher-end condos are more prone to bust. “The market is much deeper at the price point where we’re offering very competitive, moderately priced starter homes to a very strong demographic,” says David Neithercut, president of Equity.
However, if investors flee and developers continue delivering new condos, the more fortunate metro markets could slow down to 2 percent or 3 percent real estate appreciation, or worse. Gleb Nechayev, vice president and senior economist with Torto Wheaton Research and Investment Strategy Services in Boston, predicts traditionally strong markets like Washington, D.C., and San Diego will actually depreciate in 2007. “We’re in the eighth inning in regard to the housing market,” Nechayev says. “Our forecasts of home prices indicate you will see a slowdown in many markets, and you may see declines in home prices over the next five or six years.”
For developers who can recall the condo busts of the 1980s and 1990s, such a projection is no surprise. “We believe the condo market is a very sensitive one and is correlated to interest rates,” says Jack Callison, senior vice president of national operations for Archstone-Smith, an apartment REIT in Englewood, Colo. “We’ve seen this movie before, and it typically ends pretty ugly.”
