The share of condominium units among all multifamily housing starts rocketed from just above 20 percent in 2003 to about 48 percent at the end of 2005, though that share is expected to fall back as the condo market cools, the economist for the National Association of Home Builders said this week.
David Seiders, the builder trade group’s chief economist, said he expects the share of condo starts to dip to about 35 percent by late 2007. “The condo share has already started to move down in the second quarter off its high,” he said.
While condo development ramped up from 2004-05, there was a slide in the construction of rental units during that same period, according to association data. And the renter share of total households, which had been roughly flat from 1988-95, dropped from about 36 percent in 1995 to 31 percent in 2005.
“The multifamily sector has traditionally exhibited one heck of a lot of volatility,” Seiders said, with a steep decline in starts in 1990-91 and a sharp pickup in starts in 1994. But since 1997 there has been “almost a dead flat trend” in multifamily starts, he said, and “some people called this the Golden Age of multifamily production” because of this relative stability.
Seiders spoke Wednesday during a National Association of Home Builders presentation about the multifamily market. Also this week, the association released a builder’s confidence index that dropped to nearly half of the level in the second quarter that it was in second-quarter 2005.
“Investors and speculators had been a big factor driving sales and production at the height of the condo boom and they have been pulling out of the market,” Seiders said in an announcement about that index. The index, based on a quarterly national survey of multifamily builders, fell to 32 in the second quarter, compared with 61.3 in second-quarter 2005 — an index of 50 indicates a neutral market while a score lower than 50 indicates diminished confidence in the market.
The inventory of existing condos and co-ops, which was near three months in mid-2004, has since soared to about 8 months, Seiders said, which is “clearly an oversupply situation.” A supply of more than six months is generally considered to indicate a buyer’s market. And existing condo and co-op prices, which had risen sharply in 2001 and 2002, dropped sharply this year.
“For both single-family (homes) and condos we do see a convincing decline (in sales) under way,” Seiders said, “and still moving downward. We do expect sales to continue to move down through at least the end of this year … and hopefully (sales will) stabilize sometime next year.”
Meanwhile, another index that tracks builders’ confidence in the multifamily rental apartments sector found far higher levels of confidence levels during the second quarter in the current demand for rental units.
Rental rates have been firming over the past couple of years, Seiders said. Rental appreciation had actually run negative in some markets during the housing boom. Multifamily rental vacancy rates began to fall in 2004 after a prolonged rise that began in 2000.
Seiders’ multifamily forecast calls for a slight decline in multifamily housing starts to about 320,000 in 2007, down from a recent peak of about 370,000 in 2004. The share of multifamily rental starts is expected to rise while the share of condo units drops through 2007.
Bruce Menin, president of Crescent Heights in New York, a developer and marketer of high-rise condos who spoke during the NAHB multifamily presentation, said that condo investors, “who populated the market over the last few years,” are likely to blame for the rising inventory of for-sale condos. “I believe that most of the change (in market conditions) is really a function of speculators who have been in the market and who are now trying to exit what they viewed as a fast money kind of investment.”
Existing condo and co-op sales increased from 732,000 in 2003 to 896,000 in 2005, the National Association of Realtors reported. In 2005 there was an estimated supply of 4.8 months of for-sale condo inventory, based on the level of sales. In July 2006 the supply was estimated at 8.2 months, and the sales rate had fallen 10.5 percent in that month compared to July 2005.
Menin said that while the pace of sales “may be off a little bit, in absolute numbers it’s still very high.” The condo market for buyers who intend to live in the units “is clearly here to stay,” he added. “Condominiums have become much more accepted,” particularly in the past five to seven years, he said.
He also said that some proposed condo projects may be cancelled and other projects will feature rental units if they cannot sell all of the units as condos. Likewise, some speculators may choose to rent their condo units if they cannot find a buyer.
Some locations may be more prone to problems with development than others, Menin added. He said that inland parts of South Florida may not be as desirable for condo projects as coastal locations, and areas of Northern Virginia that aren’t close to transportation hubs or in areas with a current oversupply in units may also be more difficult to sell as the market cools.
Leonard Wood, director of Wood Partners, a Marietta, Ga., company that builds rental apartments and for-sale condos, said that as development costs have increased, it has become more challenging to build affordable housing. He said that more tax credit or other forms of subsidies would be helpful as an incentive to build affordable housing. “I do think there is difficulty in providing affordable housing in the U.S. in general,” he said.
