Condo supply lag woes

A funny thing happens during a boom – the longer a boom lasts the more people view returns as ‘practically guaranteed’. Thats not just buyers, developers appear to do the same thing, bidding up the price of land and tripping over themselves to build more supply. Unfortunately demand can change a lot quicker than construction can be completed. Many cities in the US are bracing for a flood of new condos projects that were started during the boom, making the supply/demand imbalance even worse than it currently is:

More than 4,000 new units will be completed in both Atlanta and Phoenix by the end of the year. Developers in Miami and Fort Lauderdale, Fla., are readying nearly 10,000 total new units in a market already struggling with canyons of unsold condos. San Diego, another hard-hit region, will add 2,500 units, according to estimates provided by Reis Inc., a New York-based real-estate-research firm.

The new building comes on top of unprecedented supply. The U.S. finished 2007 with a supply of condos large enough to absorb 10 months of demand, the highest level since the National Association of Realtors began the tally in 1999.

The deluge means bad news for developers and potentially lower prices, including in cities such as Atlanta and Dallas that have avoided the worst of the housing bust. If defaults and foreclosures rise, lenders will feel the pain too.

Regulators have been sounding the alarm for weeks about the exposure of small and mid-size banks to commercial real estate, which mostly means construction loans to developers of condos and single-family housing.

It’s not all bad news, renters and investors with cash in hand are benefiting from this imbalance:

The news isn’t bad for everyone. Vulture buyers have started to circle, hoping to take advantage of foreclosed properties that banks may start dumping at fire-sale prices. Also, some condos are being converted to rental units, increasing supply for renters and putting downward pressure on prices.

It’s interesting to see how trends change dramatically over the course of just a couple years. Speculators tend to get overly optimistic about bubble markets during booms, unfortunately economic reality always corrects overpriced assets. The building supply lag makes this correction all the more dramatic:

The deteriorating economy isn’t helping. “When the world goes to hell in a handbasket, the last thing anyone wants to buy is a condo,” says Cathy Schlegel, a mortgage-loan broker in Fort Worth, Texas, whose condo in a high-rise called The Tower sat on the market for 14 months before she finally sold it at a loss in February.

The rising supply is a reflection of the picture in 2004 through 2006 — a time of huge demand for condos. Speculation was rampant as investors believed empty nesters and young professionals seeking an urban experience akin to what they watched on “Friends” would prop up the condo market for years.

Most projects take about three years from the time they are marketed to potential buyers to the time they are ready to be moved into. Deposits help developers get a construction loan that is to be paid off when the buyers close on their new condos years later.

However, cancellations are rising, meaning developers may not be able to pay back their banks. Peter Zalewski, founder of Condo Vultures Realty LLC in Miami, says condo developers he is working with are expecting 20% to 40% of buyers who put down deposits to walk away from the deal. In some areas, such as inland buildings and new projects along the river in Miami “walkaways” are expected to be even higher.

For years we’ve been adding supply in Vancouver that is snapped up in pre-sales. As in many states during the boom years there is a view that this market activity represents inelastic demand, but when the euphoria clears will we found that we’ve overbuilt the local condo market?

A hat-tip to BCbuds for the link!

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scullboy
12 years ago

Krrish ol' buddy if I wanted investment advice from a window licker, I'd go hang out at Main and Hastings.

Thanks for the advice oh Trump of the 'tards.

Oh, and tell your mom I said hi.

Anonymous
Anonymous
12 years ago

BDK, Thanks DON you know some graduation level math in your head otherwise I should have kill my Valuable time teaching you all that along with sci-fi eco and hd eng. oye my above comment was answer to your oppertunity cost if that did not goes through here is one more attempt. "To the vast majority of people, time has value". so your oppertunity cost does not apply in the case I have forward to you. you say "then why aren’t you buying the Corus assignments that people are walking away from?" I don't need to buy anything Corus should go to hell, I have no concern to sell you anything. "He plainly doesn’t understand opportunity cost. For him “investment” is closer to gambling. It’s certainly not about calmly assesing different opportunities, or being smart and flexible".-SONIKA I think you… Read more »

BDK
BDK
12 years ago

Krissh you retarded troll, you just proved that you don't understand opportunity cost!

So rich people own units that are empty and this isn't a missed opportunity cost? Are they buying them today? Why aren't these wise men buying the assignments at Corus?

This is the best place on earth isn't it?

Where else have you been in the world have you visited?

What grade did you complete in school?

What do you actually own?

Make sure you are honest because living in a bachelor suite with your Mum doesn't count as ownership.

What makes you think someone as stupid as yourself has more assets than any of the people on here, who're all smarter than you.

Do you ever take books to the park and pretend to read them, to trick people into thinking that you aren't retarded?

scullboy
12 years ago

Hey Krrsh:

STFU, 'tard.

BDK, the dude's trollin'. He's quoting George Bush, who couldn't find BC if the map were tattooed on Dick Cheney's thighs.

He plainly doesn't understand opportunity cost. For him "investment" is closer to gambling. It's certainly not about calmly assesing different opportunities, or being smart and flexible.

The whole city's full of guys like this, people who cashed out their RRSPs and who haven't saved a cent for themselves or their children. Soon enough, they'll be wiped out.

And then those of us who have been patiently saving and waiting can come in, swoop down and buy their places at 50 cents on the dollar. Of course we'll be called vultures, not bulls but hey…. that's investment, baby 🙂

Krrish2
Krrish2
12 years ago

do you understand what opportunity cost is?

Yes Opportunity cost put you out of market you priced out bear because you were being oppotunitist's to push the fool in the market you wiseman.

in otherwords opportunity disappeared since you did not form a lineup, you were PRICED OUT!you are CARD OUT! and you had gone OUT OF SENSE!

do you understand what opportunity cost is?

Opportunity disappear so is your chance to get in BDK.

BDK
BDK
12 years ago

Krissh, do you understand what opportunity cost is?

It's clear you don't. Anyone reading this can see that you're retarded.

Rich people don't exclusively look at over priced vancouver condos you fool. You just don't get it.

There is no way you got past grade five.

If buying today is such a good deal and you actually have money then why aren't you buying the Corus assignments that people are walking away from?

jesse
jesse
12 years ago

"Vancouver and Victoria Condo Markets More Accessible To First-Time Homebuyers in 2008"

So they forecast a 5.7% rise in prices in 2008. I hope they are saying the "innovative" products they have to offer this year, not available last year, will compensate for this rise. Or maybe the title should read "Vancouver and Victoria Condo Markets More Accessible than if Prices Rose Faster". Sometimes I wonder if these guys really believe their own propaganda?

patriotz
patriotz
12 years ago

Durn tootin'.

It's King George Bush, fella.

Drachen
Drachen
12 years ago

Krrish

“In B.C. we have a strong local economy and good job growth, coupled with strong market fundamentals and sustainability, which result in no real estate bubble”.-Prince George Bush

"Prince George Bush"??? If you're going to make up names to support your flimsy arguments you could at least make up believable names.

Krrish2
Krrish2
12 years ago

BDK,

your math calculator should go in garb….you say

"So for five years you lost $1500 subsidizing the mortgage, where is that figure? Oh right that’d put you to $0".

BDK,The case above is about empty units and rich owners definitely there is no mortgage burden and the owners want their units empty so they are not looking for any yield,despite maintenance carrying cost is 0!0!0! because owner likes to keep the way it is……

Tell me if any bottom liner likes to keep their units empty?

"Go back to stacking boxes and huffing glue, or whatever it is that you’ve done to petrify your brain".

Where would you like to go bdk?

blueskies
blueskies
12 years ago

OK!

time for a new slogan…..

Vancouver…the lastplace on earth

🙂

BDK
BDK
12 years ago

What am i talking about? For one thing I have money, I doubt you do. If you're so smart and sure of yourself why aren't you buying the Corus assignments, that the buyers are walking away from? Oh right because you're an ignorant, uneducated immigrant fool who doesn't know anything and writes like an eight year old. Just look at how stupid you are. In your vacant cost example.. You've left out opportunity costs (this means if you'd leveraged $300k and bought energy stock you could have made a better return), carrying costs such as mortgage interest, strata fees, taxes. Do you even know how to use a calculator? I can here this whizzing over your head. Most retarded people insist they aren't retarded and you're no exception. "example: compare the prices vs past 5 year, average rate of rent… Read more »

Ugh
Ugh
12 years ago

Ok, affordability/foothold/"equity building" BS aside, the low single-digit condo price appreciation forecast by Genworth should set some of the bulls to thinking…

These are the cheerleaders, after all.

Ugh
Ugh
12 years ago

More happiness, this time from Genworth:

http://tinyurl.com/2k2g7g

Apparently we can't build enough of them.

Ugh.

jesse
jesse
12 years ago

RtS: "While it won’t save them alot of money it will build the reserve quicker then if the building was completely occuppied." There are two separate issues here: unoccupied units that pay fees on times and units that have fees in arrears. I agree the former leads to lower strata costs and assumedly lower fees in the long run than would be the case with 100% occupancy. As for arrears, in the short term if payments go in arrears the strata must cover the difference in fixed costs and this means higher fees. But as long as the monies can be recovered with interest eventually it's better to have as many unoccupied units as possible for the reasons you and others laid out. This does not account for the logistics/legal overhead of having people not paying, which could negate the… Read more »

Krrish2
Krrish2
12 years ago

R.T.SENDER,

It doesn't matter to those people who likes to secure a place for them self in the b.p.e. you are thinking according to your pocket and bank balance but rich people have logic to save money even if the units are empty but it's worth securing them.example: compare the prices vs past 5 year, average rate of rent $1500 a month=90,000, average appreciation 121% atleast 300k-1m for chickpeas-2 bedroom.

"In B.C. we have a strong local economy and good job growth, coupled with strong market fundamentals and sustainability, which result in no real estate bubble".-Prince George Bush

It's worth securing a place"those people won't hate them self later".-Satv

So what the fu#k Tony and Bdk are talking about?

Tony Danza
Tony Danza
12 years ago

the garbage doesn’t need to be picked up as often, the parking gates/elevators get less use etc etc.

These are regularly scheduled maintenance items, the garbage still gets picked up once a week regardless if the bin is full or not. The gates and elevators still need regular servicing whether used once or 10000 times a day. You might save very long term on wear and tear.

Nice try putting a happy face on the repercussions of our RE insanity though.

scullboy
12 years ago

Only in BC would people say "it's not so bad to live in a half empty place…" Guys, buildings are supposed to HOUSE PEOPLE. They aren't supposed to be … you know… empty museums or whatever. Think about it. Buildings are designed to be occupied. If all those units are empty, and the same is true for other new buildings, then something is SERIOUSLY WRONG WITH HOUSING IN VANCOUVER. Vancouver is building "luxury " shoeboxes that NOBODY LIVES IN. Meanwhile homelessness increases and affordability decreases. Does this REALLY sound like "the world's most liveable city", or some kind of Disneyland – esque artificial "city of the future". And another question… if those units aren't being used as someone's home, who is using them, and for what? Think about it…. "safe", "discreet" "access controlled". Strataman mentioned the massage parlour running in… Read more »

Return to Sender
Return to Sender
12 years ago

I am aware that the strata fees wouldn't get cut in half, or even reduced to 2/3rds but there is no denying if the building is half empty, the garbage doesn't need to be picked up as often, the parking gates/elevators get less use etc etc. While it won't save them alot of money it will build the reserve quicker then if the building was completely occuppied. Besides living in a half empty building is certainly a plus for me, better chance at only 1 neighbour instead of two, maybe no one above you, less waiting at the elevator, gym/pool always free for use. I can't think of the positive of the building being full unless you only intend to flip and don't want competition, but to live there it's a no brainer to me.

Tony Danza
Tony Danza
12 years ago

From CNN:

Greg and Barbara Abbott have already cut the price twice on the two-bedroom condominium they are trying to sell on the Las Vegas strip. They're asking $669,900 now — and an offer in the $650,000 range means they'll lose money.

Abbott thinks hesitant buyers don't realize how reasonable the current price is. "They're not really being realistic about what the place is worth," he said.

You're the one who isn't being realistic, dumbass. Your condo is worth whatever someone is willing to pay for it. Period.

Tony Danza
Tony Danza
12 years ago

So it’s not a bad thing to be in a half empty place

LOL, thanks man, I'll be chuckling about this one all day!

just because nobody’s moved in next door doesn’t mean somebody is desperately trying to rent out the unit, bleeding cash, etc.

Not according to the ads on craigslist…

Drachen
Drachen
12 years ago

OT but here's a tidbit for those following the US economy;

"The Standard & Poor's 500-stock index, the basis for about half of the $1 trillion invested in U.S. index funds, finished at 1352.99 on Tuesday, below the 1362.80 it hit in April 1999."

Warren
Warren
12 years ago

I'm not so sure that a half-empty building just after completion is a sign of impending doom. I've moved into a just-completed (but sold out) building and it took a while to fill up. If you see a bunch of for sale signs, that's one thing, but just because nobody's moved in next door doesn't mean somebody is desperately trying to rent out the unit, bleeding cash, etc.

Anonymous
Anonymous
12 years ago

At some point the very negative psychology south of us has got start taking hold up here….I mean we seem to embrace all other aspects of American culture etc…American Idol, and on and on

U.S. Home prices prepare for dismal spring

http://www.cnn.com/2008/BUSINESS/03/25/us.homes.a

casual observer
casual observer
12 years ago

In my experience, in a foreclosure, banks are usually pretty prompt in making sure that strata fees are paid. They don't want any other entity to have a claim against the property. Also, certain forms must be filled out before a property can legally change hands. One of those forms is a statement that there are no outstanding debts owed to the strata corporation. If there are, then the amount is usually put into escrow until closing, and then it is forwarded to the strata corp. by the lawyers handling the transaction for the new purchaser. Don't know if that's the way it works in all cases, but that's been my experience (limited).