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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March 26th, 2008 at 7:27 pm
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.
March 26th, 2008 at 4:15 pm
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 are talking about “affordability” the way that common people makes there payment go ga ga over rental yield Sonika if Investment/Real Estate were just an english than you were a champion but oppps anyway chill out but keep it up there is lots of other logics are in your comments may be one day you will be fine may be not.
“This is the best place on earth isn’t it”?
I am not following corus do we have link around here btw you never returned back from Alberni yet how is that?
March 26th, 2008 at 3:45 pm
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?
March 26th, 2008 at 3:29 pm
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
March 26th, 2008 at 3:03 pm
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.