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!