Cooling Housing Market Could Deliver a Glut of Condos
Concerns are growing that apartment condominiums may be vulnerable to the current cooldown in the nation’s residential market, according to a recent multifamily housing forecast by NAHB, even though many of the properties under development have been pre-sold.
A large share of sales contracts could be cancelled and condo units purchased by speculators could quickly make their way back onto the market in the face of oversupply and declining sales prices, the forecast warns.
“It will be hard to absorb all of the supply that will become available for occupancy in 2006 and 2007,” the forecast advises, and most vulnerable to a glut will be hot markets such as Florida and the Southwest where the condo craze has been most pronounced.
The slowdown may start occurring even before oversupply problems become apparent, according to NAHB forecasters, because lenders are starting to cut back on their support of condo production and conversions, which tend to be highly leveraged.
While well-established builders are not having as much difficulty obtaining financing as newcomers to the industry, they, too, can be expected to start having reservations about the ability of the market to absorb the supply of units in the pipeline, the forecast says. As a result, the 43% share of multifamily starts captured by condos last year was likely the cyclical high-water mark of the condo boom.
At the same time, the share of condos occupied by renters will be on the increase, according to the forecast, with apartments owned by investors a significant segment of the upper end of the rental market.
NAHB economists have identified a number of recent trends related to multifamily housing:
- The size of multifamily units has been climbing, largely as the result of the rising condo share of the industry. The median floor area of condos and other multifamily units for sale in 2004 was 1,359 square feet, compared to 1,049 for rental units. The discrepancy between the average sizes was even greater — 1,504 versus 1,080 square feet. Eighty-one percent of the condo units completed in 2004 had two or more bathrooms, compared to only 49% of rental completions, while 21% of new condos came with fireplaces, compared to only 4% of rentals.
- Multifamily buildings have been getting bigger since the mid-1990s, with 55% of the new units completed last year in structures of 20 units or more, compared to 56% in 2004 and 39% in 1995, and 59% for multifamily units started last year. By 2004, 24% of all units were in structures of 50 or more units, compared to only 8% in 1995.
- Multifamily buildings have been increasing their size by going up rather than sideways. From 1995 to 2004, the percentage of new multifamily units completed in structures of four floors or more increased form 8% to 22%, with the mid- to high-rise share of the market increasing among both for-sale and rental projects and in all regions of the country, with the exception of the Northeast, where high-rise buildings have been common for some time.
- Although there has been no major population shift back to the cities, multifamily development has been shifting back to the densely populated cores of major metropolitan areas, a movement especially apparent in the 18 most densely populated counties or county equivalents, each having more than 5,000 people per square mile in 2000 — the five boroughs of New York and three nearby New Jersey counties; San Francisco County; Philadelphia County; Cook County (Chicago), Ill.; the independent cities of Baltimore and St. Louis; the District of Columbia; and Suffolk County (Boston), Mass. The high-density group also includes some independent cities in Virginia with relatively small populations but even smaller land area, such as Falls Church, which has 10,139 inhabitants of its two square miles. Although the 18 densest counties saw their combined population of 20.2 million in 2000 decline from 7.2% of U.S. population at that time to 6.8% in 2005, their share of national multifamily permits rose from 3.1% in 1995 to 7.4% in 2000, 10.6% in 2004 and 13.2% last year.
- Counties with moderately high population densities of 2,000 to 5,000 per square mile showed no clear trend over the past five years, although such central cities as Phoenix, Houston, Dallas and Atlanta saw an increase in the single-family share of permits, with the actual number of multifamily permits declining or growing slightly.
- Although population was stagnant or falling in most of the counties with high population densities, multifamily construction continued to accelerate for at least two reasons: the number of households with only one or two people has grown as the number of larger households has declined; and building new structures often entails demolishing older structures, reducing the net gain in units.
Unless population begins increasing in the high-density areas, NAHB forecasters say that multifamily construction is likely to become less concentrated in those markets. According to population data for 2005, the out-migration from high-density counties actually accelerated last year.
The Multifamily Forecast: Major Shifts Underway
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