Magazine article Journal of Property Management

Condo Sizzle Simmers: Experts Forecast Cooling Condo Market's Future and Determine Its Effects on Real Estate Managers

Magazine article Journal of Property Management

Condo Sizzle Simmers: Experts Forecast Cooling Condo Market's Future and Determine Its Effects on Real Estate Managers

Article excerpt

If you build it they will come--or not.


Developers and building owners spent the last several years rushing to build, convert and rehab buildings for condominium use. The market was called everything from a gold mine to a condo craze to a condo circus.

Now, the once-hot condo market is cooling, but real estate experts and observers are loathe to call the downward turn a big bust. Instead, they say the market is merely softening and correcting itself--a necessary precursor to an eventual recovery and stronger health.


In spite of the historic popularity of single family homes in the United States, the condo market boomed for the first time in this country in 2001. As both interest rates and the stock market sunk, investors turned to real estate--particularly condos--as an alternative investment.

"Investors felt less comfortable with the paper wealth and wanted some more tangible wealth," said Lawrence Yun, senior economist at the National Association of Realtors.

Condo prices rose 10.3 percent in the second quarter of 2001 after a long stretch of condo price appreciation in the single digits. They continued their double digit rise until the first quarter of 2006, when condo prices rose 4.5 percent, Yun said. Now, the five-year-old condo surge is abating.

One sure sign of the market's demise is the mass exodus by investors and developers who initially bought rental apartments to convert to condos, said Dan Fasulo, director of market analysis at Real Capital Analytics, a New York research firm.


"The wave of acquisitions of apartment communities by condo converters is over," Fasulo said. "We've seen a tremendous falloff. The market is back to the levels of the pre-boom period."

In 2005, nearly 200,000 apartment units in the country were sold to investors for condo conversion. For the first eight months of 2006 fewer than 60,000 condos were sold for conversion purposes, said Michael Cohen, research strategist with Property & Portfolio Research, a Boston-based real estate research and advisory firm.

"The condo market is definitely shaky at this point, and the data bears that out," Cohen said. "It's clearly a buyers' market in the condominium market, and we're beginning to see that reflected in pricing as well."


Nationwide, condo prices fell 2.4 percent from August 2005 to August 2006, according to the latest available data from the National Association of Realtors. In contrast, single-family home prices during the same period fell 1.7 percent.

Yun said the condo slump is more pronounced than other housing slumps because investors are fleeing the sector so quickly. Prices did not fall as sharply for single-family homes, he said, because fewer investors stepped into that market versus the condo market, and as a result fewer investors are desperate to get out.

"The investors--not owner occupiers--evidently artificially raised condo demand during the housing market boom," Yun said. "They were buying in hopes of cashing out at a higher appreciation. With appreciation not coming around now, that artificial demand has disappeared."

The 2.4 percent condo pricing decline cited by the National Association of Realtors is more dramatic than it seems on the surface, said Cohen, of Property & Portfolio Research. He said the decline signals a significant downshift when compared to the double digits at which condo prices were appreciating earlier in the decade.

But the rapid decline in condo conversion investments is not necessarily a bad thing, Cohen said. It simply means the market is trying to find equilibrium again.

"We have slowing sales, increasing inventory and prices just beginning to adjust," he said. "In order for the market to get back into balance, it has to find that happy medium between supply, demand and pricing. …

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