Surplus of Condominium Units Pinches Sales, Development Projects
It was Dara Dann’s friends who convinced her to become a homeowner. With her modest salary at a nonprofit organization, Dann was happy to rent until her financial situation improved. But as she watched a growing number of her friends settle into their own homes, their prodding and encouragement piqued her curiosity.
“They kept telling me that I could afford to buy … so I decided to check it out,” she said. “I did not have much in savings, but I was able to get a zero-down loan. That is really how I was able to afford a condo.”
She picked out a 650-square-foot unit that was going for ,500 in the developing D.C. neighborhood of Columbia Heights, and in April of 2001, she moved into her first home. “I really didn’t expect to make a profit,” she said. “I was just happy to be in my own place.”
Three years later, her boyfriend—who had been fixing up his own three-bedroom townhouse—proposed, and Dann decided to sell. Within a week of putting her house on the market, she had a contract for 9,000.
“I used the money to pay for our wedding and honeymoon,” she said. “My husband and I quit our jobs and decided to travel for our honeymoon. We spent about 10 months traveling through Europe, India, Southeast Asia, Australia and New Zealand. It was amazing, and we were lucky to be able to afford it.”
Dann’s experience was no anomaly. In the selling frenzy of recent years, bidding wars and cutthroat competition meant highly lucrative—and often unexpected—sales contracts for hundreds of condo owners. Entrepreneurial builders snatched up land in developing neighborhoods and began marketing floor plans for new units that promised deluxe kitchens and sweeping views of the cityscape.
Then beginning in mid-2006, soaring prices began to fall and a thin inventory turned into a glut. The condo flurry came to an abrupt halt, leaving builders and new owners—many of whom took out risky loans in the hopes of future payoffs—wondering what’s to come.
New condo sales in the area peaked in 2005 at 13,608, up from 9,000 units in 2004 and more than triple the number from one year before that, according to a joint report from the real estate research firms Delta Associates and Transwestern.
In 2006, fewer than 7,000 units were sold. Condo sales dropped from 1,331 in the third quarter to 663 in the fourth. By comparison, sales in 2005 averaged 3,000 per quarter. At current rates, it could take four to six years to sell everything on the market, Delta Associates estimates. The sales drops are higher in D.C. and Northern Virginia than in suburban Maryland, where the number of new construction projects is not as prevalent.
Condos have appreciated rapidly over the past decade, according to the National Association of Realtors. They tend to be more popular than townhouses and single-family homes in metropolitan areas, where they are an attractive option for urban dwellers and empty nesters who like low maintenance and metropolitan lifestyles. From a developers’ standpoint, condo projects are often seen as more profitable to build in downtown neighborhoods, where property value is high and available land is scarce.
On the other hand, condos are also more vulnerable to fluctuations in value than single-family homes because many are purchased by investors who never intend to live in them and can more easily flip them or rent them out during down times. And although they are still a less expensive alternative to single-family homes, their affordability has been affected by the influx of luxury versions. At the top tier are places such as Turnberry Towers in Arlington, Va., where ultimate extravagance is being marketed for 0,000 and up.
But will such places weather the downturn?
More than 24,000 units were still on the market at the end of 2006, with 21,643 more to be added. Already, those numbers show signs of changing. As dollar signs turn into doubt, more than 13,000 proposed units have been removed from the sales market or scrapped altogether, Delta Associates reported.
Take, for example, the multimillion-dollar community planned for Bethesda, Md., that was canceled, despite numerous deposits, when developers of Canyon Ranch Living decided it wasn’t the right time for their luxury project after all.
Others are giving up in a different way—at least for now. In many cases, investors and developers are opting to rent out units as they wait for the surplus to whittle down. The number of rental listings at year’s end was up by more than 20 percent compared with 2005.
Last fall, Level 2 Development was finalizing plans for a new condo community in the up-and-coming 14th Street corridor that included plans for a Zen garden and green roof. When even the trendy location failed to attract more than a handful of early buyers, David Franco and Jeff Blum decided to convert the View 14 project into apartments that are less costly to build.
More and more owners are following suit by putting individual units up for rent. Still, experts say the supply of condos—both from developers and individual owners reselling—will not always be in overabundance.
In fact, regional officials are preparing for an expected burst in population and jobs. In 2005, more than 300 leaders gathered for a “reality check” exercise sponsored by the Urban Land Institute to brainstorm about locations where developers will be able to squeeze in enough housing to accommodate an expected 1.6 million more residents by 2030. In short, the current overstock could well become a shortage.
Nevertheless, such forecasts may come as little consolation for owners who need to sell now, but the news is not all bad. “We do not foresee a national burst as some observers are predicting,” Delta Associates reported in 2006. “We would be … confident of a soft landing in Washington, Boston and L.A.”
The firm listed expected job growth and housing demand, rising interest in urban living, and lack of affordability in the single-family market as reasons why condominiums will maintain their popularity in the D.C. area. The company also predicts that competition may be less of a factor in the second half of 2007. Nationally, overall home sales are expected to increase into next year, with new homes experiencing the speediest recovery, according to the National Association of Realtors.
For those in the market to buy, the news is even better. Some experts say it’s a great time to shop, especially for first-timers. Young professionals who once feared the market’s breakneck pace are suddenly faced with choices and incentives.
For a while, new condo developments were offering add-ons such as free plasma televisions, flooring upgrades and even new cars. When that didn’t combat the overabundance, builders and owners began to drop asking prices—a tactic realtors would have scoffed at a couple of years ago, when competitive offers reached well above listing prices. But now, dozens of developers are negotiating base prices and responding to counteroffers. Some are even allowing buyers who are still under contract to pay less than originally agreed to if other units are sold at a lower price.
On craigslist.org, a popular free Web listserv for self-posted real estate and sales, close to 200 listings from the first week of February included reduced pricing. That same week, Flower Park Condos of Takoma Park, Md., was offering up to ,000 in closing cost help on its Web site.
The days of ,000 condos may be long gone, but the rest remains to be seen. “Despite the doomsayers, household wealth will not evaporate and the economy will not go into a recession,” said David Lereah, chief economist for the National Association of Realtors. “If you’re in it for the long haul, housing is a sound investment.”
About the Author
Heather Mueller is a contributing writer for The Washington Diplomat.