The condominium market is cooling, and even a star as hot as actor George Clooney can't heat it up again.
Neither can basketball great Michael Jordan or The Donald's ex, Ivana Trump, both of whom–like Clooney–backed the development of flashy new condominium towers that will never be built in Las Vegas.
From Manhattan to Las Vegas, from Boston to Miami, the four-year building, buying, and selling frenzy that has defined the condominium market is screeching to a painful halt as interest rates elevate, construction costs escalate, and quick-flip resale profits evaporate, chasing away the investors who were so eager to snap up even the highest-priced units before their builders ever broke ground. In response, developers are canceling or delaying condominium projects, slashing prices on the ones they've already built, reverting newly converted condos back to rental status, and shying away from making new condo plans.
"If anybody told you they weren't being cautious nowadays, they'd be kidding themselves," says Matthew Blocher, senior vice president of Washington, D.C.-based JBG Cos. Frank Beck, chief development officer for Centra Properties, agrees: "Everyone is struggling."
'Gold Rush'
The struggle is acute in Las Vegas, Miami, Manhattan, San Diego, and Washington, D.C., and even in markets not typically associated with block after city block of condos, like Seattle, Boston, Minneapolis, and Toledo, Ohio. All are cities whose real estate reality was altered by what Las Vegas market analyst John Restrepo calls "a lot of irrational exuberance" on the part of speculators who flooded the market with "almost kind of a gold-rush mentality." After a few high-profile projects sold out in record time at record prices, he notes, everyone wanted a piece of the profits.
Add to that historically low mortgage rates and the ease with which even people of modest means could score interest-only loans with bare-bones down payments–seed money that they sunk into condos whose resale value was ballooning at fever pitch–and a boom was born. "We had a psychological feeding frenzy among the public to acquire condos," notes housing analyst Jack McCabe of Deerfield Beach, Fla. "It's Economics 101. You have a great demand and a limited supply, and prices go up."
Yet the opposite is true once supply catches up. By the second quarter of 2006, condo and co-op housing sales were down more than 14 percent from last year, according to the National Association of Realtors. Overall condo prices fell 0.3 percent as 26 of the 151 markets included in an NAR survey experienced declines in housing prices from a year ago. Manhattan apartment sales fell by 15 percent because of rising mortgage rates. And Bonita Springs, Fla.-based luxury home and tower builder WCI Communities revealed that new orders for its high-rise condos fell by 84 percent in a year-over-year comparison with the first two quarters of 2005, and it shaved the number of condo projects it would build from a planned 16 or 17 to no more than five.
"With more sellers competing for the pool of buyers, the pressure on home prices has evaporated in most metro areas," confirmed NAR's chief economist, David Lereah, in a statement explaining housing's poor showing. "We are presently experiencing a soft landing in the housing sector."
Soft and seemingly sudden, considering how many condo projects were in the works when it became apparent that the party was winding down. In Las Vegas, 108 high-rise condo projects–which could add a collective 60,000 units to the market–were planned as of the second quarter of 2006, estimates Restrepo, principal of the Restrepo Consulting Group. Eleven of them had "gone vertical"; that is, construction had begun. Restrepo estimates that of the original 108 projects, just 16 of them will open during the next five years. The story is similar in the Washington, D.C., market, where about 13,000 units have been built or planned over the past five years, according to Delta Associates, a real estate research firm in Alexandria, Va. Of those, 8,000 have sold; 5,000 have not. "That's a lot," says William Rich, Delta's vice president.
Las Vegas and Washington have healthy economies that could bode better for real estate sales than those in other parts of the country, analysts say. But as condos fall out of favor with speculators, whose interest in them surged with the potential to turn a profit of 20 percent or more without ever moving in, the condo markets are sagging even in these two cities. Rising construction costs–especially for out-of-town developers who rushed into those markets to mine for real estate gold–have forced builders to bump up their sales, whittling potential profits and running investment-savvy condo collectors out of town.
That's no small loss for a condominium market that, McCabe says, was "artificially propped up" by those speculators. McCabe estimates that in some major markets, up to 80 percent of condo sales over the past five years have been to speculators who wanted to flip their condos for a quick and considerable profit and had no intention of living in them. But he notes: "That only works as long as prices are going up. Now, the speculators are gone and we're back to a normal market–and we have a glut of condos."
In a normal market, condominium buildings don't sell out the first weekend their units are offered for sale. And indeed, the potential buyers who remain in the market now that the speculators have rerouted their investment dollars away from real estate are taking more time deciding whether they will call a condo their home.
Scrapped Plans
The fallout is evident from coast to coast. In condo-cluttered Philadelphia, Brown Hill Development scrapped its plans before it broke ground on a planned $40 million loft building because of low pre-construction interest from potential buyers.
In Boston, the average price of the waterfront condos that crowd the harborside plummeted from $902,644 to $564,944 during the first quarter of this year, according to the Listing Information Network. And Northeast Apartment Advisors estimates that there is almost a year's supply of $2 million-plus condos waiting for buyers in the Boston/Cambridge market.
Washington, D.C.-based Monument Realty junked its plans for a three-building, 574-unit apartment complex in Alexandria, Va., and Wood Partners of Atlanta, which was constructing a new building in Annapolis, Md., will rent those 300 units rather than sell them as condos. Likewise, Greenbelt, Md.-based Bozzuto Homes changed its plans to sell units in a new Baltimore building because "we couldn't make sense of it from a condo standpoint," says President Thomas Baum. Instead, the building will house rentals.
The dark clouds haven't skipped smaller cities: In Minneapolis, more than 2,000 units are under construction as sales are slowing, according to Maxfield Research, and The Ryan Cos., reacting to poor presales and a glut of high-priced condos, nixed plans for a 600-unit luxury condo project on the East Bank of the Mississippi River.
In Providence, R.I., Cathedral Development Group is downsizing a condo project from 82 units to 24, as increasing construction costs threatened to push the selling price out of the reach of local buyers. In nearby Warwick, R.I., Toll Brothers withdrew a plan to build 395 condominiums on the site of a former amusement park. New Port Richey, Fla., officials made no secret of their delight with a Ryland Homes plan to build 500 condos with parking, a fitness center, and swimming pools in six nine-story buildings. But in August, Ryland Homes pulled the plug on the project. And Rhode Island-based Procaccianti Group has scaled back its vision for a $110 million hotel and condo complex on the site of a former meat packing plant in Portland, Maine and will feature "significantly" fewer than the originally planned 92 condos.
And then there is Las Vegas, where eight megaprojects, including those backed by Clooney, Jordan, and Trump, stalled in quick succession over the past year.
Advertised on the Vegas Strip as a "return to the rat pack," Clooney's vision for the $3 billion, 11-tower Las Ramblas fizzled when construction costs sent the price of the condo and hotel project soaring. "Every time we tried to firm up the number, they would jump $10 million to $20 million," says William P. Thompson, executive vice president of New York-based The Related Cos., a developer of the project. "I guess we just didn't get our arms around the construction costs, and they were rising astronomically. That was a lesson learned." Related sold the Las Ramblas project for a $100 million profit and also shut down its planned two-tower Icon condominium project in Las Vegas.
Restrepo says Related got caught in "a perfect storm of things that occurred over two years that cooled off the hype." The condo developers who will succeed in Sin City, he predicts, are those with long-established connections in the construction industry–and those with the deepest pockets. The ever-expanding casino industry, he notes, absorbs much of the city's construction labor, for which it can afford to pay more than residential builders.
Yet Restrepo has faith that the condo industry will flourish in Vegas again. "The dust has settled in with more realistic expectations of what the market is," he says, noting that mixed-use (hotel/retail/residential/casino) is "probably the businessmodel" that will make it. "Stand-alone, condo-only towers are not what's going to fly here," he says.
Caution Returns
As the dust that the condo craze kicked up settles in cities around the country, what some are calling a "market correction"–one that analysts say could last anywhere from 18 months to several years–is creating a new normal for condo developers.
The Related Cos., notes Thompson, is "being very selective in what we do. ... The only markets we're going into are those markets that are productive." That includes Atlanta and one of Related's mainstay markets, Miami, where, despite slowing condo sales and the exodus of speculators, the company's luxury waterfront properties are selling–albeit slower than they have in the past.
McCabe estimates that Miami-Dade County is home to about 25,000 condos-under-construction, and two-thirds of them are priced at $700,000 or higher.
To compete in that market, Related has recruited new architects and designers to bring innovative looks to its buildings. And it has started sending its sales force to cities around the world to try to interest brokers and wealthy buyers in taking a look at its Miami condos. "A year ago, you waited for people to come into your office, and you were inundated," says Thompson. "Now, we're taking a much more aggressive approach. We're going out there in the world and telling people about Miami. It's still a good story."
Similar optimism echoes from Washington, D.C., where JBG Cos. is pre-selling a 136-unit waterfront condo tower in Rosslyn, Va., and has plans for a 110-unit building in downtown Washington's Woodley Park.
"We enjoyed the last couple of years when the frenzy was out there. Who wouldn't?" says Blocher. "But we're returning to a normal absorption pace in the market. Now sales will take longer. And we're being cautious. We're making sure we're making the right deal." He adds: "We believe in the condo market."
So does Bozzuto's Baum. "In the development business," he notes, "you always have to have a dose of optimism and an equal dose of reality. The reality is that we're currently ... oversupplied with condominiums. From an optimistic standpoint, there are still very sound fundamentals of real estate in Washington, given the job growth and economy, that we think will create opportunities for condominiums both for purchasers and for developers."
–Sharon O'Malley is a freelance writer in College Park, Md.