REQUIRED READING: While the economic crisis has created significant problems across the full spectrum of the residential home loan market, it appears that the condominium sector received more than its fair share of tumult.
‘When the U.S. market for single-family homes sneezed, the condominium market caught the flu,’ says Grant Stern, president of Bay Harbor Island, Fla.-based Morningside Mortgage Corp.
However, certain segments of the condo sector are showing signs of positive activity. Walt Molony, a spokesperson with the National Association of Realtors, cites last year's data as evidence of encouraging developments.
‘The condo sector, ironically, saw an increase in 2010, while the single-family market was down,’ he says. ‘There were 599,000 existing condos sold last year – up 1.5 percent. At the same time, there was a 5.7 percent decline in single-family house sales.’
Yet Molony cautions that it is too early to start celebrating. ‘The condo market remains more oversupplied than the single-family market,’ he observes. ‘You would want to see it down to a six- to seven-month [inventory] supply, but the condo sector, at the end of 2010, had an 11.9 month supply.’
However, a comparison between the two sectors may not be fully balanced. Scott Stern, CEO of Lenders One Mortgage Cooperative, based in St. Louis, points out that the condominiums can serve a double purpose as the primary residence for the property's owner and as rental housing. As a result, an increasing number of condos are now being used as rental properties for both displaced homeowners and those who are unable to secure home loans.
‘In the past five years, the homeownership market and rental market [have tended] to act in counterbalance,’ he explains. ‘When the homeownership market is strong, rentals tend to be weaker. When the homeownership market is struggling, however, the rental market tends to be strong.’
In terms of condo ownership, problematic perceptions are still in place in many parts of the country.  Â
‘There is still a stigma that goes with condos, especially in parts of California,’ says Shane O'Dell, director of wholesale production at San Francisco-based Bay Equity Loans. ‘Many investors have not opened up to them. It is going to take time to work things out.’
O'Dell adds that trying to follow the condo market is difficult, because the proliferation of condos is not uniform.
‘You have to go market to market,’ he says. ‘Florida, for example, is so overbuilt that it will take a lot longer for it to recover.’
Dr. Sean Snaith, director of the Institute for Economic Competitiveness at the University of Central Florida, notes that the dark clouds have yet to move away from the Sunshine State's condo glut.
‘The condo market in Florida, like housing in general, is still struggling to come out from under the weight of the crisis,’ he says. ‘There was a degree of overbuilding – South Florida was one of the most egregious offenders in that. We've seen the number of transactions increasing, but we have not seen the stabilization of prices.’
Las Vegas is in a similar situation. Bob Dorsa, president of the American Credit Union Management Association (ACUMA), says it is difficult not to notice the city's excessive surplus.
‘We've got a lot of condos – if you're interested, they're for sale!’ he says, with a laugh.
But not every major market has condo woes. Daniel Hilpert, managing director at Mortgage Equicap, has not experienced problems with condo projects in high-ticket areas of New York.
‘In June 2009, we closed a ground-up construction loan for condo development on the Upper East Side of Manhattan,’ he recalls. ‘The developer sold out 66 to 70 percent of the units. It was very surprising to be able to get a construction loan in June 2009 – at that time, it was virtually impossible to do.’
Yet Hilpert acknowledges that condos are not the right property for all areas, particularly in certain neighborhoods of New York. ‘If you have the wrong product, you're stuck,’ he says.
Some bad news
So what will it take to reanimate the market? For starters, Grant Stern believes that the federal government is not the right place to look for help. He blames the government-sponsored enterprises (GSEs) for doing more harm than good to housing, in general, and condos, in particular.
‘Theoretically, a functioning secondary market that does not scare the daylights out of its primary participants could lead the condo market out of the abyss,’ he comments. ‘Perhaps if Fannie and Freddie's role in the condo financing market is replaced by new market makers, the GSEs' disappearance will have a positive effect on the market. Currently, I believe that Fannie has lost all credibility to lead the market for condo standards, and nobody is taking its place. Ultimately, the policy of maintaining zombie agencies is already injecting severe uncertainty into the housing market.’ Â
Stern is also concerned that many people thinking about buying condos are not looking at the properties for their own residential needs.
‘According to CondoVultures.com, more than 80 percent of the condo sales in Miami's downtown district were cash buys during much of 2010,’ he says. ‘This means that the majority of buyers are likely investors and not end users. Meanwhile, all of the guidelines are written to lock out projects whose ownership is primarily non-resident. All of the existing guidelines are not written to handle recent dislocations, nor do they have flexibility to deal with the bulk-buyer phenomenon.’
Scott Stern adds his worries, noting that such strategies will not speed a housing recovery, especially if the condos being acquired were foreclosed properties.
‘It will take foreclosed properties off the market, but it does not stop property depreciation at all,’ he says.
Steve Palm, president of the Atlanta-based real estate information resource SmartNumbers, is particularly concerned about oversupply in the sector and the depreciation of condo prices.
‘For new construction to be a viable product, resales should not be less than 80 percent of value,’ he says. ‘Now, there is no way that the new construction can compete with the resales, because the resales are so low.’
Also complicating the picture are condo hotels, a niche within the sector that straddles both the residential and commercial real estate markets. Jim Butler, chairman of the global hospitality group for Los Angeles law firm Jeffer Mangels Butler & Mitchell LLP, states that this niche has been battered by the simultaneous crises facing the housing market and the hotel sector – and having the condo concept attached to it does not help matters.
‘With a few notable exceptions, almost any project involving a condominium component has been in deep hibernation since the financial meltdown,’ he says. ‘Hibernation, as you may recall, is an altered metabolic state that certain animals assume to survive long winters. They may actually appear dead if discovered in this state, and it takes a while for them to recover from this state to even a dazed wakefulness. It is not like a normal sleep, where they are easily awakened or metabolic functions are near normal levels.’
Some good news
However, Butler is optimistic that some degree of turnaround will occur within the niche.
‘Hotel mixed-use projects are an enduring and viable part of the landscape, but it will take some time for the condominium part of the equation to become viable again,’ he continues. ‘As with all hotel projects, the viability will depend on a lot of factors, including location, market segment, regime structure, amenities and value perception, consumer financing, and other factors. The good condo hotels and hotel condos will awaken from their hibernation. The ones that froze will thaw and decay.’
And there are some additional rays of opportunity across the sector. Kim Nelson, president and CEO of Atlanta-based LoanSouth, observes that in many urban markets, young professionals seeking their first residences and empty-nesters seeking to downsize their living space are showing an interest in this type of property.
‘Atlanta, like most metro cities, is a difficult place for people to afford single-family housing,’ she says. ‘So, living vertically is more appealing and cost-effective.’
A.W. Pickel III, president and CEO of LeaderOne Financial Corp. in Overland Park, Kan., can offer personal confirmation of that point: He recently accompanied his college-age daughter in her inspection of potential condo properties. Pickel notes that many twentysomethings are not interested in so-called ‘handyman special’ properties, but prefer moving into newer condos that are in prime condition.
‘My daughter is not interested in buying anything unless it is in great condition,’ he says. ‘Call it the HDTV phenomenon.’
ACUMA's Dorsa agrees with that assessment. ‘Somewhere along the way, younger people's attitude toward housing is going to change,’ he says. ‘Outdoor things will not be as interesting to them. Home will no longer be for your retirement – it will just be a place to keep the rain off your head.’
