REAL ESTATE NEWS
Many people feel the pressures of this housing market and rising costs of living. There has been a lot of competition for homes, even in the luxury price segment of the market. Please take a look at our Market Snapshot in this newsletter. At the end of January, Inventory was meager at 1,291 active homes for sale. This was down a massive 70% from the end of January 2021, which was already a tight market for buyers. So, the questions on most people’s minds are, “Why don’t they just build more homes?” and “Where have all the condos gone?”
WHERE HAVE ALL THE CONDOS GONE?
In Metro Denver, there has been a shortage of new construction for about 12 years now. As a result, our city became more attractive to companies and qualified buyers looking to move. As a result, the population increased more dramatically than usual. But construction has not been able to keep pace with all these new buyers. We have discussed some of the limiting factors to new home construction in previous editions of this newsletter. This includes everything from supplies to skilled labor and even land shortages. But what this issue boils down to is profitability.
Investors prefer to put their money into multi-family units (only apartments, NOT condos and townhomes) from a development standpoint. The return on their investments is higher. They can rent to more people using the same amount of square footage. Condo construction is near historic lows relative to the past 50 years. This data also compares multi-family units available for rent (apartment buildings) and for-sale units (condo complexes).
Condo construction reached an all-time high around 2005/2006. 50% of the new multi-family construction was a for-sale product back then. Condo construction has gone from representing about 50% of the new multi-family construction to about 5% today. Hardly any multi-family construction money is getting put into condos, which go into apartments.
WHAT CAUSED THIS DECLINE IN CONDO CONSTRUCTION?
There are a few factors for low condo construction, and lack of demand is certainly not one of them. One reason is that there is currently too much uncertainty with the retail and office asset classes. Those properties are much less attractive to commercial investors than they used to be. As a result, much of that money shifted to assets like apartments and warehouses. With higher investor demand, prices have gone up for those two industrial assets.
Another factor is that as first-time homebuyers are being priced out of the market, they are forced to rent longer or rent for the very long term. This has created a lot of rental demand for apartments. So, unfortunately, rising purchase prices for condos are creating more demand for apartments, which is, in turn, taking the availability of the condos away from renters.
The final component is probably not consistent for every market, but at least in Colorado, there is a condo defect liability problem. Developers that build a for-sale condo are exposed to liability for any defects in construction for up to 7 years after the project is completed. A couple of years ago, there was a little bit of reform on the condo defect law, but it did not go far enough, so it is still financially unattractive for developers to build condos here. Unfortunately, all these factors are likely to be stuck in place for a while, so do not expect to see a lot of condo construction any time soon.