Supply and Demand for New Condos Completely Out of Whack

by Will Smith

The diminished supply of new condominiums in the DC metro area has gotten so tight that the next chapter of condo development could materialize this year. “Supply and demand are completely out of whack,” Mark Franceski, director of market research at real estate sales and marketing firm McWilliams|Ballard, told UrbanTurf. McWilliams|Ballard recently published its semi-annual report on the new condo market, 2010 Washington Metro Area Condominium Market Overview.

The shortage of new condos in the DC area has been anticipated for some time. Real estate watchers started predicting it in mid to late 2009, when it became clear that though there had been a glut of new condos just a couple years before, the intervening freeze in development meant that all those condos would be bought up, slowly but surely, until the supply had swung from abundant to dwindling. Fast forward a year and a half, and that supply has indeed dwindled — to an acute shortage.

Evidence of the shortage abounds. The number of new condos for sale across the metropolitan area stands at 3,542, the lowest it’s been in over seven years. This time last year that figure stood at 5,383; in 2006 it was around 18,000.

Chart courtesy McWilliams|Ballard

The available inventory represents 1.3 years of supply, meaning that at the 2010 sales pace it would take 1.3 years to sell out completely. While that may seem like a long time, little new inventory is being constructed to replenish the supply. In certain markets within the metro area — namely DC proper and Arlington — the supply is even more constrained (1.0 and 1.2 years, respectively).

It’s not just the low supply that is contributing to the shortage, it’s also the limited product mix that is available. McWilliams|Ballard’s Franceski points out that the average size of a new condo that sold in 2010 was 18 percent larger than in 2009, demonstrating that the few remaining condo projects with unsold inventory are selling larger units. Because a condo project’s largest units are the last to sell, the larger size of units sold in 2010 suggests that the shortage pushed buyers to finally acquire the hardest-to-sell inventory. This makes even more sense in light of the fact that the condo projects with unsold inventory in 2010 have been selling for an average of 3.6 years — an extremely long time for any market. With few exceptions, at this point all that’s left is the least desirable units.

Sales at District Condos will be closely watched

Such an acute shortage of desirable new condos would suggest that the DC area is about to see a big increase in condo construction. Likely, but tight credit continues to hamper the market, both on the developer and consumer side. (Developers still find it hard to get financing to build condos, and buyers still find it hard to get mortgages to buy them.) If the few new sizable projects that have moved forward — like District Condos on 14th Street and Gaslight Square in Rosslyn — are successful, then new development could really accelerate.

Regardless of exactly when that surge in construction comes, McWilliams|Ballard does believe that the new condo market is at an inflection point between the last cycle and the next. From the report:

It seems that finally, nearly all of the necessary fundamentals are in place to allow for new condominiums to return and for developers to strongly consider them as a viable option. Debt and equity providers are recognizing the potential of the Washington Metro Area to absorb new condominium projects, especially in the most desirable submarkets and while end loan financing is still elusive, supply and demand are so imbalanced in some areas that properly designed and marketed new condominiums would be guaranteed successes…Early 2011 will see the overlap of the tail end of the last cycle and the budding of the next one.

This article originally published at http://dc.urbanturf.com/articles/blog/supply_and_demand_for_new_condos_completely_out_of_whack/3183


  1. john said at 2:39 pm on Friday March 18, 2011:

    I thought is always been said that an approximately 5-7 month supply is indicative of a healthy housing market.  How is a 16 month supply (or 14 month in DC) indicated above an ‘acute’ shortage?

  1. JT said at 3:20 pm on Friday March 18, 2011:

    @ john, because when a developer builds a new building they don’t have to necessarily sell every home in 5-7 months.  Instead they may plan for a 18 - 36 month sales cycle selling (hopefully) most units while the building is under construction and then the remaining unsold units soon after completion, at which point they may be able to get higher pricing. A buyer should theoretically be willing to pay more for a unit that is completed and can go to closing immediately rather than wait a year - hence the term “pre-construction pricing”. 

    5-7 months of supply is more indicative of resale demand.  Existing homes are continually coming on the market and being purchased where as new home supply, especially condos, is more erratic.

  1. Jim said at 3:38 pm on Friday March 18, 2011:

    I say that this is hopefully (fingers crossed) incredible news for existing condo owners from the angle of “lack of supply equals quickly rising prices for existing condos”.

    Perhaps that is not happy news for those folks looking to buy in 2011/2012, but for those of us who bought in 2006, watched 30-40% of the “equity” in our condo evaporate over night, and have been praying to just break even on what remains on our mortgage (yet alone what we paid for the place), it couldn’t be anything but awesome news! 

    And yes, I’m bitter, but hopeful the misery will end sooner than later (at least in DC compared to Vegas)...

  1. Callling John Galt said at 4:02 pm on Friday March 18, 2011:

    I think that there is one fine point that everyone out there either is ignoring or doesn’t know about all together.  FHA requires that a condo building be 30% (pre) sold before the first loan can close.  FHA has a penetration cap of 30% meaning that only 30% of the building can have FHA loans in it.  Fannie requires that a condo building be 70% (pre) sold before the first conventional loan can close.  That means that a developer has to presell 30% of the building to all FHA buyers in order to close the 1st loan and once that happens the building has been capped out which leaves the other 70% of the building vacant or under contract until they hit the 70% mark so that conventional buyers can close.  No developer is going to build with such insane restrictions and no buyer will plunk down a deposit waiting for a building to be 70% sold before they can settle.  Developers have gotten smart to this and are building either smaller projects (not really possible in DC) or large projects that have multiple buildings/phases to get past this (see yesterday’s UT about Gas Light Condo’s).  Where can a developer find land in the city to be able to build like that?  They can’t!  The government needs to step out of the equation so that we can maybe one day find a way to get back to normal without having yet another hoop to jump through.

  1. jag said at 4:09 pm on Friday March 18, 2011:

    The article I read before this one was “Nearly 20% of Florida homes are vacant.”

    We sure have nice problems around here.

  1. Jonathan Miller said at 4:54 pm on Friday March 18, 2011:

    Interesting juxtaposition of data Will. 

    A few observations on the information being presented from MB, the new dev sales and marketing firm. 

    First, it is impressive how so much of the inventory overhang from mid-decade has been either absorbed or converted to rental.  That’s definitely encouraging for the market going forward.  However, a 1.3 year absorption rate doesn’t suggest a looming shortage - merely that the market is in better shape now than in years past. 

    Access to financing hasn’t noticeably changed for developers or for purchasers of new condos - an improvement in market conditions are contingent on that change.

    Commenter “Callling John Galt” brings up a key point - FHA is one of the few ways buyers are purchasing new condos and FHA lending standards remain tight and are getting tighter as FHA continues to lose a lot of money.

    JT - “pre-construction” pricing was more prevalent as a marketing strategy in an era of rising prices and the condo boom mid-decade, no?  Not a rationale for the current absorption rate to be 1.3 months.

    The reason why more product isn’t being built in significant numbers is more likely due to the fact that mortgage lenders continue to remain afraid of their own shadow - legacy lending issues - these lenders are watching the market just like us and are seeing the slow rate of absorption. 

    While the total number of units, according the chart, is at its lowest since 2005, listing inventory back in 2005-2006 mushroomed by more than 200% from a few years earlier as the new condo market stalled.  Comparisons against that era of bloated supply era to current doesn’t suggest to me that there is a looming shortage now, if that is the basis of measurement.

  1. Diane said at 7:17 pm on Friday March 18, 2011:

    What this article makes clear is that supply is much lower than it was at the peak.  But what is the evidence that demand vastly outstrips the lower supply? How many would-be buyers of an apartment-style condo have decided to stay renting?  It seems to me that you have to offer a really unique product these days to lure buyers into the condo market without the expectation of stratospheric appreciation (and upgrade buying) in a few years.

  1. Chris Ballard said at 8:14 pm on Friday March 18, 2011:

    I think the most important aspect of our analysis of the new condominium market is the composition of the remaining supply. Not only the current average unit size relative to past years, but the bedroom count as well.

    In general, demand is strong for one bedroom product, but what remains for sale is primarily two bedroom or larger.  This disconnect between supply and demand will factor heavily into the success of new projects. As construction lenders begin to consider for-sale product again, presales of one bedroom units will be a key component in obtaining the financing needed to move projects forward in 2011/2012.

  1. jeffreygordon said at 12:52 am on Saturday March 19, 2011:

    As one very wise and experienced condo RE attorney likes to say “Friends don’t let friends buy condos!”.  Especially if we see an end to the deduction of mortgage interest in coming years.  In DC paying rent at maintaining flexibility on housing makes a lot more sense than buying into a condo or a 70+ year old house. Run the numbers folks, when you get done with HOA and the hassle of HOA meetings, construction defect lawsuits on new buildings and significant inventory in rented “condo projects” coming to market, don’t be fooled into buying into a condo, absolutely worst re investment going!

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